June 30, 2005 10-QSB
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________________
FORM
10 - QSB
_______________________________
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934.
For
the quarterly period ended June 30, 2005.
000-30379
(Commission
File Number)
Chembio
Diagnostics, Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
88-0425691
|
(State
or other jurisdiction of incorporation)
|
|
(IRS
Employer Identification
Number)
|
3661
Horseblock Road
Medford,
New York 11763
(Address
of principal executive offices including zip code)
(631)
924-1135
(Registrant’s
telephone number, including area code)
(Former
Name or Former Address, if Changed Since Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90
days.
Yes
X No
_____
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes
____
No X
As
of
August 4, 2005,
the
Registrant had 8,148,570 shares
outstanding of its $.01 par value common stock.
Quarterly
Report on FORM 10-QSB For The Period Ended
June
30, 2005
Table
of Contents
Chembio
Diagnostics, Inc.
PART
I
Item
1. FINANCIAL STATEMENTS
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARY
|
|
|
|
AS
OF:
|
|
-
ASSETS -
|
|
|
|
June
30, 2005
|
|
December
31, 2004
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
2,657,007
|
|
$
|
34,837
|
|
Restricted
Cash
|
|
|
-
|
|
|
250,000
|
|
Accounts
receivable, net of allowance for doubtful accounts of $14,046 and
$16,367
for June 30, 2005 and December 31, 2004, respectively
|
|
|
285,027
|
|
|
165,056
|
|
Inventories
|
|
|
564,183
|
|
|
538,647
|
|
Prepaid
expenses and other current assets
|
|
|
205,716
|
|
|
222,520
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,711,933
|
|
|
1,211,060
|
|
|
|
|
|
FIXED
ASSETS,
net of accumulated depreciation of $499,585 and $460,720 for June
30, 2005
and December 31, 2004, respectively
|
|
|
389,182
|
|
|
188,399
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
111,533
|
|
|
26,990
|
|
|
|
|
|
|
|
$
|
4,212,648
|
|
$
|
1,426,449
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY-
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Working
capital loan
|
|
$
|
-
|
|
$
|
45,000
|
|
Accounts
payable and accrued liabilities
|
|
|
815,549
|
|
|
1,102,428
|
|
Current
accrued interest payable
|
|
|
120,000
|
|
|
120,000
|
|
Current
portion of obligations under capital leases
|
|
|
41,688
|
|
|
51,029
|
|
Accrued
contingency
|
|
|
28,217
|
|
|
60,264
|
|
Payable
to related parties
|
|
|
214,906
|
|
|
284,475
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
1,220,360
|
|
|
1,663,196
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
|
|
|
Obligations
under capital leases - net of current portion
|
|
|
55,511
|
|
|
74,267
|
|
Accrued
interest, net of current portion
|
|
|
153,160
|
|
|
212,950
|
|
TOTAL
LIABILITIES
|
|
|
1,429,031
|
|
|
1,950,413
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK
-Series A 8% Convertible - $.01 par value; 10,000,000 shares authorized:
162.37241 shares issued and outstanding as of December 31, 2004.
Liquidation preference $4,929,286.
|
|
|
-
|
|
|
2,427,030
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
Stock - 10,000,000 shares authorized:
|
|
|
|
|
|
|
|
Series
A 8% Convertible - $.01 par value: 159.28688 shares issued and
outstanding
as of June 30, 2005. Liquidation preference $4,839,837
|
|
|
2,638,071
|
|
|
-
|
|
Series
B 9% Convertible - $.01 par value: 99.25 shares issued and outstanding
as
of June 30, 2005. Liquidation preference-$5,165,993
|
|
|
2,972,534
|
|
|
-
|
|
Common
stock - $.01 par value; 100,000,000 shares authorized 8,026,286
and
6,907,143 shares issued and outstanding as of June 30, 2005 and
December
31, 2004, respectively
|
|
|
80,263
|
|
|
69,071
|
|
Additional
paid-in capital
|
|
|
13,780,222
|
|
|
9,079,341
|
|
Accumulated
deficit
|
|
|
(16,687,473
|
)
|
|
(12,099,406
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
2,783,617
|
|
|
(2,950,994
|
)
|
|
|
|
|
|
|
$
|
4,212,648
|
|
$
|
1,426,449
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
|
|
|
|
FOR
THE PERIODS ENDED:
|
|
(UNAUDITED)
|
|
|
|
Three
months ended
|
|
Six months
ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
814,307
|
|
$
|
746,954
|
|
$
|
1,160,432
|
|
$
|
1,236,595
|
|
License
revenue
|
|
|
-
|
|
|
-
|
|
|
250,000
|
|
|
-
|
|
Research
grants and development income
|
|
|
91,382
|
|
|
248,121
|
|
|
227,142
|
|
|
343,782
|
|
TOTAL
REVENUES
|
|
|
905,689
|
|
|
995,075
|
|
|
1,637,574
|
|
|
1,580,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
636,380
|
|
|
673,616
|
|
|
1,100,930
|
|
|
1,139,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
269,309
|
|
|
321,459
|
|
|
536,644
|
|
|
441,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
426,782
|
|
|
377,473
|
|
|
761,532
|
|
|
515,801
|
|
Selling,
general and administrative expenses
|
|
|
729,435
|
|
|
773,624
|
|
|
1,285,
495
|
|
|
1,129,298
|
|
|
|
|
1,156,217
|
|
|
1,151,097
|
|
|
2,047,027
|
|
|
1,645,099
|
|
(LOSS)
FROM OPERATIONS
|
|
|
(886,908
|
)
|
|
(829,638
|
)
|
|
(1,510,383
|
)
|
|
(1,203,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
15,613
|
|
|
2,601
|
|
|
25,081
|
|
|
2,697
|
|
Interest
(expense)
|
|
|
(4,247
|
)
|
|
(99,680
|
)
|
|
(10,225
|
)
|
|
(155,518
|
)
|
Other
|
|
|
400
|
|
|
209,372
|
|
|
400
|
|
|
209,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
BEFORE INCOME TAXES
|
|
|
(875,142
|
)
|
|
(717,345
|
)
|
|
(1,495,127
|
)
|
|
(1,147,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(875,142
|
)
|
|
(717,345
|
)
|
|
(1,495,127
|
)
|
|
(1,147,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
payable to preferred stockholders in shares
|
|
|
212,061
|
|
|
56,810
|
|
|
394,239
|
|
|
56,810
|
|
Dividend
accreted to preferred stock for associated costs and a beneficial
conversion feature
|
|
|
-
|
|
|
261,266
|
|
|
2,698,701
|
|
|
261,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(1,
087,203
|
)
|
$
|
(1,035,421
|
)
|
$
|
(4,588,067
|
)
|
$
|
(1,465,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per share
|
|
$
|
(0.15
|
)
|
$
|
(0.18
|
)
|
$
|
(0.64
|
)
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
number of shares outstanding, basic and
diluted
|
|
|
7,413,129
|
|
|
5,881,972
|
|
|
7,180,780
|
|
|
5,419,656
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
|
FOR
THE SIX MONTHS ENDED JUNE 30, 2005
UNAUDITED
|
|
|
|
|
|
|
|
|
Preferred
A Stock
|
Preferred
B Stock
|
Common
Stock
|
Additional
paid in capital
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
Shares
|
|
Amount
|
Shares
|
|
Amount
|
Balance
at December 31, 2004
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
6,907,143
|
|
$
|
69,071
|
|
$
|
9,079,341
|
|
$
|
(12,099,406
|
)
|
$
|
(2,950,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to reflect reclassification of Preferred A Stock
|
162.37241
|
|
|
2,427,030
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,427,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
-
|
|
|
-
|
|
100.95
|
|
|
5,047,500
|
|
-
|
|
|
-
|
|
|
(321,639
|
)
|
|
-
|
|
|
4,725,861
|
|
For
services
|
-
|
|
|
-
|
|
4.98
|
|
|
249,000
|
|
-
|
|
|
-
|
|
|
(249,000
|
)
|
|
-
|
|
|
-
|
|
Exchange
from series A to series B
|
(0.66666
|
)
|
|
(11,600
|
)
|
0.40
|
|
|
20,000
|
|
-
|
|
|
-
|
|
|
(8,400
|
)
|
|
-
|
|
|
-
|
|
Allocate
fair value to warrants
|
-
|
|
|
-
|
|
-
|
|
|
(2,349,893
|
)
|
-
|
|
|
-
|
|
|
2,349,893
|
|
|
-
|
|
|
-
|
|
Allocate
value for beneficial conversion
|
-
|
|
|
-
|
|
-
|
|
|
(2,437,035
|
)
|
-
|
|
|
-
|
|
|
2,437,035
|
|
|
-
|
|
|
-
|
|
Accretion
of preferred dividend
|
-
|
|
|
190,746
|
|
-
|
|
|
203,493
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(394,239
|
)
|
|
-
|
|
Accretion
of beneficial conversion
|
-
|
|
|
261,666
|
|
-
|
|
|
2,437,035
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,698,701
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
converted from Preferred
|
(2.41887
|
)
|
|
(42,088
|
)
|
(7.08
|
)
|
|
(197,566
|
)
|
701,370
|
|
|
7,014
|
|
|
232,640
|
|
|
-
|
|
|
-
|
|
For
services
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
70,000
|
|
|
700
|
|
|
41,800
|
|
|
-
|
|
|
42,500
|
|
Payment
of dividend on preferred A (includes cash payments for partial
shares)
|
-
|
|
|
(187,683
|
)
|
-
|
|
|
-
|
|
312,773
|
|
|
3,128
|
|
|
184,551
|
|
|
-
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
for services
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
75,083
|
|
|
-
|
|
|
75,083
|
|
Exercised
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
35,000
|
|
|
350
|
|
|
24,850
|
|
|
-
|
|
|
25,200
|
|
Continuing
valuation / cancellations
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(65,932
|
)
|
|
-
|
|
|
(65,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the six months ended June 30, 2005
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,495,127
|
)
|
|
(1,495,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2005
|
159.28688
|
|
$
|
2,638,071
|
|
99.25
|
|
$
|
2,972,534
|
|
8,026,286
|
|
$
|
80,263
|
|
$
|
13,780,222
|
|
$
|
(16,687,473
|
)
|
$
|
2,783,617
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
|
|
|
|
FOR
THE PERIODS ENDED:
|
|
(UNAUDITED)
|
|
|
|
Six
months ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,495,127
|
)
|
$
|
(1,147,189
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
38,865
|
|
|
74,556
|
|
Provision
for doubtful accounts
|
|
|
(2,321
|
)
|
|
9,118
|
|
Increase
in accrued interest
|
|
|
-
|
|
|
72,760
|
|
Warrants
issued to existing debt holders, prior to the merger, recorded
as interest
expense
|
|
|
-
|
|
|
60,650
|
|
Stock
issued as compensation
|
|
|
-
|
|
|
304,229
|
|
Stock
issued as payment for fees
|
|
|
-
|
|
|
37,391
|
|
Options
issued as compensation
|
|
|
-
|
|
|
969
|
|
Options
issued as payment for fees
|
|
|
-
|
|
|
27,688
|
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(117,650
|
)
|
|
(25,477
|
)
|
Restricted
cash
|
|
|
250,000
|
|
|
-
|
|
Inventories
|
|
|
(25,536
|
)
|
|
(119,337
|
)
|
Prepaid
expenses and other current assets
|
|
|
16,532
|
|
|
(30,182
|
)
|
Other
assets and deposits
|
|
|
(84,543
|
)
|
|
31,880
|
|
Accounts
payable and accrued expenses
|
|
|
(234,956
|
)
|
|
(458,823
|
)
|
Grant
and other current liabilities
|
|
|
-
|
|
|
(12,648
|
)
|
Payable
to related parties
|
|
|
(69,569
|
)
|
|
-
|
|
Accrued
contingency
|
|
|
(32,047
|
)
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(1,756,352
|
)
|
|
(1,174,415
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(239,648
|
)
|
|
(47,337
|
)
|
Net
cash used in investing activities
|
|
|
(239,648
|
)
|
|
(47,337
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Changes
in obligations to bank
|
|
|
-
|
|
|
(67,434
|
)
|
Payment
of capital lease obligation
|
|
|
(28,097
|
)
|
|
(29,887
|
)
|
Payment
of accrued interest
|
|
|
(59,790
|
)
|
|
-
|
|
Proceeds
from working capital loan
|
|
|
161,917
|
|
|
-
|
|
Payment
of working capital loan
|
|
|
(206,917
|
)
|
|
-
|
|
Proceeds
from bridge loan and converted interest, net of the cost of financing
of
$83,770
|
|
|
-
|
|
|
926,035
|
|
Exercise
of warrants
|
|
|
25,196
|
|
|
-
|
|
Sale
of Series A Preferred Stock, net of the cost of financing of
$335,086
|
|
|
-
|
|
|
1,864,914
|
|
Sale
of Series B Preferred Stock and associated warrants, net of cash
cost of
financing of $321,639
|
|
|
4,725,861
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
4,618,170
|
|
|
2,693,628
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
2,622,170
|
|
|
1,471,876
|
|
Cash
- beginning of the period
|
|
|
34,837
|
|
|
-
|
|
|
|
|
|
|
|
|
|
CASH
- end of the period
|
|
$
|
2,657,007
|
|
$
|
1,471,876
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
68,465
|
|
$
|
1,976
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Stock
issued as payment for financing fees
|
|
$
|
-
|
|
$
|
39,400
|
|
Options
issued as payment for consulting services
|
|
|
-
|
|
|
108,564
|
|
Warrants
issued for Chembio Diagnostic Systems, Inc. for shareholder
consent
|
|
|
-
|
|
|
144,643
|
|
Warrants
issued as payment for financing fees
|
|
|
364,268
|
|
|
337,973
|
|
Bridge
debt and converted interest into Common Stock
|
|
|
-
|
|
|
330,698
|
|
Bridge
debt and converted interest into Series A Preferred Stock
|
|
|
-
|
|
|
679,107
|
|
Long
term debt converted to Preferred Series A Preferred Stock
|
|
|
-
|
|
|
1,332,292
|
|
Preferred
B issued as payment for financing fees
|
|
|
249,000
|
|
|
-
|
|
Preferred
A and associated warrants exchanged for Preferred B and associated
warrants
|
|
|
20,000
|
|
|
-
|
|
Accreted
dividend to preferred stock
|
|
|
3,092,940
|
|
|
261,266
|
|
Stock
issued as payment of Series A dividend
|
|
|
187,679
|
|
|
-
|
|
See
notes accompanying the financial
statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
NOTE
1—DESCRIPTION OF BUSINESS:
Chembio
Diagnostics, Inc. (“the Company”) was formerly known as Trading Solutions.com,
Inc. On May 5, 2004, New Trading Solutions, Inc., a wholly owned subsidiary
of
the Company merged with and into Chembio Diagnostic Systems, Inc. (“CDS”) with
CDS remaining as the surviving corporation (the “Merger”). The historical
information presented for periods prior to the merger is based on the activities
of CDS. The earnings per share presented in the statement of operations for
periods prior to 2005 have been presented to reflect the shares outstanding
as
if the merger had taken place as of January 1, 2004.
On
May 5,
2004, Chembio Diagnostics, Inc. issued 4,000,000 shares of its Common Stock
to
acquire all the outstanding Common Stock of CDS and assumed all outstanding
options and warrants of CDS. For financial reporting purposes, the acquisition
has been treated as a recapitalization of Chembio Diagnostics, Inc. with CDS,
as
the acquirer. CDS is a wholly owned subsidiary of the Company.
Trading
Solutions.com, Inc. had no assets, liabilities or transactions (other than
a
1:17 reverse split of its Common Stock) in the fiscal year preceding the merger.
Prior to the merger, Trading Solutions.com, Inc.’s fiscal year ended September
30. After the merger, Chembio Diagnostics, Inc. adopted a fiscal year ending
on
December 31, the fiscal year-end of CDS.
CDS
develops, manufactures, and markets rapid point of care medical diagnostic
tests. These tests are sold in the U.S. and/or internationally to medical
laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail establishments.
The products are made under the label of CDS or the private labels of its
distributors or their customers. The products aid in the diagnosis of infectious
diseases and other conditions in humans and animals.
SERIES
B FINANCING:
On
January 28, 2005 the Company completed a private placement of 9% Series B
Convertible Preferred Stock and associated warrants for $5,047,500. The purchase
price per unit (one share plus associated warrants) was $50,000 and a total
of
100.95 shares and warrants to purchase 7,860,846 shares of Common Stock were
issued in the transaction. In addition one Series A Preferred stockholder
exercised its right to exchange $20,000 worth of Series A 8 % Preferred Stock
and associated warrants for .40 shares of 9% Series B Preferred Stock and
warrants to purchase 31,146 shares of Common Stock.
As
part
of the terms of the Series B purchase agreement, accrued but unpaid interest
related to certain long term debt totaling $332,950 is repayable commencing
in
January 2005 over 33 months at installments of $10,000 per month and a final
payment of $2,950 in the 34th month.
Placement
Agents were paid a commission in cash of 5% of the gross cash proceeds and
received 5% of the gross cash proceeds in the form of 9 % Series B Preferred
Stock and associated warrants. In addition, they received warrants to purchase
737,712 shares of Common Stock at an exercise price of $0.80 per share. The
warrants may not be exercised until the majority investor in the Series B
financing has given notice of its intent to exercise its warrants.
PLAN
OF OPERATIONS:
We
anticipate that the funds from the Series B Offering will be enough to fund
our
needs at least through the third quarter of 2005. We anticipate this based
upon
our current operating budget which assumes significant new expenditures this
year that are intended to help us increase revenues and cash flow, and to
achieve a variety of other corporate objectives that are aimed to increase
shareholder value. The Company is considering alternatives to provide for its
capital requirements for late 2005 and beyond. There are no assurances that
it
will be successful in raising sufficient capital; also, we may have to curtail
certain of the new expenditures.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis
of Presentation:
In
the
opinion of management, the accompanying unaudited Consolidated Financial
Statements include all adjustments (consisting of normal recurring accruals
or
adjustments only) necessary to present fairly the financial position at
June 30,
2005, and the results of operations and the cash flows for all periods
presented. The results of operations for the interim periods are not necessarily
indicative of the results to be achieved in any future interim period or
for the
entire year.
For
a
summary of significant accounting policies (which have not changed from
December
31, 2004) and additional financial information, see the Company’s annual report
on Form 10-KSB filed March 31, 2005.
The
accompanying unaudited interim financial statements have been prepared
in
accordance with instructions to Form 10-QSB and, therefore, do not include
all
information and footnotes required to be in conformity with accounting
principles generally accepted in the United States of America.
Preferred
Stock:
Both
the
Series A and Series B Preferred Stock contained provisions whereby, under
certain conditions outside of the control of management, the holders could
have
required redemption; accordingly, they were initially classified outside
of
permanent equity. At June 30, 2005, such conditions no longer exist;
accordingly, the Series A and Series B Preferred have been reclassified
to
permanent equity at June 30, 2005.
Inventory:
Inventory
consists of the following at:
|
|
June
30, 2005
|
|
December
31, 2004
|
|
Raw
Materials
|
|
$
|
303,851
|
|
$
|
289,204
|
|
Work
in Process
|
|
|
112,545
|
|
|
156,063
|
|
Finished
Goods
|
|
|
147,787
|
|
|
93,380
|
|
|
|
$
|
564,183
|
|
$
|
538,647
|
|
Earnings
Per Share:
The
following weighted average shares were used for the computation of basic and
diluted earnings per share:
|
For
the three months ended
|
|
For
the six months ended
|
|
June
30, 2005
|
June
30, 2004
|
|
June
30, 2005
|
June
30, 2004
|
Basic
|
7,413,129
|
5,881,972
|
|
7,180,780
|
5,419,656
|
|
|
|
|
|
|
Diluted
|
7,413,129
|
5,881,972
|
|
7,180,780
|
5,419,656
|
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. Diluted loss per share reflects the potential dilution from the
exercise
or conversion of other securities into Common Stock, but only if dilutive.
Diluted loss per share for the three and six months ended June 30, 2005
and June
30, 2004 is the same as basic loss per share, since the effects of the
calculation were anti-dilutive due to the fact that the Company incurred
losses
for all periods presented. The following securities, presented on a common
share
equivalent basis, have been excluded from the per share
computations:
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
|
For
the three months ended
|
|
For
the six months ended
|
|
June
30, 2005
|
June
30, 2004
|
|
June
30, 2005
|
June
30, 2004
|
Stock
Options
|
1,401,125
|
1,304,000
|
|
1,401,125
|
1,304,000
|
Warrants
|
21,363,966
|
11,569,803
|
|
21,363,966
|
11,569,803
|
Preferred
Stock
|
16,100,290
|
7,578,985
|
|
16,100,290
|
7,578,985
|
Employee
Stock Option Plan:
As
part
of the merger (see note 1), the Company adopted the 1999 Stock Option Plan
(the
“Plan”) of CDS covering 1,500,000 shares of common stock. Under the terms of
this plan, the compensation committee of the Company’s board is authorized to
grant incentive options to key employees and to grant non-qualified options
to
key employees and key individuals. The options become exercisable at such
times
and under such conditions as determined by the compensation committee. The
Plan
was amended at the Company’s annual stockholder meeting on June 17, 2005. The
number of options under the Plan was increased to cover 3,000,000 shares
of
common stock. It was also amended to allow independent directors to be eligible
for grants under the portion of the Plan concerning non-qualified options.
The
Company applies Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” and related Interpretations to account for the
options issued to employees and or directors using the intrinsic value method.
Had compensation cost for the options been determined using the fair value
based
method, as defined in Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), the Company’s net (loss)
and (loss) per share would have been adjusted to the pro forma amounts indicated
below. The Company adopted Statement of Financial Accounting Standards No.
148,
“Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123” requiring interim period disclosure for the
years ending after December 15, 2002. The effect of the fair value method
allowed under SFAS 123 is shown below.
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
Net
(loss) attributable to common stockholders, as reported
|
|
$
|
(1,087,203
|
)
|
$
|
(1,035,421
|
)
|
$
|
(4,
588,607
|
)
|
$
|
(1,465,265
|
)
|
Add:
Stock-based compensation included in reported net loss
|
|
|
-
|
|
|
969
|
|
|
-
|
|
|
969
|
|
Deduct:
Total stock based compensation expense determined under the fair
value
based method for all awards (net of tax effect)
|
|
|
(53,008
|
)
|
|
(453,320
|
)
|
|
(86,549
|
)
|
|
(453,320
|
)
|
Pro
forma net (loss) attributable to common stockholders
|
|
$
|
(1,140,211
|
)
|
$
|
(1,487,772
|
)
|
$
|
(4,675,156
|
)
|
$
|
(1,917,616
|
)
|
Net
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per share - as reported
|
|
$
|
(0.15
|
)
|
$
|
(0.18
|
)
|
$
|
(0.64
|
)
|
$
|
(0.27
|
)
|
Basic
and diluted (loss) per share - pro forma
|
|
$
|
(0.15
|
)
|
$
|
(0.25
|
)
|
$
|
(0.65
|
)
|
$
|
(0.35
|
)
|
The
fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
w
For
the three and six
months ended June 30, 2005: expected volatility of 95.56%; risk-free interest
rate of 3.67% to 3.76%; and expected lives of 3 to 7 years.
w
For
the three and six months ended June
30, 2004: expected volatility of 82.6%; risk-free interest rate of 3.31%; and
expected lives of 4 to 7 years.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
The
effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts since future amounts will be affected by the
number
of grants awarded and additional awards are generally expected to be made
at
varying prices.
In
December 2004, the FASB issued a revision of SFAS No. 123 "Share-Based
Payment"
123(R). The statement establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods and services.
It
also addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's
equity
instruments or that may be settled by the issuance of those equity instruments.
The statement does not change the accounting guidance for share-based payments
with parties other than employees.
The
statement requires a public entity to measure the cost of employee service
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exception). That cost will be recognized
over the period during which an employee is required to provide service
in
exchange for the award (usually the vesting period). A public entity will
initially measure the cost of employee services received in exchange for
an
award based on its current fair value; the fair value of that award will
be
re-measured subsequently at each reporting date through the settlement
date.
Changes in fair value during the requisite service period will be recognized
as
compensation over that period.
The
grant-date for fair value of employee share options and similar instruments
will
be estimated using option-pricing models adjusted for the unique characteristics
of these instruments. The Company will be required to comply with this
pronouncement beginning January 1, 2006.
Stock
incentive plan activity is summarized as follows:
|
|
Number
of shares
|
|
Weighted
Average Exercise Price
|
|
Options
outstanding at December 31, 2004
|
|
|
1,105,000
|
|
$
|
1.55
|
|
Granted
|
|
|
396,500
|
|
|
0.80
|
|
Canceled
|
|
|
(225,000
|
)
|
|
1.99
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Options
outstanding at June 30, 2005
|
|
|
1,276,500
|
|
$
|
1.24
|
|
NOTE
3—GEOGRAPHIC INFORMATION:
In
June
1997, FASB issued SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information”. SFAS 131 establishes standards for the way that business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information.
It
also establishes standards for related disclosures about product and services,
geographic areas, and major customers.
SFAS
131
further states that enterprises report “Information about Products and Service”.
The Company produces only one group of similar products known collectively
as
“rapid medical tests”. We do not produce any further breakdown in our
general-purpose statements and it would be impracticable for us to do
so.
The
Company believes that it operates in a single business segment. Net sales by
geographic area are as follows:
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
AFRICA
|
|
$
|
176,641
|
|
$
|
24,352
|
|
$
|
217,711
|
|
$
|
34,246
|
|
ASIA
|
|
|
48,688
|
|
|
77,677
|
|
|
76,088
|
|
|
110,733
|
|
AUSTRALIA
|
|
|
1,455
|
|
|
4,590
|
|
|
13,078
|
|
|
16,328
|
|
EUROPE
|
|
|
20,385
|
|
|
54,509
|
|
|
54,843
|
|
|
77,085
|
|
MIDDLE
EAST
|
|
|
12,510
|
|
|
29,155
|
|
|
97,316
|
|
|
62,771
|
|
NORTH
AMERICA
|
|
|
160,467
|
|
|
302,013
|
|
|
235,680
|
|
|
476,617
|
|
SOUTH
AMERICA
|
|
|
394,161
|
|
|
254,658
|
|
|
465,716
|
|
|
458,815
|
|
|
|
$
|
814,307
|
|
$
|
746,954
|
|
$
|
1,160,432
|
|
$
|
1,236,595
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
NOTE
4—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
The
following tables detail the component parts of accounts payable and accrued
liabilities:
|
|
as
of
|
|
|
|
June
30, 2005
|
|
December
31, 2004
|
|
Accounts
Payable - Suppliers
|
|
$
|
405,990
|
|
$
|
453,839
|
|
Accrued
Payroll
|
|
|
59,592
|
|
|
49,888
|
|
Accrued
Commissions and Royalties
|
|
|
164,908
|
|
|
383,630
|
|
Accrued
Payroll and other taxes
|
|
|
-
|
|
|
30,540
|
|
Accrued
Legal and Accounting
|
|
|
22,268
|
|
|
81,005
|
|
Accrued
Expenses - other
|
|
|
162,791
|
|
|
103,526
|
|
TOTAL
|
|
$
|
815,549
|
|
$
|
1,102,428
|
|
NOTE
5—LONG-TERM DEBT AND WORKING CAPITAL LINE OF CREDIT:
At
December 31, 2004, the Company had a $250,000 line of credit with a bank
collateralized by a certificate of deposit in an equivalent amount with that
bank.
As
part
of the requirements of the Series B Offering (see note 1) this line of credit
was repaid and closed in February of 2005 and the collateral was
released.
NOTE
6—STOCKHOLDERS’ EQUITY:
(a) Common
Stock
During
the three month periods ended June 30, 2005 and March 31, 2005 the Company
issued 50,000 and 20,000 shares of its Common Stock, respectively, to
consultants as compensation. One consultant received 20,000 shares in the
first
quarter which were valued at $0.75 per share and were expensed over the three
month life of the contract. The other consultants received an aggregate of
50,000 shares in the second quarter which were valued at $.55 per share and
are
being expensed over the lives of their respective contracts.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
For
the
three months ended June 30, 2005 there were no conversions of Series A Preferred
Stock.
Series
A
shareholders converted 2.41887 shares into 120,943 shares of Common Stock in
the
six months ended June 30, 2005.
Series
B
shareholders converted 7.08 shares into 580,427 shares of Common Stock in the
three months ended June 30, 2005.
During
the quarter ended June 30, 2005 warrants were exercised to purchase 35,000
shares of Common Stock. The price received was $25,200.
On
May
14, 2005 the Company issued 312,773 shares of its Common Stock as payment
of
dividends on its series A preferred stock.
(b) Warrants
In
association with the series B offering, warrants to purchase 8,280,550 shares
of
Common Stock were issued. These warrants were assigned a value of
$2,349,893.
Warrants
were issued in January 2005 to placement agents in connection with the Series
B
Preferred Stock financing to purchase a total of 737,712 shares of Common
Stock
at an exercise price of $0.80. The fair values of these warrants are $364,268.
The effect of this transaction was reflected in Additional Paid in
Capital.
Warrants
to purchase 35,000 shares of Common stock were exercised in the three months
ended June 30, 2005 at an exercise price of $0.72 per share for a total of
$25,200.
On
March
18, 2005, the Company’s Board of Directors approved the re-pricing of existing
warrants to purchase 425,000 shares of Common Stock held by a former Director.
The exercise price was changed from $0.90 per share to $0.75 per share. The
Company is accounting for these warrants as variable from the date of the
modification to the date the award is exercised, is forfeited, or expires
unexercised. At June 30, 2005 the stock price was less than the exercise
price;
therefore there was no intrinsic value.
In
May of
2005 warrants to purchase 100,000 shares of Common Stock were issued to a
consultant as payment for services at exercise prices from $1.20 to $1.60
per
share. The value ($23,120) of these warrants was calculated on a fair value
basis and is being amortized over the life of the contract. These warrants
will
continue to be revalued until the services are completed.
In
August
2005, subsequent to the balance sheet date, the Company issued warrants
to
purchase 94,650 shares of common stock to a distributor as payment for
commissions of $73,617 accrued at June 30, 2005. The value ($51,963) of these
warrants was calculated on a fair value basis. The Company recorded this
transaction as of June 30, 2005.
(c) SERIES
A
8% CONVERTIBLE Preferred Stock:
The
Series A Preferred Stock was issued at a face value of $30,000 per share
and
came with detachable warrants. The recorded amount of the preferred shares
was
calculated using a fair value allocation between the preferred shares and
detachable warrants. Some key features include:
Dividends:
Holders are entitled to an 8% per annum dividend payable semi-annually, in
cash
or, at the Company’s option, in Common Stock.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
Conversion:
Series A preferred stock is convertible, at the option of the holders,
into
shares of Common Stock at a conversion price of $0.60 per share. Based
on its
original purchase price of $30,000 per share, each share of Series A
Preferred
Stock is convertible into 50,000 shares of Common Stock.
Redemption:
The Series A Preferred Stock is not currently redeemable and there is
no
certainty that it will become redeemable; accordingly, no accretion is
being
made to bring the value up to its redemption value (The liquidation preference
is $30,000 per share plus accrued and unpaid dividends, presently $384.07
per
share, an aggregate for all such shares of $4,839,837). Accrued but unpaid
dividends of $61,177 are included in the preferred stock carrying value
as at
June 30, 2005.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the series A preferred stock transaction and found
that there
was an associated beneficial conversion feature totaling $1,635,416;
the
preferred stock was further discounted by this amount. The beneficial
conversion
amount was then accreted back to the preferred stock in accordance with
the
conversion provision which allowed for 20% to be converted immediately
and 100%
after the earlier of ten months from the merger or 6 months after the
registration statement registering the underlying common shares was effective.
The total amount accreted back to the preferred and charged to dividends
was
$261,666. Likewise, costs associated with the offering were charged to
dividends
over the same period. This amount totaled $62,728 for the six month period
ended
June 30, 2005.
(d) SERIES
B 9% CONVERTIBLE Preferred Stock:
The
Series B Preferred Stock was issued at a face value of $50,000 per share
and
came with detachable warrants. The recorded amount of the preferred shares
was
calculated using a fair value allocation between the preferred shares
and
detachable warrants. Some key features of the Series B Preferred Stock
(see note
1) are as follows:
Dividends:
The 9% Series B Preferred Stock accrues dividends at 9% per annum, payable
semi-annually. Dividends are payable in either Series B Preferred Stock
(plus
associated warrants) or cash. The majority investor in the Series B financing
has the option as it pertains to their dividend payment to choose cash
or
preferred shares. The Company has the option to choose cash or preferred
shares
as to the balance of the dividends.
Conversion:
The Series B Preferred Stock is convertible, at the option of the holders,
into
shares of Common Stock at a conversion price of $.61 per share. Based
on the
original purchase price of $50,000 per share, each share of Series B
Stock is
convertible into 81,968 shares of Common.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series B Preferred Stock. The series
B preferred is not currently redeemable and there is no certainty that
it will
become redeemable; accordingly, no accretion is being made to bring the
value up
to its redemption value (The liquidation preference is $50,000 per share
plus
accrued and unpaid dividends, presently $2,050.31 per share, an aggregate
for
all such shares of $5,165,993). Accrued but unpaid dividends of $203,493
are
included in the preferred stock carrying value as at June 30, 2005.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the series B preferred stock transactions and found
that there
was an associated beneficial conversion feature totaling $2,437,035;
the
preferred stock was further discounted by this amount. The beneficial
conversion
amount was then accreted back to the preferred stock in accordance with
the
conversion provision which allowed for 100% to be converted immediately.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED STATEMENTS
UNAUDITED
NOTE
7—COMMITMENTS AND CONTINGENCIES:
Economic
Dependency:
The
Company had sales to one customer in excess of 10% of total sales in the
three
months ended June 30, 2005. Sales to this customer aggregated
$352,500.
The
Company had sales to two customers in excess of 10% of total sales in the
three
months ended June 30, 2004. Sales to these customers were $241,156 and $140,218,
respectively.
The
Company had sales to two customers in excess of 10% of total sales in the
six
months ended June 30, 2005. Sales to these customers were $352,500 and $118,294,
respectively.
The
Company had sales to two customers in excess of 10% of total sales in the
six
months ended June 30, 2004. Sales to these customers were $361,156 and $167,797,
respectively.
The
Company had no purchases from any vendor in excess of 10% of total purchases
for
the three months or six months ended June 30, 2005 and June 30, 2004.
Litigation:
The
Company is involved in a patent litigation with Saliva Diagnostic Systems,
Inc.
(“Saliva”), the assignee of patent related to a method for collecting samples.
The Company has requested relief from the court that its Sure Check™ HIV test
does not infringe Saliva’s patent, that such patent is invalid, and that it is
unenforceable due to inequitable procurement. Saliva has answered and
counterclaimed, alleging that the Company has infringed the patent, which the
Company has denied. In the years 2001 through 2003, the Company paid royalties
to Saliva and took several other actions based upon Saliva’s representations
regarding its alleged patent. The parties to the litigation are presently
awaiting the judge’s ruling on certain issues before proceeding with the
discovery phase. The Company’s patent counsel has opined that the product
manufactured by the Company is not in fact covered by Saliva’s patent, that said
patent is invalid and that it was obtained through inequitable
procurement.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
This
discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and
analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared as set forth
in Note
2 in the Notes to Consolidated Statements. The preparation of financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, reported amounts of revenue
and
expenses during the reporting period, and disclosure of any contingent
liabilities at the financial statement date. On an on-going basis we review
our
estimates and assumptions. Our estimates were based on our historical experience
and other assumptions that we believe to be reasonable under the circumstances.
Actual results are likely to differ from those estimates under different
assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or unknown risks,
uncertainties and other factors that may cause the actual results, performance,
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Specifically, 1) our ability to obtain necessary regulatory
approvals for our products; and 2) our ability to increase revenues
and
operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continues" or the negative of these terms or
other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
OVERVIEW
The
Company, through its wholly owned subsidiary, Chembio Diagnostic Systems,
Inc.
(“CDS”), develops, manufactures, and markets rapid point of care medical
diagnostic tests. These tests are sold in the U.S. and/or internationally
to
medical laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail establishments.
The products are made under the label of CDS or the private labels of its
distributors or their customers. The products aid in the diagnosis of infectious
diseases and other conditions in humans and animals
Critical
Accounting Policies and Estimates
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies
affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, research and development costs, valuation
of
inventory, valuation of long-lived assets and income taxes. For a summary
of our
significant accounting policies (which have not changed from December 31,
2004),
see our annual report on Form 10-KSB for the period ended December 31,
2004
filed March 31, 2005.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AS COMPARED WITH
THE
THREE MONTHS ENDED JUNE 30, 2004
Revenues
are comprised of $814,307 in net sales and $91,382 in grants and development
income for the three months ended June 30, 2005 as compared with $746,954
in net
sales and $248,121 in grant and development income for the three months
ended
June 30, 2004. The increase in sales is attributable to increased sales
of our
HIV product of $215,101, decreased sales of our pregnancy test kit of $145,760,
a product line which the Company is deemphasizing, and decreases in other
product sales of $1,988. The decrease in grant and development income of
$156,739 was due to grants and development income received in the second
quarter
of 2004 that did not recur in 2005. A substantial portion of the grant-related
income in the second quarter of 2005 is expected not to recur beyond
the
third quarter of 2005.
Cost
of
goods sold for the three months ended June 30, 2005 was $636,380, or 78.2%
of
net sales, as compared to $673,616, or 90.2% of
net
sales, for the three months ended June 30, 2004. The increase in gross
margin
percentage is primarily attributable to the increased sales for our HIV
products, which were at a higher margin than our other product lines. We
anticipate that we will receive significant orders of our HIV and Chagas
disease
rapid test products over the next two quarters which, if realized, should
generate substantially increased gross margins for the balance of
2005.
Research
and development expenses for the three months ended June 30, 2005 were $426,782
compared with $377,473 for the three months ended June 30, 2004. Included
in
this category are expenses for Clinical & Regulatory Affairs which totaled
$170,376 for the three months ended June 30, 2005, a decrease of $46,194
compared to the three months ended June 30, 2004. This category includes
costs
incurred for regulatory approvals, clinical studies, product evaluations
and
registrations. We had a decrease in our clinical trial costs of almost $100,000
which was partially offset by the added costs of $38,000 for a VP of Regulatory
Affairs who commenced employment in July of 2004. We expect costs in this
category to continue in the third quarter of 2005 and be reduced in the fourth
quarter of 2005. Increased salaries and wages and related costs of the R&D
group of $34,000, increased travel and entertainment of $26,000, grant payments
to Stony Brook University of $20,000 and recruitment charges of $10,500 to
hire
additional staff has contributed to the increase in R&D
expenses.
The
status of each of our major research and development projects is as follows:
Project
|
New
Generation Rapid Tests Based Upon Patent Pending
Platform
|
Current
status
|
We
have done an extensive amount of preliminary laboratory work
on prototypes
of a our new patent pending lateral flow rapid test platform
with a new
generation rapid HIV test using our current reagents as the initial
application. This preliminary work has confirmed the advantages
of this
new platform in terms of sensitivity to weak and early sero-conversion
samples. We also believe that this platform may provide us the
level of
sensitivity that we will need in order to complete development
of our
human TB rapid test which we could not achieve sensitivity with
based upon
the existing platform. Based upon additional work planned on
this project
over the balance of this year and input from our marketing department
we
will determine which of these or other applications to focus
on for this
new platform.
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
Will
depend on decisions regarding applications and other features
to be
incorporated into this platform, and as such cannot be anticipated
at this
time
|
Anticipated
completion date
|
It
is not known at this time whether or how long it will take to
develop the
product or obtain regulatory approvals in the US, Europe, Japan
and other
potential markets.
|
Risks
and uncertainties associated with completing development on schedule,
and
the consequences to operations, financial position and liquidity
if not
completed timely
|
The
requirements for clinical testing and the outcomes of such clinical
testing can not be known at this time, and this information poses
substantial risk and uncertainty as to whether or when this product
will
contribute to the operations, financial position and
liquidity.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project
will
commence due to the uncertainties associated with the completion
of the
product, regulatory submissions, and without further progress
on a
distribution strategy.
|
Project
|
Rapid
Test for Mad Cow Disease
|
Anticipated
completion date
|
This
project has been suspended
indefinitely
|
Project
|
Rapid
Test for the detection of antibodies to active
pulmonary
tuberculosis in non-human primate whole blood
samples
|
Current
status
|
Product
validation completed.
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
We
submitted the initial documentation required to commence our application
to the United States Department of Agriculture (USDA) for the approval
of
the product and of our facility where it will be manufactured. We
have
continued to work with our collaborators in order to complete our
clinical
trial protocol and are developing a marketing plan for this
product.
|
Anticipated
completion date
|
We
anticipate that we could have USDA approval by the first quarter
of
2006.
|
Risks
and uncertainties associated with completing development on schedule,
and
the consequences to operations, financial position and liquidity
if not
completed timely
|
The
requirements for clinical testing and the outcomes of such clinical
testing can not be known at this time, and this information poses
substantial risk and uncertainty as to whether or when this product
will
contribute to the operations, financial position and
liquidity.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project
will
commence due to the uncertainties associated with the completion
of the
product, regulatory submissions, and without further progress on
a
distribution strategy.
|
Project
|
Dental
Bacteria Test
|
Current
status
|
We
expected to complete Phase 2 of the Project Plan (Optimization of
Test)
and move into Phase 3 (Scale Up of Production and validation) in
2005.
However, one of the monoclonal antibodies has sensitivity and specificity
problem with lateral flow test system. We are therefore discussing
strategies in order to overcome this technical problem. We are also
considering another detection system, which could be applied instead
of
the lateral flow system. Such a system could be based on antibodies
labeled with fluorescence markers. However, a correspondent reader
would
have to be used for an analysis of the risk of caries (dental
decay).
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
In
April 2004, Chembio received 80% of the Phase 2 project funding of
$65,000, or $52,000 and this reflected the estimate of the costs
anticipated to be incurred to complete Phase 2 during a three to
five
month period. It is now assumed that Phase 2 will not be satisfactorily
completed and that any additional funding from Ivoclar-Vivadent will
be
pursuant to a new development contract, which is under discussion.
Chembio
has completed the level of effort needed to earn the 80%
funded.
|
Anticipated
completion date
|
It
is not known at this time whether or how long it will take to develop
the
product or obtain regulatory approvals in the US, Europe, Japan and
other
potential markets.
|
Risks
and uncertainties associated with completing development on schedule,
and
the consequences to operations, financial position and liquidity
if not
completed timely
|
Technical
challenges remain that must be overcome in order for this product
to meet
the performance specifications that Ivoclar-Vivadent had set forth
in the
Agreement. If we do not achieve the performance specifications, the
product will not be completed.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project
will
commence due to the uncertainties associated with the completion
of the
product, regulatory submissions, and the nature and timing of
Ivoclar-Vivadent’s distribution network and
strategy.
|
Selling,
general and administrative expense decreased $44,189 to
$729,435 in the three months ended June 30, 2005 compared with the same
period
in 2004. This decrease was attributable to over $240,000 related to officer’s
salary in the 2004 period resulting from the value of stock issued at
the time
of the merger to a former officer, which was partially offset by increases
in
office salary of $31,000, sales and marketing salary increases of $39,000,
commissions and royalty expenses of $49,500, trade shows of $10,000,
investor
relations of $37,000, consulting costs associated with 404 compliance
(Sarbanes-Oxley) of $17,000, insurance coverage for directors and officers
of
$8,000 and other expenses aggregating $4,500.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AS COMPARED WITH
THE SIX
MONTHS ENDED JUNE 30, 2004
Revenues
are comprised of $1,160,432 in net sales, $250,000 in license revenue
and
$227,142 in grants and development income for the six months ended June
30, 2005
as compared with $1,236,595 in net sales, no license revenue and $343,782
in
grant and development income for the six months ended June 30, 2004.
The
decrease in sales is attributable to decreased sales of our pregnancy
test kit
of $213,456 which was partially offset by increased sales of our HIV
product of
$129,080 and increases in other product sales aggregating $8,213. The
increase
in license revenue was $250,000 and is due to a technology transfer agreement.
The Company does not expect that this revenue will continue in the future.
The
decrease in grant and development income was $116,640 and was due to
grants
received in the first half of 2004 that weren’t awarded or earned in 2005. A
substantial portion of the grant-related income is expected to recur
until the
third quarter of 2005.
Selling,
general and administrative expense decreased $44,189 to $729,435 in the
three
months ended June 30, 2005 compared with the same period in 2004. This
decrease
was attributable to over $240,000 related to officer’s salary in the 2004 period
resulting from the value of stock issued at the time of the merger to
a former
officer, which was partially offset by increases in office salary of
$31,000,
sales and marketing salary increases of $39,000, commissions and royalty
expenses of $49,500, trade shows of $10,000, investor relations of $37,000,
consulting costs associated with 404 compliance (Sarbanes-Oxley) of $17,000,
insurance coverage for directors and officers of $8,000 and other expenses
aggregating $4,500.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AS COMPARED WITH
THE SIX
MONTHS ENDED JUNE 30, 2004
Revenues
are comprised of $1,160,432 in net sales, $250,000 in license revenue
and
$227,142 in grants and development income for the six months ended June
30, 2005
as compared with $1,236,595 in net sales, no license revenue and $343,782
in
grant and development income for the six months ended June 30, 2004.
The
decrease in sales is attributable to decreased sales of our pregnancy
test kit
of $213,456 which was partially offset by increased sales of our HIV
product of
$129,080 and increases in other product sales aggregating $8,213. The
increase
in license revenue was $250,000 and is due to a technology transfer agreement.
The Company does not expect that this revenue will continue in the future.
The
decrease in grant and development income was $116,640 and was due to
grants
received in the first half of 2004 that weren’t awarded or earned in 2005. A
substantial portion of the grant-related income is expected to recur
until the
third quarter of 2005.
Cost
of
goods sold for the six months ended June 30, 2005 was $1,100,930, or 94.9%
of
net sales, as compared to $1,139,018, or 92.1% of
net
sales, for the six months ended June 30, 2004. The decrease in gross margin
is
primarily attributable to underutilization of manufacturing capacity as sales
volume for the first quarter decreased. We also had increased costs due to
the
creation of separate quality assurance and quality control departments and
the
hiring of a new manager to head up the quality assurance department. We
anticipate that we will receive significant orders of our HIV and Chagas
Disease
rapid test products over the next two quarters which should generate
substantially increased gross margins for the balance of 2005.
Research
and development expenses for the six months ended June 30, 2005 were $761,532
compared with $515,801 for the six months ended June 30, 2004. Expenses for
Clinical & Regulatory Affairs, totaled $309,143 for the six months ended
June 30, 2005, an increase of $79,508 over the six months ended June 30,
2004,
and accounted for most of this increase. This category includes costs incurred
for regulatory approvals, clinical studies, product evaluations and
registrations as well as $82,000 due salary and related cost of a Vice-President
of Regulatory Affairs which was partially offset by a reduction of $21,000
in
outside regulatory consultants. These costs are expected to continue in the
3rd
quarter of 2005, when the HIV rapid test applications and review will be
completed. Increased salaries and wages and related costs for the R&D group
of $74,000, increased travel and entertainment of $41,000, grant payments
to
Stony Brook University of $35,000 and recruitment charges to hire additional
staff of $11,500 has contributed to the increase in R&D
expenses.
Selling,
general and administrative expense increased $156,197 to $1,285,495 in the
six
months ended June 30, 2005 compared with the same period in 2004. This increase
was attributable to $54,000 in office salaries, $7,000 in increased sales
and
marketing salaries, $39,000 for increased marketing consultant expenses,
$73,500
in increased royalties, additional costs relating to investor relations of
$87,000, new costs associated with our board of directors of $20,000, increased
insurance coverage for directors and officers of $18,500, costs related to
404
compliance of $17,000 and increased legal and accounting expenses of $136,000
relating to patent applications, patent litigation, the filing of a registration
statement and other required year-end and quarterly filings. These increases
were partially offset by a reduction of $45,000 in sales commissions, reduction
of travel and entertainment of $14,000, reduction of recruiting fees of $12,000
and a reduction in officer’s salaries of $240,000 mostly due to the valuation of
stock issued to a former officer at the time of the merger in the 2004
period.
LIQUIDITY
AND CAPITAL RESOURCES
We
had a
working capital surplus of $2,491,573 at June 30, 2005 and a working capital
deficiency of $452,136 at December 31, 2004. On January 28, 2005, we completed
a
private placement offering which raised $5,047,500 before costs in the form
of
9% Convertible Series B Preferred Stock and associated warrants (“Series B
Offering”). The proceeds from the Series B Offering are being used primarily for
general corporate purposes including for sales and marketing, research and
development, and intellectual property, and also for working capital, investor
relations, and capital expenditures.
We
anticipate that the funds from the Series B Offering will be enough to fund
our
needs at least through the third quarter of 2005. We anticipate this based
upon
our recently completed operating budget which assumes significant new
expenditures this year that are intended to help us increase revenues and
cash
flow, and to achieve a variety of other corporate objectives that are aimed
to
increase shareholder value. The Company is considering alternatives to provide
for its capital requirements for late 2005 and beyond. There are no assurances
that it will be successful in raising sufficient capital.
Our
liquidity and cash requirements will depend on several factors. These factors
include (1) the level of revenue growth; (2) the extent to which, if any,
that
revenue growth improves operating cash flows; (3) our investments in research
and development, facilities, marketing, regulatory approvals, and other
investments we may determine to make, and (4) the investment in capital
equipment and the extent to which it improves cash flow through operating
efficiencies.
The
following table lists the future payments required on our debt and any other
contractual obligations as of June 30, 2005:
OBLIGATIONS
|
|
Total
|
|
Less
than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Greater
than
5
Years
|
|
Long
Term Debt(1)
|
|
$
|
273,160
|
|
$
|
120,000
|
|
$
|
153,160
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Leases (2)
|
|
$
|
97,199
|
|
$
|
41,688
|
|
$
|
55,511
|
|
|
-
|
|
|
-
|
|
Operating
Leases
|
|
$
|
173,950
|
|
$
|
98,613
|
|
$
|
75,337
|
|
|
-
|
|
|
-
|
|
Other
Long Term Obligations(3)
|
|
$
|
852,717
|
|
$
|
461,217
|
|
$
|
260,250
|
|
$
|
25,000
|
|
$
|
106,250
|
|
Total
Obligations
|
|
$
|
1,397,026
|
|
$
|
721,518
|
|
$
|
544,258
|
|
$
|
25,000
|
|
$
|
106,250
|
|
(1) This
represents accrued interest which is currently being paid out at the rate of
$10,000 per month.
(2) This
represents capital leases used to purchase capital equipment.
(3) This
represents contractual obligations for licenses and employment
contracts.
CHEMBIO’S
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During
the second quarter of 2005, we
established an office in East Africa and are making significant progress
toward
becoming part of the national testing algorithms in countries in this region,
the primary focus of our sales efforts. We have already registered our
products
and have established distribution partners in certain of these countries
and are
in that process in other countries. We also put in place a distribution
agreement with a company that specializes in bidding for international
tenders
of HIV tests and related products that are funded by donor programs and
in July
we received a purchase order for approximately 50,000 tests as a result
of this
agreement. This order is for delivery during the third quarter of 2005.
Participation in these tenders is possible because of our qualification
under
the 2005 WHO bulk procurement list and the USAID waiver list, in addition
to
successful local registrations and evaluations. The 2005 WHO bulk procurement
list and the updated USAID waiver list was distributed late in the second
quarter of this year. We are also working on establishing an office in
West
Africa and we currently anticipate that we will have this in place within
the
next 60 days.
Our
technology transfer and supply agreement in Brazil is moving forward We
shipped
150,000 test units last quarter, and received a new order for 220,000 test
units
to be delivered in the third quarter of 2005. We
expect to receive an order to deliver 330,000 additional tests during the
fourth
quarter. This will result in a total of 700,000 test units shipped in 2005
up
from 450,000 units last year. We further expect, although there is no assurance
that this program will continue to increase in 2006. Furthermore we are
actively discussing new projects and collaborations with our Brazilian
partners
which we believe, could generate additional revenues in 2006
We
also
believe that there will be significant revenue growth for our Chagas Disease
rapid test in the balance of 2005 and into 2006, primarily because of the
specifications for certain international donor-funded programs for which
we
believe our test is uniquely qualified. However
we have no commitments or other assurance they will
occur.
Over
the
next 12 months we will be making significant new investments in our sales
and
marketing organization in order to increase sales of our existing products
as
well as to penetrate markets for new products we have under development.
We are
also investing in personnel and outside consultants that we believe will
provide
us with more visibility both within the markets for our products as well
as
within the financial and investment markets in order that investors may
become
more familiar with our business and strategy.
During
the second quarter we filed a patent application for a new lateral flow
device
and method which we believe will provides
us with proprietary intellectual property to develop a pipeline of products
that we believe will have improved performance over currently available
lateral flow technologies. We believe that this new platform can be the
basis
for significant new product developments during 2006 which can address
large and
unmet needs for screening of tuberculosis and other infectious diseases
that
occur in markets that we are already serving with our HIV rapid
tests.
As
stated
above, we believe that our current cash balances, will be sufficient to
fund
operations at least through the end of the third quarter of 2005. Therefore,
we
expect that we will be required to sell additional equity or obtain additional
credit facilities in the fourth quarter of 2005.
ITEM
3. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, we have evaluated, under the
supervision and with the participation of management, including our chief
executive officer and the chief financial officer, the effectiveness of the
design and operation of our “disclosure controls and procedures” (as defined in
Security Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). Based
on this
evaluation our management, including our chief executive officer and chief
financial officer, have concluded that as of the end of the period covered
by
this report our disclosure controls and procedures were effective to ensure
that
all material information required to be filed in this report has been made
known
to them.
Changes
In Internal Controls Over Financial Reporting
There
have been no changes in internal controls over financial reporting that occurred
during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
On
April
15, 2005, the Company granted its new non-employee director, Alan Carus,
options
to purchase 36,000 shares of the Company’s common stock at an exercise price of
$0.79, as a part of his compensation for his service on the Company’s Board of
Directors. One-third of the options granted vest immediately, one-third of
the
options vest one year after the date of grant, and one-third of the options
vest
two years after the date of grant. Each of these options expires on April
15,
2010.
On
May 1,
2005, the Company entered into a contract with Business Consulting Group
Unlimited, Inc., a consulting company, and as part of the terms of this contract
the Company issued 25,000 shares of common stock to the consulting company
as a
portion of the compensation for services to be performed. If the contract
is not
terminated, the Company will be required to issue an additional 25,000 shares
of
common stock to the consulting company. The Company relied on Section 4(2)
of
the Securities Act of 1933 as the basis for its exemption from registration
of
this issuance. The sole investor in the issuance was an accredited
investor.
On
May
15, 2005, the Company issued 312,773 shares of common stock as payment of
dividends on the Company’s series A preferred stock. No cash was exchanged in
this issuance. The Company relied on Section 4(2) of the Securities Act of
1933
as the basis for its exemption from registration of this issuance. The investors
in the issuance were accredited investors of the Company.
On
May
17, 2005, in accordance with the terms of the Company’s 1999 Equity Incentive
Plan, the Company granted to certain employees of the Company options to
purchase 289,000 shares of the Company’s common stock. The exercise price for
these options is equal to $.80. Each option granted will expire and terminate,
if not exercised sooner, upon the earlier to occur of (a) 30 days after
termination of the employee’s employment with the Company or (b) the fifth
anniversary of the date of grant. The Company relied on Section 4(2) of the
Securities Act of 1933 and Rule 701 as the basis for its exemption from
registration of this issuance.
On
May
16, 2005, the Company entered into a contract with Global Health Strategies,
a
consulting firm that assists the Company with marketing, strategic planning,
and
communications issues. As a part of the terms of this contract the Company
issued to Global Health Strategies, as part of Global Health Strategies’
compensation, 25,000 shares of the Company’s common stock and warrants to
purchase an aggregate of 100,000 shares of the Company’s common stock, 50,000
shares at an exercise price of $1.20 per share and 50,000 shares at an exercise
price of $1.60 per share, to become exercisable six months from the date
of the
contract and to expire and terminate on the third anniversary of the date
of the
contract. The Company relied on Section 4(2) of the Securities Act of 1933
as
the basis for its exemption from registration of this issuance. The sole
investor in the issuance was an accredited investor.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The
Annual Meeting of Stockholders was held on June 17, 2005. There were four
matters submitted to a vote of security holders.
The
first matter was the election of directors. Each of the
persons named in the Proxy Statement as a nominee for director was elected
to a
one-year term. Following are the voting results on each of the nominees
for
director:
Nominees |
Votes
For
|
Votes
Withheld
|
Lawrence A. Siebert |
4,756,308
|
116,051
|
Dr. Gary Meller |
4,756,308
|
116,051
|
Gerald A. Eppner |
4,756,308
|
116,051
|
Alan Carus |
4,756,308
|
116,051
|
The
second matter was the amendment to the Company’s Articles of
Incorporation to increase the number of authorized shares of common stock
from
50,000,000 to 100,000,000 shares. The stockholders cast 4,755,055 votes
in the
affirmative and 118,304 votes in the negative, stockholders holding 0 votes
abstained from voting, and there were 0 broker non-votes on the amendment
to the
Articles of Incorporation.
The
third
matter was the amendment and restatement of the Company’s 1999 Stock Option Plan
to increase the number of shares of common stock issuable pursuant to options
granted under that Plan from 1,500,000 to 3,000,000 and to permit the grant
of
stock options to non-employee directors under the Plan. The stockholders
cast
3,260,837 votes in the affirmative and 122,304 votes in the negative,
stockholders holding 0 votes abstained from voting, and there were 1,489,218
broker non-votes on the amendment to the 1999 Stock Option Plan.
The
fourth matter was the ratification of the Board of Directors’ selection of
Lazar, Levine & Felix LLP to serve as the Company’s independent certified
accountants for the fiscal year ending December 31, 2005. The stockholders
cast
4,752,161 votes in the affirmative and 116,051 votes in the negative, and
stockholders holding 5,000 votes abstained from voting on the ratification
of
Lazar, Levine & Felix LLP as the Company’s independent certified accountants
for the fiscal year ending December 31, 2005.
3.2
Bylaws. (1)
_____________________
(1)
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed with
the Commission on August 23, 1999.
(2)
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on May 14, 2004.
(3)
Incorporated by reference to the Registrant’s registration statement on Form
10-KSB filed with the Commission on March 31, 2005.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chembio
Diagnostics, Inc.
Date:
|
August
12, 2005
|
By:
/s/ Lawrence A. Siebert
|
|
|
Lawrence
A. Siebert
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
Date:
|
August
12, 2005
|
By:
/s / Richard J. Larkin
|
|
|
Richard
J. Larkin
|
|
|
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
|