UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Chembio
Diagnostics, Inc.
(Name
of
small business issuer in its charter)
Nevada
|
6282
|
88-0425691
|
(State
or Jurisdiction of Incorporation or organization)
|
(Primary
Standard Industrial Classification Code Number)
|
(I.R.S.
Employer Identification Number)
|
|
|
|
3661
Horseblock Road
Medford,
New York 11763
631)
924-1135
(Address
and telephone number of principal executive offices)
Lawrence A.
Siebert
3661
Horseblock Road
Medford,
New York 11763
(631)
924-1135
(Name,
address and telephone number of agent for service)
Copy
of
all communications to:
Alan
Talesnick, Esq.
James
J. Muchmore, Esq.
Patton
Boggs LLP
1660
Lincoln Street, Suite 1900
Denver,
Colorado 80264
(303)
830-1776
Approximate
date of commencement of proposed sale to the public: As soon
as practicable
after this registration statement becomes effective.
If
this
Form is filed to register additional securities for an offering
pursuant to Rule
462(b) under the Securities Act, please check the following box
and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the
Securities Act, check the following box and list the Securities
Act registration
statement number of the earlier effective registration statement
for the same
offering. [ ]
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the
Securities Act, check the following box and list the Securities
Act registration
statement number of the earlier effective registration statement
for the same
offering. [ ]
If
any of
the securities being registered on this Form are to be offered
on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If
delivery of the prospectus is expected to be made pursuant to
Rule 434, please
check the following box. [ ]
CALCULATION
OF REGISTRATION FEE
|
Title
Of Each
Class
of Securities
To
Be Registered
|
Number
of Units/Shares To Be
Registered
|
Proposed
Maximum
Offering
Price
Per
Unit (1)
|
Proposed
Maximum
Aggregate
Offering
Price (1)
|
Amount
Of
Registration
Fee
|
|
|
|
|
|
Common
Stock, $0.01 par value per share (2)
|
26,024,217
|
$.80
|
$20,813,373
|
$2,227.67
|
|
|
|
|
|
(1)
|
Estimated
solely for purposes of calculating the registration
fee in accordance with
Rule 457(c) under the Securities Act of 1933, as amended
(the “Act”),
based on the average of the bid and ask prices for
the Registrant’s common
stock as reported on the OTC Bulletin Board on October
27,
2006.
|
a.
|
Includes
(i) up to 10,312,500 shares issuable upon the conversion
of 165
shares of the Registrant’s 7% Series C Convertible Preferred Stock,
(ii) up to 2,578,125 shares issuable upon the exercise of
related
warrants.
|
b. |
Includes
(i) up to 520,000 shares issuable upon the exercise of
warrants related to
Debentures issued June 29, 2006, and (ii) 156,000 shares
of common stock
that may be issued to the Selling Stockholders under
the anti-dilution
provisions of the Debentures.
|
c. |
Includes
(i) up to 1,803,273 shares issuable upon the conversion of
22 shares
of the Registrant’s 9% Series B Convertible Preferred Stock,
(ii) up to 1,713,114 shares issuable upon the exercise of
related
warrants.
|
d. |
Represents
shares of common stock registered for resale by the holders
(the “Selling
Stockholders”) of shares of 9% Series B Convertible Preferred Stock
consisting of (i) 486,884 shares of common stock that
may be issued to pay
semi-annual dividends to the Selling Stockholders, and
(ii) 1,200,984
shares of common stock that may be issued to the Selling
Stockholders
under the anti-dilution provisions of the 9% Series B
Convertible
Preferred Stock.
|
e. |
Represents
shares of common stock registered for resale by the holders
(the “Selling
Stockholders”) of shares of 7% Series C Convertible Preferred Stock
consisting of (i) 2,165,625 shares of common stock that
may be issued to
pay semi-annual dividends to the Selling Stockholders,
and (ii) 4,516,875
shares of common stock that may be issued to the Selling
Stockholders
under the anti-dilution provisions of the 9% Series B
Convertible
Preferred Stock.
|
f. |
Includes
(i) shares up to 172,082 shares currently held by the selling
stockholders and (ii) up to 398,755 shares issuable upon the exercise
of outstanding warrants.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
EXPLANATORY
NOTE
Pursuant
to Rule 429 promulgated under the Securities Act of 1933, as
amended, the
prospectus included in this registration statement is a joint
prospectus that
updates and replaces the prospectus included in the registration
statements on
Form SB-2 first filed with the Securities and Exchange Commission
on
June 7, 2004 (Commission File Number 333-116219), on March 28, 2005
(Commission File Number 333-123600), and on April 26, 2006 (Commission
File
Number 333-125942), and also constitutes the prospectus for this
registration
statement (Commission File Number 333-______).
The
information in this prospectus is not complete and may be changed.
The selling
security holders may not sell these securities until the registration
statement
filed with the Securities and Exchange Commission is effective.
This prospectus
is not an offer to sell these securities and neither the selling
security
holders nor we are soliciting offers to buy these securities
in any state where
the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED
OCTOBER 27, 2006
PROSPECTUS
CHEMBIO
DIAGNOSTICS, INC.
73,333,448
SHARES OF COMMON STOCK
This
prospectus relates to the sale by certain stockholders of Chembio
Diagnostics,
Inc. of up to 73,333,448 shares of our common stock which they
own, or which
they may at a later date acquire upon the conversion of shares
of our 8%
series A convertible preferred stock, upon the conversion of shares
of our
9% series B convertible preferred stock, upon the conversion of shares
of
our 7% series C convertible preferred stock, upon the exercise of warrants
and options to purchase shares of our common stock, as payments
of semi-annual
dividends on our 9% series B convertible preferred stock and
our 7% series C
senior convertible preferred stock, upon the trigger of the anti-dilution
provisions of the 9% series B convertible preferred stock and
the 7%
series C senior convertible preferred stock. In this prospectus, we
refer
to these persons as the selling security holders.
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.” On
October 27, 2006 the closing bid and ask prices for one share
of our common
stock were $0.78 and $0.81, respectively, as reported by the
OTC Bulletin Board
website. These over-the-counter quotations reflect inter-dealer
prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual
transactions.
---------------------------------------------
These
securities are speculative and involve a high degree of risk.
You should
consider carefully the “Risk Factors” beginning on Page 3 of this
prospectus before making a decision to purchase our stock.
---------------------------------------------
Neither
the Securities and Exchange Commission nor any state securities
commission has
approved or disapproved of these securities or passed upon the
adequacy or
accuracy of this prospectus. Any representation to the contrary
is a criminal
offense.
---------------------------------------------
The
date
of this prospectus is ________, 2006
TABLE
OF CONTENTS
Prospectus
Summary
|
1
|
Risk
Factors
|
3
|
Use
of Proceeds
|
9
|
Dilution
|
9
|
Selling
Security Holders
|
10
|
Plan
of Distribution
|
15
|
Legal
Proceedings
|
16
|
Directors,
Executive Officers and Control Persons
|
17
|
Security
Ownership of Certain Beneficial Owners and Management
|
19
|
Description
of Securities
|
21
|
Description
of business and organization for Last Five Years
|
25
|
Cautionary
Statement Regarding Forward-Looking Statements
|
38
|
Management's
Discussion and Analysis and Plan of Operation
|
38
|
Description
of Property
|
47
|
Certain
Relationships and Related Transactions
|
48
|
Market
for Common Equity and Related Stockholder Matters
|
50
|
Executive
Compensation
|
52
|
Financial
Statements
|
55
|
Experts
|
55
|
Legal
Matters
|
55
|
Disclosure
of Commission Position of Indemnification for Securities
Act
Liabilities
|
55
|
Changes
in and Disagreements with Accountants on Accounting
and Financial
Disclosure
|
56
|
Additional
Information
|
56
|
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in
this prospectus.
You should read the entire prospectus carefully before making
an investment
decision.
Overview
Chembio
Diagnostic Systems Inc. was formed in 1985. Since inception we
have been
involved in developing, manufacturing, selling and distributing
medical
diagnostic tests, including rapid tests, for a number of diseases
and for
pregnancy. On May 5, 2004, Chembio Diagnostic Systems Inc. completed a
merger through which it became a wholly-owned subsidiary of Chembio
Diagnostics,
Inc., formerly known as Trading Solutions.com, Inc. (“Chembio” or the
“Company”). As a result of this transaction, the management and business
of
Chembio Diagnostic Systems Inc. became the management and business
of the
Company.
Our
Business
We
are a
developer and manufacturer of rapid diagnostic tests that aid
in the detection
of infectious diseases. On May 25, 2006 we received regulatory
approval from the
Food and Drug Administration (the “FDA”) of two pre-market applications for
rapid HIV tests. One pre-market application approval was for
our SURE CHECK® HIV
1/2, which incorporates the proprietary barrel technology; the
other pre-market
application approval was for our HIV 1/2 STAT PAK™ rapid HIV test in a cassette
format. We also have a third rapid HIV test, HIV 1/2 STAT PAK
Dipstick that is
only sold outside of the U.S. Applications for Clinical Laboratory
Improvement
Act waivers for these two FDA-approved tests have since been
submitted to the
FDA, and are currently pending.
During
2005 and 2006 year to date, we have had significant increases
in sales of our
rapid HIV tests to international customers. The majority of these
sales have
been to an agency of the Brazilian government, and for programs
in Africa funded
by major bi-lateral and multi-lateral programs, particularly
the President’s
Emergency Plan for AIDS Relief. On September 29, 2006, we executed
marketing and
license agreements with Inverness Medical Innovations, Inc.,
pursuant to which
Inverness will exclusively market both FDA approved products
in the U.S., and
SURE CHECK HIV 1/2, globally. Through these agreements, we have
also received
from Inverness a non-exclusive license to all of their lateral
flow intellectual
property for certain product lines we have and/or are developing.
We also are
focused on (1) marketing efforts to expand distribution of our
Chagas disease
rapid test; (2) efforts to complete development of, and to complete
regulatory
approval for our rapid tests for the detection of tuberculosis
in a number of
animal species; and (3) development of a number of other rapid
test applications
using our patent-pending Dual Path Platform (DPP™) technology, including an oral
fluid rapid HIV test and a human tuberculosis test.
Our
main
products are as follows:
· |
HIV
Rapid Tests: HIV 1/2 STAT-PAK(TM) Cassette’,
HIV 1/2 SURE CHECK(R)
and HIV 1/2 STAT-PAK (TM) Dipstick
|
· |
Chagas
Rapid Test: Chagas STAT-PAK
|
· |
Tuberculosis
(TB): Prima TB STAT-PAK and Veterinary
products
|
· |
We
also are in the process of developing rapid tests employing
our
patent-pending Dual Path Platform (DPP™) technology including, but not
limited to an oral fluid rapid HIV test and a human tuberculosis
test.
|
We
manufacture all of the products we sell. All of these products,
as well as those
that are under development employ various formats of lateral
flow technology.
Lateral flow, whether single or dual path, generally refers to
the process of a
sample flowing from the point of application on a test strip
to provide a test
result on a portion of a strip downstream from either the point
of application
of the sample or of another reagent. We believe we have expertise
and
proprietary know-how in the field of lateral flow technology.
We
have a
history of losses and we continue to incur operating and net
losses. We own no
patents, though we have non-exclusive licenses to lateral flow
patents held by
Inverness and Abbott Laboratories, Inc. and to reagents including
those that are
used in our HIV rapid tests. These licenses do not necessarily
insulate us from
patent challenges by other patent holders. We have filed applications
for two
lateral flow patents that incorporate features that we believe
may further
protect us from patent challenges.
Our
principal executive offices are located at 3661 Horseblock Road,
Medford, New
York 11763. Our telephone number is (631) 924-1135. Our website
address is
www.chembio.com.
The
Offering
By
means
of this prospectus, a number of our stockholders are offering
to sell up to
8,133,872 shares of common stock which they own, up to 25,121,345
shares of
common stock which they may at a later date acquire upon the
conversion of our
series A, series B and/or series C preferred stock, up to 24,290,013
shares of
common stock which they may at a later date acquire upon the
exercise of
warrants and/or options, up to 4,687,156 shares of common stock
which they may
at a later date acquire as dividends payable semi-annually on
the series B and
series C preferred stock, up to 10,945,062 shares of common stock
which they may
at a later date acquire pursuant to the anti-dilution provisions
of the series B
and series C preferred stock and up to 156,000 shares of common
stock which they
may at a later date acquire pursuant to the anti-dilution provisions
of the
debenture warrants. In this prospectus, we refer to these persons
as the selling
security holders.
As
of
October 6, 2006 we had 11,036,246 shares of common stock issued
and outstanding,
which includes shares offered by this prospectus. The number
of outstanding
shares of common stock does not give effect to common stock which
may be issued
pursuant to the conversion of our series A, B and C preferred
stocks and the exercise of options and/or warrants previously
issued by Chembio
Diagnostics, Inc.
We
will
not receive any proceeds from the sale of common stock by the
selling security
holders pursuant to this prospectus. If any of the shares registered
are not
issued as dividends, or under the anti-dilution provisions, to
the holders of
the series B or series C preferred stock, we will not sell these
shares to third
parties and will de-register those shares.
Summary
Financial Data
The
following table presents summary historical financial information
for the six
months ended June 30, 2006 and the fiscal years ended December 31, 2005 and
2004. The financial statements are set forth beginning on page
F-1 of this
prospectus, and you should read those financial statements for
a more complete
understanding of the following information.
|
|
For
the Six Months Ended June 30, 2006
|
|
Year
Ended December 31, 2005
|
|
Year
Ended
December
31, 2004
|
|
Revenue
|
|
$
|
2,874,903
|
|
$
|
3,940,730
|
|
$
|
3,305,932
|
|
Operating
Expenses
|
|
|
3,375,239
|
|
|
4,630,133
|
|
|
3,807,447
|
|
Net
Loss
|
|
|
(2,391,090
|
)
|
|
(3,252,000
|
)
|
|
(3,098,891
|
)
|
Current
Assets
|
|
|
3,665,469
|
|
|
2,468,193
|
|
|
1,211,060
|
|
Total
Assets
|
|
|
4,663,183
|
|
|
3,016,406
|
|
|
1,426,449
|
|
Current
Liabilities
|
|
|
4,279,722
|
|
|
1,818,474
|
|
|
1,663,196
|
|
Total
Liabilities
|
|
|
4,664,817
|
|
|
1,963,703
|
|
|
1,950,413
|
|
Convertible
Redeemable Preferred
|
|
|
n/a
|
|
|
n/a
|
|
|
2,427,030
|
|
Stockholders’
Equity (Deficit)
|
|
|
(1,634
|
)
|
|
1,052,703
|
|
|
(2,950,994
|
)
|
RISK
FACTORS
You
should carefully consider each of the following risk factors
and all of the
other information provided in this prospectus before purchasing
our common
stock. The risks described below are those we currently believe
may materially
affect us. An investment in our common stock involves a high
degree of risk, and
should be considered only by persons who can afford the loss
of their entire
investment.
Risks
related to our industry, business and strategy
Because
we may not be able to obtain necessary regulatory approvals for
some of our
products, we may not generate revenues in the amounts we expect,
or in the
amounts necessary to continue our business.
All
of
our proposed and existing products are subject to regulation
in the U.S. by the
U.S. Food and Drug Administration, the U.S. Department of Agriculture
and/or
other domestic and international governmental, public health
agencies,
regulatory bodies or non-governmental organizations. In particular,
we are
subject to strict governmental controls on the development, manufacture,
labeling, distribution and marketing of our products. The process
of obtaining
required approvals or clearances varies according to the nature
of, and uses
for, a specific product. These processes can involve lengthy
and detailed
laboratory testing, human or animal clinical trials, sampling
activities, and
other costly, time-consuming procedures. The submission of an
application to a
regulatory authority does not guarantee that the authority will
grant an
approval or clearance for product. Each authority may impose
its own
requirements and can delay or refuse to grant approval or clearance,
even though
a product has been approved in another country.
The
time
taken to obtain approval or clearance varies depending on the
nature of the
application and may result in the passage of a significant period
of time from
the date of submission of the application. Delays in the approval
or clearance
processes increase the risk that we will not succeed in introducing
or selling
the subject products, and we may determine to devote our resources
to different
products.
Changes
in government regulations could increase our costs and could
require us to
undergo additional trials or procedures, or could make it impractical
or
impossible for us to market our products for certain uses, in
certain markets,
or at all.
Changes
in government regulations may adversely affect our financial
condition and
results of operations because we may have to incur additional
expenses if we are
required to change or implement new testing, manufacturing and
control
procedures. If we are required to devote resources to develop
such new
procedures, we may not have sufficient resources to devote to
research and
development, marketing, or other activities that are critical
to our business.
For
example, the European Union and other jurisdictions have recently
established a
requirement that diagnostic medical devices used to test human
biological
specimens must receive regulatory approval known as a CE mark,
or be registered
under the ISO 13.485 medical device directive. The letters “CE” are the
abbreviation of the French phrase “Conforme Européene” which means “European
conformity.” ISO (“International Organization for Standardization”) is the
world’s largest developer of standards with 148 member countries. As
such,
export to the European and other jurisdictions without the CE
or ISO 13.485 mark
is not possible. Although we are not currently selling products
to countries
requiring CE marking, we expect that we will do so in the near
future in order
to grow our business. We are in the process of implementing quality
and
documentary procedures in order to obtain CE and ISO 13.485 registration,
and we
are not aware of any material reason why such approvals will
not be granted.
However, if for any reason CE or ISO 13.485 registration is not
granted, our
ability to export our products could be adversely impacted.
We
can
manufacture and sell our products only if we comply with regulations
of
government agencies such as the FDA and USDA. We have implemented
a quality
system that is intended to comply with applicable regulations.
Although FDA
approval is not required for the export of our products, there
are export
regulations promulgated by the FDA that specifically relate to
the export of our
products. Although we believe that we meet the regulatory standards
required for
the export of our products, these regulations could change in
a manner that
could adversely impact our ability to export our products.
Our
products may not be able to compete with new diagnostic products
or existing
products developed by well-established competitors, which would
negatively
affect our business.
The
diagnostic industry is focused on the testing of biological specimens
in a
laboratory or at the point-of-care and is highly competitive
and rapidly
changing. Our principal competitors often have considerably greater
financial,
technical and marketing resources than we do. Several companies
produce
diagnostic tests that compete directly with our testing product
line, including
but not limited to , Orasure Technologies, Inverness Medical
and Trinity
Biotech. As new products enter the market, our products may become
obsolete or a
competitor’s products may be more effective or more effectively marketed
and
sold than ours. Although we have no specific knowledge of any
competitor’s
product that will render our products obsolete, if we fail to
maintain and
enhance our competitive position or fail to introduce new products
and product
features, our customers may decide to use products developed
by competitors
which could result in a loss of revenues and cash flow.
We
are
developing an oral fluid rapid HIV test as well as other applications
utilizing
our Dual Path Platform technology which we believe could enhance
our competitive
position in HIV rapid testing and other fields. However, we have
not completed
development of any DPP product, and we still have technical,
manufacturing,
regulatory and marketing challenges to meet before we will know
whether we can
successful commercialize products incorporating this technology.
There can be no
assurance that we will overcome these challenges.
We
have
granted Inverness exclusive rights to market our SURE CHECK® HIV 1/2 globally
and our HIV 1/2 STAT PAK™ in the U.S. Inverness has no rapid HIV
tests that are approved for marketing in the U.S., we are not aware
of any
rapid HIV products that Inverness is even contemplating for the
U.S., and
Inverness is obligated to inform us of any such products as soon
as it is able
to do so. Inverness does have rapid HIV tests manufactured by certain
of its subsidiaries outside the U.S. that are being actively
marketed outside
the U.S., primarily in developing countries. Our HIV 1/2 STAT
PAK cassette and
dipstick products compete against these Inverness Products, and
we specifically
acknowledge in our agreements with Inverness the existence of
such other
products. Moreover, except for a product in the HIV barrel field
as defined in
our agreement with Inverness, Inverness is permitted under our
agreements to
market certain types of permitted competing rapid HIV tests in
the U.S. Under
these conditions, we could choose to terminate the applicable
agreement with
Inverness or change the agreement to a non-exclusive agreement,
and Inverness
would expand the lateral flow license granted to the Company
to allow the
Company to market the product independently or through other
marketing partners.
While we believe that Inverness is committed to successfully
marketing our
products particularly in the U.S. and other developed countries
where our
products are or become approved for marketing, Inverness may
choose to develop
or acquire competing products for marketing in the U.S. as well
as other markets
where they are marketing our SURE CHECK HIV 1/2 product, and
such an action
could have at least a temporary material adverse effect on the
marketing of
these products until such time as alternative marketing arrangements
could be
implemented. While we also believe that the expansion of our
license to the
Inverness lateral flow patents substantially facilitates our
ability to make
alternative marketing arrangements, there can be no assurance
that the
modification of marketing arrangements and the possible corresponding
delays or
suspension of sales would not have a material adverse effect
on our
business.
In
addition, the point-of-care diagnostics industry is undergoing
rapid
technological changes, with frequent introductions of new technology-driven
products and services. As new technologies become introduced
into the
point-of-care diagnostic testing market, we may be required to
commit
considerable additional efforts, time and resources to enhance
our current
product portfolio or develop new products. We may not have the
available time
and resources to accomplish this and many of our competitors
have substantially
greater financial and other resources to invest in technological
improvements.
We may not be able to effectively implement new technology-driven
products and
services or be successful in marketing these products and services
to our
customers, which would materially harm our operating results.
We
own no issued patents covering lateral flow technology, and the
field of lateral
flow technology is complex and characterized by a substantial
amount of
litigation, so the risk of potential patent challenges is ongoing
for us in
spite of our pending patent applications.
Although
we have been granted non-exclusive licenses to lateral flow patents
owned by
Inverness Medical Innovations, Inc. and Abbott Laboratories,
Inc., there is no
assurance that their lateral flow patents will not be challenged
or that
licenses from other parties may not be required, if available
at all. In the
event that it is determined that a license is required and it
is not possible to
negotiate a license agreement under a necessary patent, we may
be able to modify
our HIV rapid test products and other products such that a license
would not be
necessary. However, this alternative could delay or limit our
ability to sell
these products in the U.S. and other markets, which would adversely
affect our
results of operations, cash flows and business.
During
2005 and 2006, the Company has made substantial additions to
its intellectual
property portfolio as a result of the development of a new rapid
test platform,
Dual Path Platform (DPP™). This platform has shown improved sensitivity as
compared with conventional platforms in a number of preliminary
studies using
well characterized HIV, Tuberculosis and other samples. This
technology has
formed the basis of two patent applications that were filed,
and may result in
additional applications covering additional uses of this technology
platform.
Also, the Company believes that this new lateral flow platform
is outside of the
scope of currently issued patents in the field of lateral flow
technology,
thereby offering the possibility of a greater freedom to operate.
There is no
assurance that the patent application will be granted, or that
its claims will
not be modified upon review, or that the Company’s patents or its products
incorporating the patent claims will not be challenged at some
time in the
future.
New
developments in health treatments or new non-diagnostic products
may reduce or
eliminate the demand for our products.
The
development and commercialization of products outside of the
diagnostics
industry could adversely affect sales of our product. For example,
the
development of a safe and effective vaccine to HIV or treatments
for other
diseases or conditions that our products are designed to detect,
could reduce,
or eventually eliminate, the demand for our HIV or other diagnostic
products and
result in a loss of revenues.
We
may not have sufficient resources to effectively introduce and
market our
products, which could materially harm our operating results.
Introducing
and achieving market acceptance for our rapid HIV tests and other
new products
will require substantial marketing efforts and will require us
or our contract
partners to make significant expenditures. In the U.S. and other
developed world
markets where we will begin to market our FDA-approved products
through
Inverness and through other partners, we have no history upon
which to base
market or customer acceptance of these products. In some instances
we will be
totally reliant on the marketing efforts and expenditures of
our contract
partners. If they do not have or commit the expertise and resources
to
effectively market the products that we manufacture, our operating
results will
be materially harmed.
The
success of our business depends on our ability to raise additional
capital
through the sale of debt or equity or through borrowing, and
we may not be able
to raise capital or borrow funds in amounts necessary to continue
our business,
or at all.
Although
the Company’s revenues and gross margins increased significantly in recent
periods, it sustained significant operating losses in the six
months of 2006 and
the years 2005 and 2004. At June 30, 2006, the Company had a
Stockholders’
Deficiency of $1,634, and a working capital deficiency of $614,253.
After giving
account to the series C 7% convertible preferred stock offering
(the “Series C
Offering”), the Company believes its resources are sufficient to fund
its needs
through the end of 2007. The Company’s 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) its investments in research and development,
facilities,
marketing, regulatory approvals and other investments it may
determine to make;
and (4) the investment in capital equipment and the extent to
which it improves
cash flow through operating efficiencies. There are no assurances
that the
Company will be successful in raising sufficient capital.
On
March
30, 2006, the Company sold $1 million of additional Series B
Preferred stock to
a Series B Preferred shareholder pursuant to provisions of the
January 2005
Series B 9% Preferred Stock financing agreements. Such provisions
were exclusive
to said shareholder.
On
June
29, 2006, the Company borrowed $1,300,000. The loan was repaid
in part on
September 27, 2006 and the balance converted on October 5, 2006
and is secured
by a lien on the assets of the Company. See
Note
1 of the financial statements for further details.
On
September 29, 2006 and October 5, 2006 the Company completed
the Series C
Offering for $8,150,000. Some of the proceeds were used to repay
the loan
borrowed on June 29, 2006. This Series C offering will be enough
to supply the
Company’s cash needs through the end of 2007.
Our
objective of increasing international sales is critical to our
business plan and
if we fail to meet this objective, we may not generate revenues
in the amounts
we expect, or in amounts necessary to continue our
business.
We
intend
to attempt to increase international sales of our products. A
number of factors
can slow or prevent international sales, or substantially increase
the cost of
international sales, including:
· |
regulatory
requirements and customs regulations;
|
· |
cultural
and political differences;
|
· |
foreign
exchange rates, currency fluctuations and
tariffs;
|
· |
dependence
on and difficulties in managing international distributors
or
representatives;
|
· |
the
creditworthiness of foreign entities;
|
· |
difficulties
in foreign accounts receivable collection;
and
|
· |
economic
conditions and the absence of available funding
sources.
|
If
we are
unable to increase our revenues from international sales, our
operating results
will be materially harmed.
We
rely on trade secret laws and agreements with our key employees
and other third
parties to protect our proprietary rights, and we cannot be sure
that these laws
or agreements adequately protect our rights.
We
believe that factors such as the technological and creative skills
of our
personnel, strategic relationships, new product developments,
frequent product
enhancements and name recognition are essential to our success.
All our
management personnel are bound by non-disclosure agreements.
If personnel leave
our employment, in some cases we would be required to protect
our intellectual
property rights pursuant to common law theories which may be
less protective
than provisions of employment, non-competition or non-disclosure
agreements.
We
seek
to protect our proprietary products under trade secret and copyright
laws, enter
into license agreements for various materials and methods employed
in our
products, and enter into strategic relationships for distribution
of the
products. These strategies afford only limited protection. We
currently have no
or foreign patents, although we have several license agreements
for reagents.
Our Sure Check™ trademark has been registered in the U.S.
Despite
our efforts to protect our proprietary rights, unauthorized parties
may attempt
to copy aspects of our products or to obtain information that
we regard as
proprietary. We may be required to expend substantial resources
in asserting or
protecting our intellectual property rights, or in defending
suits related to
intellectual property rights. Disputes regarding intellectual
property rights
could substantially delay product development or commercialization
activities
because some of our available funds would be diverted away from
our business
activities. Disputes regarding intellectual property rights might
include state,
federal or foreign court litigation as well as patent interference,
patent
reexamination, patent reissue, or trademark opposition proceedings
in the U.S.
Patent and Trademark Office.
To
facilitate development and commercialization of a proprietary
technology base,
we may need to obtain additional licenses to patents or other
proprietary rights
from other parties. Obtaining and maintaining these licenses,
which may not be
available, may require the payment of up-front fees and royalties.
In addition,
if we are unable to obtain these types of licenses, our product
development and
commercialization efforts may be delayed or precluded.
In
order to sell our rapid HIV tests and generate expected revenue
from these
tests, we will need to arrange for a license to patents for detection
of the
HIV-2 virus, and we may not be able to do so.
Although
the current licensor of the peptides used in our HIV tests claims
an HIV-2
patent, other companies have also claimed such patents. Even
though HIV-2 is a
type of the HIV virus estimated to represent only a small fraction
of the known
HIV cases worldwide, it is still considered to be an important
component in the
testing regimen for HIV in many markets. HIV-2 patents often
are found in most
of the countries of North America and Western Europe, as well
as in Japan,
Korea, South Africa and Australia. Access to a license for one
or more HIV-2
patents may be necessary to sell HIV-2 tests in countries where
such patents are
in force, or to manufacture in countries where such patents are
in force and
then sell into non-patent markets. Since HIV-2 patents are in
force in the U.S.,
we may be restricted from manufacturing a rapid HIV-2 test in
the U.S. and
selling into other countries, even if there were no HIV-2 patents
in those other
countries. The license agreement that we have in effect for the
use and sale of
the Adaltis HIV 1 and 2 peptides that are used in our HIV rapid
test does not
necessarily insulate us from claims by other parties that we
need to obtain a
license to other HIV-1 and/or HIV-2 patents. Although we have
discussed
additional HIV-2 licenses that would be advantageous for some
markets, if we are
unable to complete these discussions successfully our business
and operating
results could be materially harmed.
Our
continued growth depends on retaining our current key employees
and attracting
additional qualified personnel, and we may not be able to do
so.
Our
success will depend to a large extent upon the skills and experience
of our
executive officers, management and sales, marketing, operations
and scientific
staff. Although we have not experienced unusual retention and/or
recruitment
problems to date, we may not be able to attract or retain qualified
employees in
the future due to the intense competition for qualified personnel
among medical
products businesses.
If
we are
not able to attract and retain the necessary personnel to accomplish
our
business objectives, we may experience constraints that will
adversely affect
our ability to effectively manufacture, sell and market our products,
to meet
the demands of our strategic partners in a timely fashion, or
to support
internal research and development programs. Although we believe
we will be
successful in attracting and retaining qualified personnel, competition
for
experienced scientists and other personnel from numerous companies
and academic
and other research institutions may limit our ability to do so
on acceptable
terms.
We
have
entered into employment contracts with our President, Lawrence
Siebert, our Vice
President of Research and Development, Javan Esfandiari, and
our Vice President
of Sales, Marketing, and Business Development, Avi Pelossof.
Due to the specific
knowledge and experience of these executives regarding the industry,
technology
and market, the loss of the services of any one of them would
likely have a
material adverse effect on the Company. The contract with Mr.
Siebert has a term
of two years ending May 2008, and the contracts with Messrs.
Esfandiari and
Pelossof have terms of three years ending May 2007. We have obtained
key man
insurance policies for Messrs. Esfandiari and Pelossof.
We
believe our success depends on our ability to participate in
large government
programs in the U.S. and worldwide and we may not be able to
do
so.
We
believe it to be in our best interest to meaningfully participate
in the
Presidential Emergency Plan for Aids Relief Program, UN Global
Fund initiatives
and other programs funded by large donors. We have initiated
several strategies
to participate in these programs. Participation in these programs
requires
alignment with the many other participants in these programs
including the World
Health Organization, U.S. Center for Disease Control, U.S. Agency
for
International Development, non-governmental organizations, and
HIV service
organizations. If we are unsuccessful in our efforts to participate
in these
programs, our operating results could be materially harmed.
We
have a history of incurring net losses and we cannot be certain
that we will be
able to achieve profitability.
Since
the
inception of Chembio Diagnostic Systems, Inc. in 1985 and through
the period
ended December 31, 2005, we have incurred net losses. As of December 31,
2005, we have an accumulated deficit of $(18,868,428).
We
incurred net losses of $(3,252,000) and $(3,098,891) in 2005
and 2004,
respectively.
We
expect
to continue to make substantial expenditures for sales and marketing,
regulatory
submissions, product development and other purposes. Our ability
to achieve
profitability in the future will primarily depend on our ability
to increase
sales of our products, reduce production and other costs and
successfully
introduce new products and enhanced versions of our existing
products into the
marketplace. If we are unable to increase our revenues at a rate
that is
sufficient to achieve profitability, our operating results would
be materially
harmed.
To
the extent that we are unable to obtain sufficient product liability
insurance
or that we incur product liability exposure that is not covered
by our product
liability insurance, our operating results could be materially
harmed.
We
may be
held liable if any of our products, or any product which is made
with the use or
incorporation of any of the technologies belonging to us, causes
injury of any
type or is found otherwise unsuitable during product testing,
manufacturing,
marketing, sale or usage. Although we have obtained product liability
insurance,
this insurance may not fully cover our potential liabilities.
In addition, as we
attempt to bring new products to market, we may need to increase
our product
liability coverage which would be a significant additional expense
that we may
not be able to afford. If we are unable to obtain sufficient
insurance coverage
at an acceptable cost to protect us, we may be forced to abandon
efforts to
commercialize our products or those of our strategic partners,
which would
reduce our revenues.
Risks
related to our common stock
Our
common stock is classified as penny stock and is extremely illiquid,
so
investors may not be able to sell as much stock as they want
at prevailing
market prices.
Our
common stock is classified as penny stock. Penny stocks generally
are equity
securities with a price of less than $5.00 and trade on the over-the-counter
market. As a result, an investor may find it more difficult to
dispose of or
obtain accurate quotations as to the price of the shares of the
common stock
being registered in this registration statement. In addition,
the “penny stock”
rules adopted by the Commission under the Securities Exchange
Act of 1934, as
amended (the “Exchange Act”), subject the sale of the shares of the common stock
to regulations which impose sales practice requirements on broker-dealers,
causing many broker-dealers to not trade penny stocks or to only
offer the
stocks to sophisticated investors that meet specified net worth
or net income
criteria identified by the Commission. These regulations contribute
to the lack
of liquidity of penny stocks.
The
average daily trading volume of our common stock on the over-the-counter
market
was less than 16,000 shares per day over the three months ended
September 30,
2006. If limited trading in our stock continues, it may be difficult
for
investors to sell their shares in the public market at any given
time at
prevailing prices. Since the certificates of designation creating
our
series A and series B preferred stock contain restrictions on our ability
to declare and pay dividends on our common stock, the lack of
liquidity of our
common stock could negatively impact the rate of return on your
investment.
Sales
of a substantial number of shares of our common stock into the
public market by
the selling stockholders may result in significant downward pressure
on the
price of our common stock and could affect the ability of our
stockholders to
realize the current trading price of our common stock.
At
the
time of effectiveness of the registration statement, the number
of shares of our
common stock eligible to be immediately sold in the market will
increase
approximately from 180,000
to approximately 58,000,000. If the selling stockholders sell
significant
amounts of our stock, our stock price could drop. Even a perception
by the
market that selling stockholders will sell in large amounts after
the
registration statement is effective could place significant downward
pressure on
our stock price.
You
will experience substantial dilution upon the conversion of the
shares of
preferred stock and the exercise of warrants that we issued in
three private
placements and the warrants and options that were assumed in
connection with the
merger.
On
May 5,
2004, we completed three separate private placements in which
we issued
151.57984 shares of our series A preferred stock and warrants
to acquire
9,094,801 shares of our common stock at an exercise price of
$.90 per share. The
shares of series A preferred stock are convertible into 7,578,985
shares of our
common stock. We also issued warrants to purchase 425,000 shares
of our common
stock at an exercise price of $0.72 per share and warrants to
purchase 510,000
shares of common stock at an exercise price of $1.08 per share
to designees of
our placement agents. We also issued warrants pursuant to an
employment
agreement with Mark L. Baum, our former president and former
member of our board
of directors, to purchase 425,000 shares and 425,000 shares of
our common stock,
respectively, at exercise prices of $0.60 and $0.90 per share
respectively. In
connection with the acquisition of Chembio Diagnostic Systems,
Inc., we assumed
the obligation to issue 690,000 shares of our common stock upon
the exercise of
warrants, which warrants are exercisable at prices ranging from
$0.45 to $4.00
per share. We also adopted the stock option plan of Chembio Diagnostic
Systems
Inc. and assumed all of the obligation to issue 704,000 common
shares upon the
exercise of the options outstanding as of the merger date. On
January 28, 2005, we completed a private placement in which we
issued 100 shares
of our 9% Series B Convertible Preferred Stock, which we refer
to as the “Series
B Stock,” together with warrants to purchase 7,786,960 shares of our common
stock. For each $.61 invested in this private placement, an investor
received
(a) $.61 of face amount of Series B Stock, which is convertible
into one share
of our common stock, and (b) a five-year warrant to acquire .95
of a share of
our common stock. Each full share of the Series B Stock was purchased
for
$50,000, with fractional shares of Series B Stock being purchased
by investments
of less than $50,000. In connection with the January 28, 2005
offering, we also
issued to the placement agent Series B Stock in an aggregate
amount equal to 5%
of the amount of cash proceeds from the private placement, together
with
accompanying warrants to purchase our common stock. We also issued
to the
placement agent warrants to purchase 737,712 shares of our common
stock.
As of
March 31, 2006, there were 1,529,750 options issued and outstanding
under the
stock option plan and 1,470,250 options available for issuance
under the stock
option plan. As a result, the conversion of the outstanding preferred
stock and
the exercise of the outstanding warrants and options will result
in substantial
dilution to the holders of our common stock.
On
March
30, 2006, we issued to an investor 20 shares (face amount $1,000,000)
of the
Company’s series B preferred stock with warrants to purchase a total
of
1,557,377 shares of Company’s common stock at an exercise price of $0.61 per
share for a period of five years. The Company agreed to issue,
and the investor
agreed to purchase for $1,000,000, the securities described above
pursuant to
the terms of a Securities Purchase Agreement dated January 26,
2005 by and among
the Company and various purchasers. This transaction represents
the second
closing under the Agreement, and was triggered upon the Company’s achieving, as
of the fourth fiscal quarter of 2005, certain financial milestones.
As
compensation for services rendered to the Company by Midtown
for the second
closing, the Company agreed to issued to Midtown two shares (face
amount
$100,000) of its Series B Preferred and warrants to purchase
a total of 155,738
shares of its Common Stock at an exercise price of $.061 per
share for a period
of five years.
On
June
29, 2006, we issued $1,300,000 of secured debentures to four
investors. Pursuant
to the terms of these debentures, investors agreed to receive
back from the
Company the full amount of their principal investment, plus interest
on the
unpaid principal sum outstanding at the rate of 0.667% per month.
Each investor
was also granted a warrant to purchase up to 400 shares of common
stock for each
$1,000 of such investor’s subscription amount, with an exercise price of $0.75
per share, exercisable for a five year term.
On
September 29, 2006 and October 5, 2000, we completed a private
placement for
$8,150,000, consisting of 165 shares of 7% series C convertible preferred
stock, which we refer to as the “Series C Stock,” together with warrants to
purchase 2,578,125 shares of our common stock. For each $0.80
of consideration
received, an investor received (a) $0.80 of face amount of series
C stock, which
shall pay cumulative dividends in cash or shares at the rate
of 7% per annum
payable semiannually beginning in the year 2007, and which is
convertible into
one share of the common stock, and (b) a five-year warrant to
acquire shares of
our common stock, equal to 25% of the investor’s subscription amount divided by
$0.85, with an exercise price of $1.00 share. Each full share
of the Series C
Stock was purchased for $50,000, with fractional shares of series
C preferred
stock being purchased by investments of less than $50,000. In
connection with this private placement, we employed Midtown
Partners & Co., LLC to serve as the placement agent with respect to
investors investing $1,000,000 in this offering. As compensation
for services
rendered to the Company, we agreed to (i) pay Midtown
a
cash
fee equal to 5% of the amount of cash proceeds the Company received
from the
investors Midtown solicited, and (ii) issue to Midtown warrants
to purchase
62,500 shares of our common stock. The warrants issued to Midtown
are
exercisable for a period of five years from their issuance and
have an exercise
price of $1.00 per share.
Our
management and larger stockholders exercise significant control
over our company
and may approve or take actions that may be adverse to your
interests.
As
of
September 30, 2006, our named executive officers, directors and
5% stockholders
beneficially owned approximately 26.28% of our voting power.
For the foreseeable
future, to the extent that our current stockholders vote similarly,
they will be
able to exercise control over many matters requiring approval
by the board of
directors or our stockholders. As a result, they will be able
to:
· |
control
the composition of our board of
directors;
|
· |
control
our management and policies;
|
· |
determine
the outcome of significant corporate transactions, including
changes in
control that may be beneficial to stockholders;
and
|
· |
act
in each of their own interests, which may conflict with,
or be different
from, the interests of each other or the interests of
the other
stockholders.
|
USE
OF PROCEEDS
We
will
not receive proceeds from the sale of shares under this prospectus
by the
selling security holders. If any of the shares registered are
not issued as
dividends, or under the anti-dilution provisions, to the holders
of the series B
preferred stock or the Series C preferred stock, we will not
sell these shares
to third parties and will de-register those shares.
DILUTION
We
are
not selling any common stock in this offering. The selling security
holders are
current stockholders of the Company. As such, there is no dilution
resulting
from the common stock to be sold in this offering.
SELLING
SECURITY HOLDERS
The
securities are being offered by the named selling security holders
below. The
selling security holders hold one or more of the following securities
which are
described in section “Description of Securities”: Common stock, series A
preferred stock which is convertible into common stock at $.60
per share, series
B preferred stock which is convertible into common stock at $.61
per share,
series C preferred stock which is convertible into common stock
at $.80 per
share, options to purchase common stock at prices ranging from
$0.45 per share
to $1.00 per share, or warrants to purchase common stock exercisable
at prices
ranging from $0.45 per share to $4.00 per share. However, the
table below
assumes the immediate conversion by all series A, series B and
series C
preferred stock into common stock and the immediate exercise
of all options and
warrants to purchase common stock, without regard to other factors
which may
determine whether such rights of conversion or purchase are exercised.
These
factors include but are not limited to the other rights associated
with
remaining a preferred stockholder, the terms of these agreements,
and the
specific conversion or exercise price of the securities held
by such selling
security holder and its relation to the market price. The selling
security
holders may from time to time offer and sell pursuant to this
prospectus up to
an aggregate of 8,133,872 shares of our common shares now owned
by them,
5,558,832 shares issuable to them upon the conversion of series
A preferred
stock that they hold, 9,250,013 shares issuable to them upon
the conversion of
series B preferred stock that they hold, 10,312,500 shares issuable
to them upon
the conversion of series C preferred stock that they hold, 23,555,388
shares
issuable to them upon the exercise of warrants that they hold
and 734,625 shares
issuable to them upon the exercise of options that they hold.
The selling
security holders may, from time to time, offer and sell any or
all of the shares
that are registered under this prospectus, although they are
not obligated to do
so.
The
holders of the series B preferred stock may sell pursuant to
this prospectus up
to an aggregate of (i) 2,521,531 shares of common stock which
they may at a
later date acquire as dividends payable semi-annually on the
series B preferred
stock, and (ii) 6,428,187 shares of common stock which they may
at a later date
acquire pursuant to the anti-dilution provisions of the series
B preferred
stock, as described below in section “Description of Securities - Series B
Preferred Stock.” These shares are not included in the table below.
Further,
the holders of the series C preferred stock may sell pursuant
to this prospectus
up to an aggregate of (i) 2,165,625 shares of common stock which
they may at a
later date acquire as dividends payable semi-annually on the
series C preferred
stock, and (ii) 4,516,875 shares of common stock which they may
at a later date
acquire pursuant to the anti-dilution provisions of the series
C preferred
stock, as described below in section “Description of Securities - Series C
Preferred Stock.” These shares are not included in the table below.
In
addition, the holders of the Company’s Secured Debentures dated June 29, 2006,
may sell pursuant to this prospectus up to an aggregate of (i) 520,000
shares of common stock which they may at a later date acquire
if they exercise
warrants to purchase common stock at an exercise price of $0.75
per share, and
(ii) 156,000 shares of common stock which they may at a later
date acquire
pursuant to the anti-dilution provisions of these secured debentures.
Certain
of the individuals listed below received the shares offered hereby
in connection
with the merger described under the caption “Description of Business - Merger.”
In connection with the merger, we agreed to prepare and file
at our expense, as
promptly as practical, and in any event, by June 4, 2004, a registration
statement with the Securities and Exchange Commission covering
the resale of the
shares received in the merger by the individuals listed below.
The list of
selling security holders also includes Mark L. Baum, who acquired, or has
the right to acquire, the shares and warrants indicated next
to his name
pursuant to an employment agreement dated May 5, 2004 with Chembio
Diagnostics, Inc. Also named as selling security holders are
designees of H.C.
Wainwright & Co., Inc. and WellFleet Partners, Inc., each of which received
common stock and warrants to purchase the indicated number of
shares of common
stock in connection with serving as placement agents in connection
with our
May 5, 2004 private placement of series A preferred stock, and Patton
Boggs
LLP, which received 37,319 shares as payment for a past obligation
of $27,989,
that we owed. Also included are a total of 25,000 shares and
options to acquire
166,250 shares that we issued to non-employee third parties for
services
performed, together with 375,000 options to purchase shares issued
to employees
and directors.
Certain
of the entities or individuals listed below acquired the shares
offered hereby
in connection with our May 5, 2004 private placement of series A preferred
stock. Pursuant to this private placement, we received $2.2 million
in cash as
payment for 73.3333 shares of preferred stock that are convertible
into
3,666,664 shares of common stock. We also issued to the investors
in the series
A preferred stock warrants to acquire 4.4 million shares of common
stock at an
exercise price of $.90 per share. Based on the $2.2 million paid,
the purchase
price per common share is $.60, without allocating any portion
of the purchase
price to the warrants. At the same time as this transaction,
a conversion of
$1,009,803 face amount and accrued interest of convertible notes
that had been
issued in March 2004 occurred. Of this conversion, $330,696 face
amount and
interest was converted into 826,741 shares of common for a conversion
price,
based on the face amount of the notes, of $.40 per share; and
$679,107 face
amount and interest was converted into 33.83682 shares of our
series A
preferred, together with warrants to purchase 2,030,217 shares
of common stock
at $.90 per share. The 33.83682 shares of series A preferred
are convertible
into 1,691,835 shares of our common stock, which based on the
face amount of the
notes, represents a purchase price of $.40 per share of common
stock, without
allocating any portion of the purchase price to the warrants.
Also
simultaneously with the other two private placement transactions,
we issued
44.40972 shares of our series A preferred stock, convertible
into 2,220,486
shares of our common stock, together with warrants to purchase
2,664,584 shares
of our common stock at an exercise price of $.90 per share, in
exchange for
$1,332,292 face amount of our debt obligations. Based on the
face amount of
these obligations, the price per common share is $.60 per share,
without
allocating any portion of the purchase price to the warrants.
On
December 29, 2004 the Company converted $361,560 of additional
debt into
12.05199 shares of series A preferred stock and associated warrants to purchase
723,120 shares of common stock. Also
in
connection with these three private placements, we agreed to
prepare and file at
our expense, as promptly as practical, and in any event, by June 4, 2004, a
registration statement with the Securities and Exchange Commission
covering the
resale of the shares of common stock issuable upon conversion
of the series A
preferred stock and the shares of common stock issuable upon
exercise of the
warrants. The
Company issued 312,773 shares of common stock on May 14, 2005
as payment of
dividends on the series A preferred stock. These shares of common
stock are not
registered with the Securities and Exchange Commission and are
not a part of
this prospectus.
Certain
of the entities or individuals listed below acquired the shares
offered hereby
in connection with our January 28, 2005 private placement of series B
preferred stock. Pursuant to this private placement, we received
$5 million in
cash as payment for (a) 100 shares of preferred stock that are
convertible into
8,196,800
shares
of common stock, and (b) warrants to acquire 7,786,960 shares
of common stock at
an exercise price of $.61 per share. Based on the $5 million paid, the
purchase price per common share is $.61, without allocating any
portion of the
purchase price to the warrants. Also in connection with these
private
placements, we agreed to prepare and file at our expense, as
promptly as
practical, and in any event, on or before 60 days after January
26, 2005, a
registration statement with the Securities and Exchange Commission
covering the
resale of the shares of common stock issuable upon conversion
of the series B
preferred stock and the shares of common stock issuable upon
exercise of the
warrants.
In
connection with the private placement, the Company issued to
the placement
agent, Midtown Partners & Co., LLC, or its designees, 4.98 shares of series
B preferred stock that are convertible into 409,012 shares of
common
stock,
together with warrants to acquire 388,588 shares of common stock
at an exercise
price of $.61 per share. The Company also issued to Midtown Partners
& Co.,
LLC, or its designees, warrants to purchase 737,712 shares of
the Company’s
common stock at an exercise price of $.80 per share.
In
connection with the series B private placement, three of the
investors in the
series A preferred stock collectively acquired a .95 share of
series B preferred
stock, convertible into 77,868 shares of common stock, together
with warrants to
acquire 73,972 shares of common stock. In addition, one investor
in our series A
preferred stock converted all of his interests in the series
A preferred stock
for a .4 share of series B preferred stock, convertible into
32,786 shares of
common stock, together with warrants to acquire 38,933 shares
of common
stock.
On
March
30, 2006, the Company issued an investor 20 shares of its series
B preferred
stock. In connection with this issuance, the Company also issued
this investor
warrants to purchase a total of 1,557,377 shares of the Company’s common stock
at an exercise price of $0.61 per share for a period of five
years. These series
B preferred shares are convertible into 1,639,340 shares of common
stock, which
the investor may sell pursuant to this prospectus, and the holder
may also sell
up to 1,557,377 shares of Company’s common stock issuable to them upon the
exercise of the warrants that they hold. In addition, as compensation
for
services rendered to the Company for this private placement,
the Company issued
the placement agent two shares of the Company’s series B preferred shares, as
well as warrants to purchase the Company’s common stock. These series B
preferred shares are convertible into 163,933 shares of common
stock, which the
placement agent may sell pursuant to this prospectus, and the
placement agent
may sell up to 155,738 shares of the Company’s common stock, which it may
acquire pursuant to the warrants it was granted. These warrants
are exercisable
at an exercise price of $.061 per share for a period of five
years.
Certain
of the entities or individuals listed below acquired the shares
offered hereby
in connection with our September 29, 2006 private placement of
series C
preferred stock. Pursuant to this private placement; we received
$8,150,000 in
cash as payment for (a) 165 shares of preferred stock that are
convertible into
10,312,500 shares of common stock, and (b) warrants to acquire
2,578,125 shares
of common stock at an exercise price of $1.00 per share. Based
on the $50,000
paid per series C preferred share, the purchase price per common
share is $0.80,
without allocating any portion of the purchase price to the warrants.
Also in
connection with these private placements, we agreed to prepare
and file at our
expense, as promptly as practical, and in any event, on or before
45 days after
September 29, 2006, a registration statement with the SEC covering
the resale of
the shares of common stock issuable upon conversion of the series
C preferred
stock and the shares of common stock issuable upon exercise of
the warrants. In
the event this registration statement is not declared effective
by the SEC
within 120 days of September 29, 2006 (within 150 days of such
date in the event
of a full review by the SEC), then we will be subject to the
payment of
liquidated damages equal to 1% of the aggregate purchase price
we received from
each respective subscriber. $600,245 of the private placement
resulted from
conversion of previously outstanding convertible debt of the
Company. Based on
the terms of the previously outstanding convertible debt, the
$600,245 of debt
was converted at a discount of 12.5% to the price paid by the
other
investors.
Certain
of the entities or individuals listed below acquired the shares
offered hereby
in connection with our June 29, 2006 Secured Debenture offering
which raised
$1,300,000. Pursuant to the terms of these debentures, each investor
was granted
a warrant to purchase up to 400 shares of common stock for each
$1,000 of such
investor’s subscription amount, with an exercise price of $0.75 per share,
and
exercisable for a five year term.
The
following table sets forth, to the Company’s best knowledge and belief, with
respect to the selling security holders:
· |
the
number of shares of common stock beneficially owned as
of October 6, 2006
and prior to the offering contemplated
hereby;
|
· |
the
number of shares of common stock eligible for resale
and to be offered by
each selling security holder pursuant to this prospectus;
|
· |
the
number of shares owned by each selling security holder
after the offering
contemplated hereby assuming that all shares eligible
for resale pursuant
to this prospectus actually are sold;
|
· |
the
percentage of shares of common stock beneficially owned
by each selling
security holder after the offering contemplated hereby;
and
|
· |
in
notes to the table, additional information concerning
the selling security
holders including any NASD affiliations and any relationships,
excluding
non-executive employee and other non-material relationships,
that a
selling security holder had during the past three years
with the
registrant or any of its predecessors or
affiliates.
|
Selling
security holders
(C)
|
|
Number
of Shares of Common Stock Owned
Before Offering (A)
|
|
Number
of Shares To Be
Offered (B)
|
|
Number
of Shares Owned After
Offering
|
|
Percentage
of Shares of Common Stock
Owned After Offering
|
|
Alchemy,
LLC 1
|
|
|
40,471
|
|
|
40,471
|
|
|
-
|
|
|
0.00
|
%
|
Alpha
Capital AG 2 ,3
|
|
|
2,048,889
|
|
|
1,978,875
|
|
|
70,014
|
|
|
0.57
|
%
|
Bassett,
Truman 1
|
|
|
42,526
|
|
|
42,526
|
|
|
-
|
|
|
0.00
|
%
|
Baum,
Mark L. 2
|
|
|
1,643,807
|
|
|
1,629,703
|
|
|
14,104
|
|
|
0.12
|
%
|
Bell,
Lon E. 2
|
|
|
298,601
|
|
|
282,198
|
|
|
16,403
|
|
|
0.14
|
%
|
Beller,
Claudio 2
|
|
|
153,781
|
|
|
145,582
|
|
|
8,199
|
|
|
0.07
|
%
|
Big
Bend XXXI Investments, LP
|
|
|
2,343,750
|
|
|
2,343,750
|
|
|
-
|
|
|
0.00
|
%
|
BioEquity
Partners, Inc.
1,4
|
|
|
109,375
|
|
|
109,375
|
|
|
-
|
|
|
0.00
|
%
|
Breitbart,
Ted 1,5
|
|
|
18,208
|
|
|
18,208
|
|
|
-
|
|
|
0.00
|
%
|
Bristol
Investment Fund, Ltd.
|
|
|
160,000
|
|
|
160,000
|
|
|
-
|
|
|
0.00
|
%
|
Bruce,
Richard 1
|
|
|
125,500
|
|
|
75,500
|
|
|
50,000
|
|
|
0.045
|
%
|
Bushido
Capital Master Fund, LP
|
|
|
1,171,875
|
|
|
1,171,875
|
|
|
-
|
|
|
0.00
|
%
|
C.E.
Unterberg, Towbin Capital Partners I, L.P.
|
|
|
666,875
|
|
|
666,875
|
|
|
-
|
|
|
0.00
|
%
|
Calamaro,
Jean-Paul 2
|
|
|
325,984
|
|
|
309,581
|
|
|
16,403
|
|
|
0.14
|
%
|
CEOcast,
Inc.
|
|
|
76,250
|
|
|
76,250
|
|
|
-
|
|
|
0.00
|
%
|
Chrust,
Steve 1
|
|
|
107,656
|
|
|
107,656
|
|
|
-
|
|
|
0.00
|
%
|
Clarke,
John R.1,6
|
|
|
158,400
|
|
|
158,400
|
|
|
-
|
|
|
0.00
|
%
|
Colby,
Russ 1
|
|
|
12,500
|
|
|
12,500
|
|
|
-
|
|
|
0.00
|
%
|
Bio-Business
Science & Development LTDA
|
|
|
252,923
|
|
|
252,923
|
|
|
-
|
|
|
0.00
|
%
|
Cranshire
Capital, LP
|
|
|
390,625
|
|
|
390,625
|
|
|
-
|
|
|
0.00
|
%
|
Crestview
Capital Master, LLC 7
|
|
|
16,322,556
|
|
|
16,322,556
|
|
|
-
|
|
|
0.00
|
%
|
Dabush,
Ami 2
|
|
|
572,018
|
|
|
542,371
|
|
|
29,647
|
|
|
0.26
|
%
|
Daedalus
Consulting, Inc.8
|
|
|
35,963
|
|
|
35,963
|
|
|
-
|
|
|
0.00
|
%
|
Dashefsky,
Jeff 1
|
|
|
12,500
|
|
|
12,500
|
|
|
-
|
|
|
0.00
|
%
|
Diamond
Deecembra 8
|
|
|
143,853
|
|
|
143,853
|
|
|
-
|
|
|
0.00
|
%
|
DKR
Soundshore Oasis Holding Fund, Ltd.9
|
|
|
600,750
|
|
|
600,750
|
|
|
-
|
|
|
0.00
|
%
|
Eckert,
Christopher & Lynn 2,10
|
|
|
197,515
|
|
|
186,666
|
|
|
10,849
|
|
|
0.10
|
%
|
Engel,
Sam 1
|
|
|
4,118
|
|
|
4,118
|
|
|
-
|
|
|
0.00
|
%
|
Esfandiari,
Javan 1
|
|
|
254,580
|
|
|
167,080
|
|
|
87,500
|
|
|
0.78
|
%
|
Falvo,
Pete 2
|
|
|
40,000
|
|
|
40,000
|
|
|
-
|
|
|
0.00
|
%
|
FAMALOM,
LLC 8
|
|
|
179,817
|
|
|
179,817
|
|
|
-
|
|
|
0.00
|
%
|
Feldman,
Stephen 1
|
|
|
2,055
|
|
|
2,055
|
|
|
-
|
|
|
0.00
|
%
|
Ferrari,
Braden A.
|
|
|
1,875
|
|
|
1,875
|
|
|
-
|
|
|
0.00
|
%
|
Frankenthal,
Stuart J.
|
|
|
234,375
|
|
|
234,375
|
|
|
-
|
|
|
0.00
|
%
|
Fuchs,
Ari 2,6
|
|
|
49,058
|
|
|
49,058
|
|
|
-
|
|
|
0.00
|
%
|
Ginsberg,
Mike 1
|
|
|
2,375
|
|
|
2,375
|
|
|
-
|
|
|
0.00
|
%
|
Glass,
Marc 1
|
|
|
20,708
|
|
|
20,708
|
|
|
-
|
|
|
0.00
|
%
|
Goldberg,
Jeffrey 1,11
|
|
|
52,875
|
|
|
52,875
|
|
|
-
|
|
|
0.00
|
%
|
Greenblatt,
Phil 1
|
|
|
10,347
|
|
|
10,347
|
|
|
-
|
|
|
0.00
|
%
|
Gregoretti,
Gordan
|
|
|
81,220
|
|
|
81,220
|
|
|
-
|
|
|
0.00
|
%
|
Gressel,
Daniel 1,12
|
|
|
462,501
|
|
|
462,501
|
|
|
-
|
|
|
0.00
|
%
|
Guzikowski,
Frank J.1
|
|
|
178,114
|
|
|
178,114
|
|
|
-
|
|
|
0.00
|
%
|
H.C.
Wainwright & Co.
1,13
|
|
|
390,867
|
|
|
390,867
|
|
|
-
|
|
|
0.00
|
%
|
Haendler,
Kurt 1
|
|
|
432,263
|
|
|
422,400
|
|
|
9,863
|
|
|
0.09
|
%
|
Haendler,
Renata 1
|
|
|
138,196
|
|
|
133,174
|
|
|
5,022
|
|
|
0.05
|
%
|
Haendler,
Tomas 2,14
|
|
|
540,132
|
|
|
535,436
|
|
|
4,696
|
|
|
0.04
|
%
|
Haim,
Eduardo 1
|
|
|
7,115
|
|
|
7,115
|
|
|
-
|
|
|
0.00
|
%
|
Hamblett,
Michael 15
|
|
|
521,665
|
|
|
521,665
|
|
|
-
|
|
|
0.00
|
%
|
Hanson,
Andrew Merz 2,16
|
|
|
126,105
|
|
|
119,545
|
|
|
6,560
|
|
|
0.06
|
%
|
Howard
M. Rossman Revocable Trust
|
|
|
234,375
|
|
|
234,375
|
|
|
-
|
|
|
0.00
|
%
|
Hunt,
David 1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.00
|
%
|
Ide,
Bruce J.2,17
|
|
|
501,336
|
|
|
486,612
|
|
|
14,724
|
|
|
0.13
|
%
|
Imas,
Ariel
|
|
|
2,500
|
|
|
2,500
|
|
|
-
|
|
|
0.00
|
%
|
Inverness
Medical Innovations, Inc.
|
|
|
3,125,000
|
|
|
3,125,000
|
|
|
-
|
|
|
0.00
|
%
|
Investor
Relations Group
|
|
|
255,414
|
|
|
255,414
|
|
|
-
|
|
|
0.00
|
%
|
Iroquois
Master Fund, Ltd.
|
|
|
40,000
|
|
|
40,000
|
|
|
-
|
|
|
0.00
|
%
|
Jacob,
Sam 1
|
|
|
10,000
|
|
|
10,000
|
|
|
-
|
|
|
0.00
|
%
|
Jacoby,
Richard A.2
|
|
|
487,061
|
|
|
464,698
|
|
|
22,363
|
|
|
0.20
|
%
|
Joffe,
Wendy 2
|
|
|
37,329
|
|
|
36,110
|
|
|
1,219
|
|
|
0.01
|
%
|
Jordan,
Bruce 18
|
|
|
105,741
|
|
|
105,741
|
|
|
-
|
|
|
0.00
|
%
|
JP
Turner 1,5
|
|
|
41,250
|
|
|
41,250
|
|
|
-
|
|
|
0.00
|
%
|
Keskinen,
Karen 1
|
|
|
1,579
|
|
|
1,579
|
|
|
-
|
|
|
0.00
|
%
|
Klaus,
Elaine 1
|
|
|
2,242
|
|
|
2,242
|
|
|
-
|
|
|
0.00
|
%
|
Knasin,
Paul and Ellen 2
|
|
|
160,506
|
|
|
152,307
|
|
|
8,199
|
|
|
0.07
|
%
|
Koch,
Scott F.1,6
|
|
|
158,400
|
|
|
158,400
|
|
|
-
|
|
|
0.00
|
%
|
Kolstad
Jr., Kaare 1
|
|
|
50,589
|
|
|
50,589
|
|
|
-
|
|
|
0.00
|
%
|
Kreger,
Richard H. 18
|
|
|
642,403
|
|
|
642,403
|
|
|
-
|
|
|
0.00
|
%
|
Krumholz,
Jacob & Arlene
|
|
|
66,869
|
|
|
66,869
|
|
|
-
|
|
|
0.00
|
%
|
Kurzman
Partners, LP 19
|
|
|
70,479
|
|
|
69,866
|
|
|
613
|
|
|
0.01
|
%
|
Lankenau,
Robert 1
|
|
|
226,568
|
|
|
219,910
|
|
|
6,658
|
|
|
0.06
|
%
|
Lanouette,
Kevin P.
|
|
|
34,483
|
|
|
34,483
|
|
|
-
|
|
|
0.00
|
%
|
Larkin,
Richard 2
|
|
|
199,967
|
|
|
109,189
|
|
|
90,778
|
|
|
0.81
|
%
|
Lawrence,
Colin 1
|
|
|
7,115
|
|
|
7,115
|
|
|
-
|
|
|
0.00
|
%
|
Ledowitz,
Bill 1
|
|
|
7,118
|
|
|
7,118
|
|
|
-
|
|
|
0.00
|
%
|
Lew,
Felicia 1
|
|
|
31,250
|
|
|
31,250
|
|
|
-
|
|
|
0.00
|
%
|
Lew,
Hanka 1
|
|
|
31,250
|
|
|
31,250
|
|
|
-
|
|
|
0.00
|
%
|
Lifshitz,
Joshua 2
|
|
|
102,140
|
|
|
100,839
|
|
|
1,301
|
|
|
0.01
|
%
|
Little
Gem Life Sciences Fund LLC 2
|
|
|
184,312
|
|
|
178,994
|
|
|
5,318
|
|
|
0.05
|
%
|
Longview
Fund, LP
|
|
|
781,250
|
|
|
781,250
|
|
|
-
|
|
|
0.00
|
%
|
Lyashchenko,
Konstantin 1
|
|
|
35,500
|
|
|
10,500
|
|
|
25,000
|
|
|
0.23
|
%
|
Maloney
& Company, LLC
|
|
|
51,795
|
|
|
51,795
|
|
|
-
|
|
|
0.00
|
%
|
Mayer-Wolf,
Mike 1
|
|
|
18,379
|
|
|
18,379
|
|
|
-
|
|
|
0.00
|
%
|
McCarthy,
Michael 1
|
|
|
4,145
|
|
|
4,145
|
|
|
`
|
|
|
0.00
|
%
|
McGusty,
Edwin 1
|
|
|
125,000
|
|
|
125,000
|
|
|
-
|
|
|
0.00
|
%
|
Metasequoia,
LLC 2
|
|
|
39,500
|
|
|
37,332
|
|
|
2,168
|
|
|
0.02
|
%
|
Midtown
Partners & Co., LLC 20
|
|
|
199,785
|
|
|
199,785
|
|
|
-
|
|
|
0.00
|
%
|
Millennium
3 Opportunity Fund, LLC 21
|
|
|
3,411,082
|
|
|
3,411,082
|
|
|
-
|
|
|
0.00
|
%
|
Moran,
Sean
|
|
|
24,215
|
|
|
24,215
|
|
|
-
|
|
|
0.00
|
%
|
MSAS
Trust 2
|
|
|
773,047
|
|
|
742,666
|
|
|
30,381
|
|
|
0.26
|
%
|
Nite
Capital, LP22
|
|
|
754,450
|
|
|
754,450
|
|
|
-
|
|
|
0.00
|
%
|
Patton
Boggs LLP 1
|
|
|
37,319
|
|
|
37,319
|
|
|
-
|
|
|
0.00
|
%
|
Pelossof,
Avi 2
|
|
|
671,996
|
|
|
570,685
|
|
|
101,311
|
|
|
0.88
|
%
|
Pelossof,
Elior 2
|
|
|
89,578
|
|
|
84,659
|
|
|
4,919
|
|
|
0.04
|
%
|
Perlmutter,
Alan 1
|
|
|
50,000
|
|
|
50,000
|
|
|
-
|
|
|
0.00
|
%
|
Phillips,
Chris 8
|
|
|
90,316
|
|
|
90,316
|
|
|
-
|
|
|
0.00
|
%
|
Phillips,
Scott W.1
|
|
|
14,589
|
|
|
14,589
|
|
|
-
|
|
|
0.00
|
%
|
Pierce
Diversified Strategy Master Fund, LLC - Series BUS
|
|
|
390,625
|
|
|
390,625
|
|
|
-
|
|
|
0.00
|
%
|
Poole,
Colin 2
|
|
|
142,461
|
|
|
135,981
|
|
|
6,480
|
|
|
0.06
|
%
|
Poole,
John G.1
|
|
|
68,365
|
|
|
68,365
|
|
|
-
|
|
|
0.00
|
%
|
Raker,
Gilbert 2
|
|
|
86,515
|
|
|
84,659
|
|
|
1,856
|
|
|
0.02
|
%
|
Reibman,
Spencer 1
|
|
|
1,707
|
|
|
1,707
|
|
|
-
|
|
|
0.00
|
%
|
RHK
Midtown Partners, LLC
|
|
|
8,333
|
|
|
8,333
|
|
|
-
|
|
|
0.00
|
%
|
Rohan,
J. Rory 18
|
|
|
572,831
|
|
|
572,831
|
|
|
-
|
|
|
0.00
|
%
|
Rojas,
Zilma 1
|
|
|
15,500
|
|
|
5,500
|
|
|
10,000
|
|
|
0.09
|
%
|
Ross,
Anne 1
|
|
|
63,236
|
|
|
63,236
|
|
|
-
|
|
|
0.00
|
%
|
Sandler,
J & S 1
|
|
|
8,287
|
|
|
8,287
|
|
|
-
|
|
|
0.00
|
%
|
Sandler,
Mark and Lori 2
|
|
|
197,415
|
|
|
186,666
|
|
|
10,749
|
|
|
0.10
|
%
|
Schnipper,
Steve 2
|
|
|
166,122
|
|
|
164,182
|
|
|
1,940
|
|
|
0.02
|
%
|
Schwartz,
Eric 1
|
|
|
5,496
|
|
|
5,496
|
|
|
-
|
|
|
0.00
|
%
|
Seren,
Stanley 1
|
|
|
8,287
|
|
|
8,287
|
|
|
-
|
|
|
0.00
|
%
|
Shapiro,
Alex 1
|
|
|
112,412
|
|
|
112,412
|
|
|
-
|
|
|
0.00
|
%
|
Siderowf,
Richard 2,23
|
|
|
86,373
|
|
|
84,399
|
|
|
1,974
|
|
|
0.02
|
%
|
Siebert
Best, Ellen 2
|
|
|
43,418
|
|
|
42,199
|
|
|
1,219
|
|
|
0.01
|
%
|
Siebert,
Lawrence
|
|
|
6,511,492
|
|
|
1,108,800
|
|
|
5,402,692
|
|
|
34.14
|
%
|
Sive
Paget & Reisel 1
|
|
|
2,055
|
|
|
2,055
|
|
|
-
|
|
|
0.00
|
%
|
Smith,
Robin 1,24
|
|
|
119,883
|
|
|
119,883
|
|
|
-
|
|
|
0.00
|
%
|
Spatacco,
Jr., Anthony J. 25
|
|
|
52,542
|
|
|
52,542
|
|
|
-
|
|
|
0.00
|
%
|
Speer,
Sandy 1
|
|
|
95,468
|
|
|
65,468
|
|
|
30,000
|
|
|
0.27
|
%
|
Spilka,
R. Edward 2,26
|
|
|
323,987
|
|
|
313,138
|
|
|
10,849
|
|
|
0.10
|
%
|
Starboard
Capital Markets, LLC 27
|
|
|
9,880
|
|
|
9,880
|
|
|
-
|
|
|
0.00
|
%
|
Starobin
Partners 1,5
|
|
|
110,000
|
|
|
110,000
|
|
|
-
|
|
|
0.00
|
%
|
Straightline
Capital Opportunities Fund I, LLC 2
|
|
|
783,869
|
|
|
741,296
|
|
|
42,573
|
|
|
0.35
|
%
|
Talesnick,
Alan L. 2,28
|
|
|
249,396
|
|
|
239,976
|
|
|
9,420
|
|
|
0.08
|
%
|
TCMP3
Partners
|
|
|
344,568
|
|
|
344,568
|
|
|
-
|
|
|
0.00
|
%
|
Thunderbird
Global Corporation 2,29
|
|
|
1,054,557
|
|
|
1,021,7850
|
|
|
32,807
|
|
|
0.28
|
%
|
Total
M.I.S., Inc. 2
|
|
|
592,552
|
|
|
560,000
|
|
|
32,552
|
|
|
0.28
|
%
|
Tyson,
John 2,30
|
|
|
16,250
|
|
|
16,250
|
|
|
-
|
|
|
0.00
|
%
|
Vicis
Capital Master Fund 2,31
|
|
|
5,925,533
|
|
|
5,600,000
|
|
|
325,533
|
|
|
1.97
|
%
|
Wachs,
Mark 2
|
|
|
15,676
|
|
|
15,118
|
|
|
558
|
|
|
0.01
|
%
|
Weiss,
Gunther 1
|
|
|
28,334
|
|
|
28,334
|
|
|
-
|
|
|
0.00
|
%
|
Westbury
Diagnostics, Inc. 2
|
|
|
152,882
|
|
|
144,485
|
|
|
8,397
|
|
|
0.08
|
%
|
TOTALS
|
|
|
64,119,041
|
|
|
57,545,230
|
|
|
6,573,811
|
|
|
|
|
(A) Includes
shares underlying series A, series B and series C preferred
stock into which the
series A, series B and series C preferred stock is
convertible, and shares
underlying warrants and/or options held by the selling
security holder that are
covered by this prospectus, including any convertible
securities that, due to
contractual restrictions, may not be exercisable within
60 days of the date of
this prospectus.
(B)
The number of shares of common stock to be sold assumes
that the selling
security holder elects to sell all the shares of common
stock held by the
selling security holder that are covered by this prospectus.
(C)
It is our understanding that any selling security holder
that is an affiliate of
a broker-dealer purchased the securities offered hereunder
in the ordinary
course of business, and at the time of the purchase,
had no agreements or
understanding to distribute the securities.
1
The sale
of all of these shares is currently registered under Chembio’s Registration
Statement on Form SB-2 that became effective with the SEC
on May 20, 2006. The
sale of these shares also is included in this Prospectus
so that Chembio can
make any future amendments for the Registration Statement
of which this
Prospectus is a part, together with amendments of the 2004
Registration
Statement in a single joint prospectus.
2
The sale
of all of these shares, except for less than 326,000 that
represent dividend
shares, currently is registered under Chembio’s Registration Statement on Form
SB-2 that became effective with the SEC on November 4,
2004. The sale of these
shares also is included in this Prospectus so that Chembio
can make any future
amendments for the Registration Statement of which this
Prospectus is a part,
together with amendments of the 2004 Registration Statement,
in a single joint
prospectus.
3
Konrad
Ackerman has ultimate control over Alpha Capital AG and
the shares held by Alpha
Capital AG.
4
Provides
marketing consulting services to the Company.
5
Affiliated with Wellfleet Partners.
6
Affiliated with HC Wainwright, investment banking services.
7Affiliated
with Dillion Capital, a NASD member. Robert Hoyt has ultimate
control over
Crestview Capital Master, LLC and the shares held by Crestview
Capital Master,
LLC.
8
Affiliated with Midtown Partners & Co., LLC, investment banking
services.
9
DKR
SoundShore Oasis Holding Fund Ltd. (the “Fund”) is a master fund in a
master-feeder structure. The Fund’s investment manager is DKR Oasis Management
Company LP (the “Investment Manager”). Pursuant to an investment management
agreement among the Fund, the feeder funds and the Investment
Manager, the
Investment Manager has the authority to do any and all
acts on behalf of the
Fund, including voting any shares held by the Fund. Mr.
Seth Fischer is the
managing partner of Oasis Management Holdings LLC, one
of the general partners
of the Investment Manager. Mr. Fischer has ultimate responsibility
for trading
with respect to the Fund. Mr. Fischer disclaims beneficial
ownership of the
shares.
10
Christopher Eckert is an employee of Smith Barney.
11
Affiliated with Wellfleet Partners and Starobin Partners,
investment banking
services.
12
Former
Director of CDS.
14
Former
President of CDS and Director.
15
Employee
of Starboard Capital Markets, LLC, investment banking
services.
16
Assisted
the Company in fundraising.
18
Employee
of Midtown Partners & Co., LLC, investment banking
services.
19
Affiliated with Needham & Company, investment banking services, until
February 4, 2005.
20
NASD
member, assisted the Company in fundraising.
21
Fred
Fraenkel and Udi Toledano have ultimate control over Millennium
3 Opportunity
Fund and the shares held by Millennium 3 Opportunity Fund.
22
Keith
Goodman, Manager of the General Partner of Nite Capital,
LP has voting control
and investment discretion over securities held by Nite
Capital, LP.
Mr. Goodman disclaims beneficial ownership of the shares held
by Nite
Capital, LP.
23
Registered sales representative with RBC Dain Rauscher.
24
Provided
marketing consulting services; affiliated with Wellfleet
Partners and Starobin
Partners.
25
Assisted
the Company in fundraising; employee of Starboard Capital
Markets
LLC.
26
Stockholder of Lehman Brothers.
28
Partner
at Patton Boggs LLP, our legal counsel.
29
WSITE
International Foundation (“WSITE”) is the ultimate beneficiary of Thunderbird
Global Corporation. Gustavo Montilla is the Chairman of WSITE
International Foundation and controls the daily affairs
of
WSITE.
30
Provides
marketing consulting services.
31
Vicis
Capital Master Fund’s investment manager is Vicis Capital, LLC. Shad Stastney,
John Succo, and Sky Lucas have the ultimate control over
the shares held by
Vicis Capital Master Fund.
PLAN
OF DISTRIBUTION
Each
selling stockholder (the “Selling Stockholders”) of the common stock (the
“Common Stock”) of the Company and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all
of their shares
of Common Stock on any stock exchange, market or trading facility
on which the
shares are traded or in private transactions. These sales may
be at fixed or
negotiated prices. A Selling Stockholder may use any one or more
of the
following methods when selling shares:
· |
ordinary
brokerage transactions and transactions in which the
broker-dealer
solicits purchasers;
|
· |
block
trades in which the broker-dealer will attempt to sell
the shares as agent
but may position and resell a portion of the block as
principal to
facilitate the transaction;
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
|
· |
an
exchange distribution in accordance with the rules of
the applicable
exchange;
|
· |
privately
negotiated transactions;
|
· |
settlement
of short sales entered into after the date of this
prospectus;
|
· |
broker-dealers
may agree with the Selling Stockholders to sell a specified
number of such
shares at a stipulated price per share;
|
· |
a
combination of any such methods of sale;
|
· |
through
the writing or settlement of options or other hedging
transactions,
whether through an options exchange or otherwise;
or
|
· |
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under
the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers
to
participate in sales. Broker-dealers may receive commissions
or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent
for the
purchaser of shares, from the purchaser) in amounts to be negotiated,
but,
except as set forth in a supplement to this prospectus, in the
case of an agency
transaction not in excess of a customary brokerage commission
in compliance with
NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the Common Stock or interests therein,
the Selling
Stockholders may enter into hedging transactions with broker-dealers
or other
financial institutions, which may in turn engage in short sales
of the Common
Stock in the course of hedging the positions they assume. The
Selling
Stockholders may also sell shares of the Common Stock short and
deliver these
securities to close out their short positions, or loan or pledge
the Common
Stock to broker-dealers that in turn may sell these securities.
The Selling
Stockholders may also enter into option or other transactions
with
broker-dealers or other financial institutions or the creation
of one or more
derivative securities which require the delivery to such broker-dealer
or other
financial institution of shares offered by this prospectus, which
shares such
broker-dealer or other financial institution may resell pursuant
to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are
involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event,
any commissions
received by such broker-dealers or agents and any profit on the
resale of the
shares purchased by them may be deemed to be underwriting commissions
or
discounts under the Securities Act. Each Selling Stockholder
has informed the
Company that it does not have any written or oral agreement or
understanding,
directly or indirectly, with any person to distribute the Common
Stock. In no
event shall any broker-dealer receive fees, commissions and markups
which, in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred
by the Company
incident to the registration of the shares. The Company has agreed
to indemnify
the Selling Stockholders against certain losses, claims, damages
and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery
requirements
of the Securities Act. In addition, any securities covered by
this prospectus
which qualify for sale pursuant to Rule 144 under the Securities
Act may be sold
under Rule 144 rather than under this prospectus. Each Selling
Stockholder has
advised us that they have not entered into any written or oral
agreements,
understandings or arrangements with any underwriter or broker-dealer
regarding
the sale of the resale shares. There is no underwriter or coordinating
broker
acting in connection with the proposed sale of the resale shares
by the Selling
Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the
date on which the
shares may be resold by the Selling Stockholders without registration
and
without regard to any volume limitations by reason of Rule 144(e)
under the
Securities Act or any other rule of similar effect or (ii) all
of the shares
have been sold pursuant to the prospectus or Rule 144 under the
Securities Act
or any other rule of similar effect. The resale shares will be
sold only through
registered or licensed brokers or dealers if required under applicable
state
securities laws. In addition, in certain states, the resale shares
may not be
sold unless they have been registered or qualified for sale in
the applicable
state or an exemption from the registration or qualification
requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any
person engaged in
the distribution of the resale shares may not simultaneously
engage in market
making activities with respect to the Common Stock for a period
of two business
days prior to the commencement of the distribution. In addition,
the Selling
Stockholders will be subject to applicable provisions of the
Exchange Act and
the rules and regulations thereunder, including Regulation M,
which may limit
the timing of purchases and sales of shares of the Common Stock
by the Selling
Stockholders or any other person. We will make copies of this
prospectus
available to the Selling Stockholders and have informed them
of the need to
deliver a copy of this prospectus to each purchaser at or prior
to the time of
the sale.
LEGAL
PROCEEDINGS
From
time
to time, we may be involved in litigation relating to claims
arising out of our
operations in the normal course of business. We know of no material,
existing or
pending legal proceedings against us, nor are we involved as
a plaintiff in any
material proceeding or pending litigation. There are no proceedings
in which any
of our directors, officers or affiliates, or any registered or
beneficial
shareholder, is an adverse party or has a material interest to
our interest.
DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
Lawrence A.
Siebert (49),
President, Chief Executive Officer and Director. Mr. Siebert
was appointed
President of Chembio Diagnostics, Inc. and a member of our board
of directors
upon consummation of the merger. Mr. Siebert has been Chairman
of Chembio
Diagnostic Systems Inc. for approximately 12 years and its President
since May
2002. Mr. Siebert’s background is in private equity and venture capital
investing. From 1982 to 1991, Mr. Siebert was associated with
Stanwich Partners,
Inc, which during that period invested in middle market manufacturing
and
distribution companies. From 1992 to 1999, Mr. Siebert was an
investment
consultant and business broker with Siebert Capital Corp. and
Siebert Associates
LLC, and was a principal investor in a privately held test and
measurement
company which was sold in 2002. Mr. Siebert received a JD from
Case Western
Reserve University School of Law in 1981 and a BA with Distinction
in Economics
from the University of Connecticut in 1978.
Richard J.
Larkin (50),
Chief
Financial Officer. Mr. Larkin was appointed as Chief Financial
Officer of
Chembio Diagnostics, Inc. upon consummation of the merger. Mr.
Larkin oversees
our financial activities and information systems. Mr. Larkin
has been the Chief
Financial Officer of Chembio Diagnostic Systems Inc. since September
2003. Prior
to joining Chembio Diagnostic Systems Inc., Mr. Larkin served
as CFO at Visual
Technology Group from May 2000 to September 2003, and also led
their consultancy
program that provided hands-on expertise in all aspects of financial
service,
including the initial assessment of client financial reporting
requirements
within an Enterprise
Resource Planning (Manufacturing) environment through training
and
implementation. Prior to joining VTG, he served as CFO at Protex
International
Corporation from May 1987 to January 2000. Mr. Larkin holds a
BBA in Accounting
from Dowling College and is a member of the American Institute
of Certified
Public Accountants.
Avi
Pelossof (44),
Vice
President Sales, Marketing and Business Development. Mr. Pelossof
joined Chembio
Diagnostic Systems Inc. in 1996 and has been responsible for
developing Chembio
Diagnostic System’s marketing strategy and collaborations. From 1991 to 1996, he
was Managing Director and co-founder of The IMS Group, Inc.,
which provided
strategic marketing advisory services to companies involved in
Latin American
markets including Chembio Diagnostics, Inc. Prior to IMS he was
a Citibank Vice
President in the International Corporate Finance Group focused
on Latin America.
Mr. Pelossof received his MBA in finance and international business
from New
York University in 1986 and a BA with Distinction in economics
from the
University of Michigan in 1984.
Javan
Esfandiari (40),
Director
of Research and Development. Mr. Esfandiari joined Chembio Diagnostic
Systems,
Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner
of Sinovus
Biotech AB where he served as Director of Research and Development
concerning
lateral flow technology until Chembio Diagnostic Systems Inc.
acquired Sinovus
Biotech AB in 2000. From 1993 to 1997, Mr. Esfandiari was Director
of Research
and Development with On-Site Biotech/National Veterinary Institute,
Uppsala,
Sweden, which was working in collaboration with Sinovus Biotech
AB on
development of veterinary lateral flow technology. Mr. Esfandiari
received his
B.Sc. in Clinical Chemistry and his M. Sc. in Molecular Biology
from Lund
University, Sweden. He has published articles in various veterinary
journals and
has co-authored articles on tuberculosis serology with Dr.
Lyashchenko.
Richard
Bruce (52),
Vice
President, Operations. Mr. Bruce was hired in April 2000 as Director
of
Operations. He is responsible for manufacturing, maintenance,
inventory,
shipping, receiving, and warehouse operations. Prior to joining
Chembio
Diagnostic Systems Inc., he held director level positions at
Wyeth Laboratories
from 1984 to 1993. From 1993 to 1998, he held various management
positions in
the Operations department at Biomerieux. From 1998 to 2000, he
held a management
position at V.I. Technologies. Mr. Bruce has over 25 years of
operations
management experience with Fortune 500 companies in the field
of in-vitro
diagnostics and blood fractionation. Mr. Bruce received his BS in
Management from National Louis University in 1997.
Les
Stutzman (54), VP
of
Marketing. In 2005, Mr. Stutzman joined Chembio as Vice President
of Marketing
to lead the development and launch of rapid tests for veterinary
and human TB
and other veterinary products. Mr. Stutzman has spent over twenty
years in
marketing leadership positions within various diagnostics companies.
He has held
Global Director and Business Development Director positions in
Marketing for
diagnostic companies including bioMérieux Inc., (formerly Organon Teknika
Corp.), Durham, North Carolina from 1997 to 2002 and TREK Diagnostic
Systems,
Cleveland, Ohio from 2002 to 2005. Mr. Stutzman received his
MBA in Marketing
from Duke University Fuqua School of Business in 1988 and his
Masters in
Microbiology from Wagner College in 1982. Mr. Stutzman is MT
(ASCP) SM
certified.
Tom
Ippolito (43), VP
of
Regulatory Affairs, QA and QC. Mr. Ippolito joined Chembio in
June 2005. He has
over twenty years experience with in vitro diagnostics for infectious
diseases,
protein therapeutics, vaccine development, Process Development,
Regulatory
Affairs and Quality Management. Over the years, Mr. Ippolito
has held Vice
President level positions at Biospecific Technologies, Corp.
from 2000 - 2005,
Director level positions in Quality Assurance, Quality Control,
Process
Development and Regulatory Affairs at United Biomedical, Inc.
from 1987 - 2000.
Mr. Ippolito is the Course Director for “drug development process” and “FDA
Regulatory Process” for the BioScience Certificate Program at the New York State
University of Stony Brook, a program he has been a part of since
its inception
in 2003.
Alan
Carus, CPA (67),
Director, Audit Committee chair. Mr. Carus was elected to Chembio’s Board of
Directors on April 15, 2005. He is a co-founder of LARC Strategic
Concepts LLC, a consulting firm dedicated to guiding emerging
companies to next
stage development. Prior to co-founding LARC Strategic Concepts
LLC, Mr. Carus
was Senior Vice President of Maritime Overseas Corporation (“MOC”) and a senior
executive of Overseas Ship holding Group, Inc. (“OSG”) from 1981 to 1998 when he
retired. MOC was managing agent for OSG, one of the world’s largest ship-owners.
He was a member of OSG’s senior management committee and had senior
responsibility in areas relating to administration, accounting,
tax, finance,
budgets, long-range projections, and human resources. Mr. Carus
was involved in
numerous acquisitions, debt and equity offerings, complex transaction
structuring, and was active in the management of OSG’s major investments in the
cruise industry and other development stage companies. From 1964
to 1981, he was
with Ernst & Young (including predecessors), the last seven years as a
partner. Mr. Carus has a B.B.A. from the Baruch School of Business
of the City
College of New York.
Dr.
Gary Meller (55),
Director. Dr. Meller was elected to our Board of Directors on
March 15, 2005.
Dr. Meller has been the president of CommSense Inc., a healthcare
business
development company, since 2001. CommSense Inc. works with clients
in Europe,
Asia, North America, and the Middle East on medical information
technology,
medical records, pharmaceutical product development and financing,
health
services operations and strategy, and new product and new market
development.
From 1999 until 2001 Dr. Meller was the executive vice president,
North America,
of NextEd Ltd., a leading internet educational services company
in the Asia
Pacific region. Dr. Meller also is a limited partner and a member
of the
Advisory Board of Crestview Capital Master LLC, which was the
lead investor in
our series B preferred stock private placement. Dr. Meller is
a graduate of the
University of New Mexico School of Medicine and has an MBA from
the Harvard
Business School.
Gerald
A. Eppner (67), Director.
Mr. Eppner was elected to our Board of Directors on March 15, 2005. Mr.
Eppner is Counsel in the Corporate and Finance Department of
Kaye Scholer where
his practice includes matters under the federal securities laws. He has
engaged in private law practice in New York City for over 40
years and retired
as a partner in Cadwalader, Wickersham & Taft at the end of 2004 and as
Senior Counsel to that firm in 2005. Mr. Eppner is Vice Chairman
and General
Counsel of Emeritus Capital Partners, LLC, a New York City-based
capital
strategies firm that specializes in large asset-based securitizations
and
secondary market intermediation of senior life settlement insurance
portfolios. He is also a Managing Director of Access Equity Partners, LLC,
a New York-and Chicago-based venture capital firm. Prior to coming to New
York, Mr. Eppner was an employee of agencies and departments
of the U.S.
government.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the
beneficial
ownership of our common stock by each person or entity
known by us to be the beneficial owner of more than 5% of the
outstanding shares
of common stock, each of our directors and each of our “named executive
officers” and all of our directors and executive officers as a group as
of
October 6, 2006.
Name
and Address of Beneficial Owner
|
|
Number
of Shares Beneficially Owned
|
|
Percent
of Class
|
|
Lawrence
Siebert (1)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
2,099,636
|
|
|
18.40
|
%
|
Avi
Pelossof (2)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
527,323
|
|
|
4.65
|
%
|
Javan
Esfandiari (3)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
185,830
|
|
|
1.66
|
%
|
Richard
Bruce (4)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
100,500
|
|
|
.90
|
%
|
Richard
J. Larkin (5)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
100,785
|
|
|
.91
|
%
|
Alan
Carus (6)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
66,000
|
|
|
0.60
|
%
|
Les
Stutzman
3661
Horseblock Road
Medford,
NY 11763
|
|
|
25,000
|
|
|
0.23
|
%
|
Tom
Ippolito
3661
Horseblock Road
Medford,
NY 11763
|
|
|
15,000
|
|
|
.14
|
%
|
Gary
Meller (7)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
51,000
|
|
|
0.46
|
%
|
Gerald
Eppner (8)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
51,000
|
|
|
0.46
|
%
|
All
officers and directors as a group(9)
|
|
|
3,222,074
|
|
|
26.28
|
%
|
Mark
Baum (10)
580
Second Street, Suite 102
Encinitas,
CA 92024
|
|
|
1,405,474
|
|
|
11.82
|
%
|
Beneficial
ownership is determined in accordance with the Rule 13d-3(a)
of the Securities
Exchange Act of 1934, as amended, and generally includes voting
or investment
power with respect to securities. Except as subject to community
property laws,
where applicable, the person named above has sole voting and
investment power
with respect to all shares of our common stock shown as beneficially
owned by
him.
The
beneficial ownership percent in the table is
calculated with respect to the number of outstanding shares (11,036,245)
of the
Company's common stock outstanding as of October 6, 2006. Each
stockholder's
ownership is calculated as the number of shares of common stock
owned plus the
number of shares of common stock into which any preferred stock,
warrants,
options or other convertible securities owned by that stockholder
can be
converted within 60 days. In addition to the 11,036,245 shares
of common stock
outstanding, the Company’s outstanding series A, B and C preferred stock is
convertible into a total of approximately 27.1 million shares
of preferred
stock, and there are warrants to purchase approximately 22,2
million shares of
common stock outstanding. None of the preferred shares can be
converted into
common stock and none of the warrants can be exercised if the
conversion or
exercise would result in the holder owning more than 4.99% of
the Company's
outstanding common stock unless the holder provides the Company
with 61 days
advance written notice. As a result of this provision, holders
of preferred
stock that is convertible into common stock and holders of warrants
to purchase
common stock who, with 61 days advance notice, can convert those
securities into
more than 5% of the Company's outstanding stock are not required
to be listed in
this table.
The
term
“named executive officer” refers to our chief executive officer and each of our
other executive officers who received at least $100,000 of compensation
in
2005.
This
table does not include convertible securities which, due to contractual
restrictions, are not exercisable within 60 days of the date
of this prospectus.
Specifically, at no time may a holder of shares of series A,
series B or series
C preferred stock convert shares of the series A or series B
preferred stock if
the number of shares of common stock to be issued pursuant to
such conversion
would exceed, when aggregated with all other shares of common
stock owned by
such holder at such time, the number of shares of common stock
which would
result in such holder beneficially owning (as determined in accordance
with
Section 13(d) of the Securities Exchange Act) in excess of either
4.999% or
9.999% of the then issued and outstanding shares of common stock
outstanding at
such time, unless the holder has provided us with sixty-one (61)
days notice
that the holder has elected to waive this restriction.
|
(1)
|
Includes
170,000 shares issuable upon exercise of options exercisable
within 60
days and 207,566 warrants. Also does not include 1,937,220
shares issuable
upon conversion of series A preferred stock, 2,324,666
shares issuable
upon exercise of warrants, 88,971 shares issuable upon
conversion of
series B preferred stock and 77,868 shares issuable
upon exercise of
warrants because conversion of any of those shares
of series A or series B
preferred stock or exercise of those warrants would
result in the holder
beneficially owning in excess of 4.99% of the then
issued and outstanding
shares of common stock outstanding at that
time.
|
|
(2)
|
Includes
277,500 shares issuable upon exercise of options exercisable
within 60
days and 22,555 shares issuable upon exercise of warrants.
Does not
include 122,500 shares issuable upon exercise of options
that are not
exercisable within the next 60 days. Also does not
include 10,078 shares
issuable upon conversion of series A preferred stock
and 12,095 shares
issuable upon exercise of warrants because conversion
of any of those
shares of series A preferred stock or exercise of any
of those warrants
would result in the holder beneficially owning in excess
of 4.99% of the
then issued and outstanding shares of common stock
outstanding at that
time.
|
|
(3)
|
Includes
163,750 shares issuable upon exercise of options exercisable
within 60
days and 2,007 shares issuable upon exercise of warrants.
Does not include
68,750 shares issuable upon exercise of options that
are not exercisable
within the next 60 days.
|
|
(4)
|
Includes
95,000 shares issuable upon exercise of options exercisable
within 60 days
and 500 shares issuable upon exercise of warrants.
Does not include 25,000
shares issuable upon exercise of options that are not
exercisable within
the next 60 days
|
|
(5)
|
Includes
93,750 shares issuable upon exercise of options exercisable
within 60 days
and 250 shares issuable upon exercise of warrants.
Does not include 43,750
shares issuable upon exercise of options that are not
exercisable within
the next 60 days. Also does not include 30,236 shares
issuable upon
conversion of series A preferred stock and 25,196 shares
issuable upon
exercise of warrants because conversion of any of those
shares of series A
preferred stock or exercise of any of those warrants
would result in the
holder beneficially owning in excess of 4.99% of the
then issued and
outstanding shares of common stock outstanding at that
time.
|
|
(6)
|
Includes
51,000 shares issuable upon exercise of options exercisable
within 60
days. Does not include 36,000 shares issuable upon
exercise of options
that are not exercisable within the next 60
days.
|
|
(7)
|
Includes
51,000 shares issuable upon exercise of options exercisable
within 60
days. Does not include 36,000 shares issuable upon
exercise of options
that are not exercisable within the next 60
days.
|
|
(8)
|
Includes
51,000 shares issuable upon exercise of options exercisable
within 60
days. Does not include 36,000 shares issuable upon
exercise of options
that are not exercisable within the next 60
days.
|
|
(9)
|
Includes
footnotes (1)-(8).
|
|
(10)
|
Includes
850,000 shares issuable upon exercise of warrants.
Does not include
108,333 shares issuable upon conversion of series A
preferred stock and
130,000 shares issuable upon exercise of warrants because
conversion of
any of those shares of series A preferred stock or
exercise of those
warrants would result in the holder beneficially owning
in excess of 4.99%
of the then issued and outstanding shares of common
stock outstanding at
that time.
|
DESCRIPTION
OF SECURITIES
Pursuant
to our articles of incorporation, as amended, we are authorized
to issue
100,000,000 shares of common stock, par value $0.01 per share
and 10,000,000
shares of preferred stock, par value $0.01 per share. Below is
a description of
our common stock, shares of which are being offered in this prospectus
and a
description of our preferred stock.
Common
stock
Holders
of the common stock are entitled to one vote for each share held
by them of
record on our books in all matters to be voted on by the stockholders.
Holders
of common stock are entitled to receive dividends as may be legally
declared
from time to time by the board of directors, and in the event
of our
liquidation, dissolution or winding up, to share ratably in all
assets remaining
after payment of liabilities. Declaration of dividends on common
stock is
subject to the discretion of the board of directors and will
depend upon a
number of factors, including our future earnings, capital requirements
and
financial condition. We have not declared dividends on our common
stock in the
past and we currently anticipate that retained earnings, if any,
in the future
will be applied to our expansion and development rather than
the payment of
dividends. Additionally, pursuant to the certificate of designation
authorizing
and creating the series A preferred stock, we are restricted
from paying
dividends on the common stock without the approval of holders
of at least
three-fourths of the then outstanding shares of our series A
preferred
stock.
The
holders of common stock have no preemptive or conversion rights
and are not
subject to further calls or assessments. There are no redemption
or sinking fund
provisions applicable to the common stock. Our articles of incorporation
require
the approval of the holders of a majority of our outstanding
common stock for
the election of directors and for other fundamental corporate
actions, such as
mergers and sales of substantial assets, or for an amendment
to our articles of
incorporation. There exists no provision in our articles of incorporation
or our
bylaws that would delay, defer or prevent a change in control
of the
Company.
Action
Stock Transfer acts as our transfer agent and registrar
Series
A Preferred Stock
Dividends.
Holders
of series A preferred stock are entitled to an 8% per annum dividend
per share.
The dividend accrues and is payable semi-annually either in cash,
in shares of
series A preferred stock or in shares of common stock. Accrued
but unpaid
dividends are also payable upon the conversion or redemption
of the shares of
series A preferred stock and upon our liquidation, dissolution
or winding up.
In
the event the Company elects to pay any dividend in shares
of common stock or in
shares of series A preferred stock, so long as Vicis Capital
Master Fund owns
any shares of series A preferred stock, Vicis Capital Master
Fund will receive
such dividend in cash unless it otherwise notifies the
Company no later than
five (5) trading days prior to the date of the applicable
dividend payment. Such
payment to Vicis Capital Master Fund will not affect the
Company’s election to
make the applicable dividend payment in stock so long as
the only holder
receiving the dividend payment in cash is Vicis Capital
Master
Fund.
Voting
Rights.
As long
as any shares of series A preferred stock are outstanding, we
cannot take any of
the following actions without the separate class vote or written
consent of at
least three-fourths of the then outstanding shares of our series
A preferred
stock:
· |
amend,
alter or repeal the provisions of the series A preferred
stock so as to
adversely affect any right, preference, privilege or
voting power of the
series A preferred stock;
|
· |
repurchase,
redeem or pay dividends on shares of common stock or
any other shares of
our equity securities that by their terms do not rank
senior to the series
A preferred stock, other than de minimus repurchases
from our employees in
certain circumstances;
|
· |
amend
our articles of incorporation or bylaws so as to affect
materially and
adversely any right, preference, privilege or voting
power of the series A
preferred stock;
|
· |
effect
any distribution with respect to any equity securities
that by their terms
do not rank senior to the series A preferred
stock;
|
· |
reclassify
our outstanding securities;
|
· |
voluntarily
file for bankruptcy, liquidate our assets or make an
assignment for the
benefit of our creditors; or
|
· |
change
the nature of our business.
|
In
addition, as long as at least $1,000,000 of series A preferred
stock is
outstanding, we cannot, without the affirmative vote or consent
of the holders
of at least three-fourths of the shares of the series A preferred
stock
outstanding at the time, authorize, create, issue or increase
the authorized or
issued amount of any class or series of stock, except for the
issuance of shares
of series A preferred stock with respect to the payment of dividends
on the
outstanding shares of series A preferred stock.
Except
with respect to items set forth above upon which the series A
preferred stock
shall be entitled to vote separately as a class and except as
otherwise required
by Nevada law, the series A preferred stock does not have any
voting rights. The
common stock into which the series A preferred stock is convertible
will have,
upon issuance, all the same voting rights as other issued and
outstanding shares
of our common stock.
Conversion.
The
series A preferred stock is convertible, at the option of the
holders, into
shares of common stock at a conversion price of $.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. The
series A preferred stock is issuable in fractional shares. The
series A
preferred stock contains adjustment provisions upon the occurrence
of stock
splits, stock dividends, combinations, reclassifications or similar
events of
our capital stock. The series A preferred stock also provides
for adjustment of
the conversion price if the Company sells common stock at a price,
or issues a
security convertible into common stock with a conversion price,
less than the
then-current conversion price for the series A preferred stock.
Each
share of the series A preferred stock will automatically convert
into common
stock on the date that the closing bid price for the common stock
exceeds $1.50
for a period of ten (10) consecutive trading days, if the following
conditions
are satisfied:
· |
such
date is at least one hundred eighty (180) days following
the effective
date of this registration statement; and
|
· |
this
registration statement has been effective, without lapse
or suspension of
any kind, for a period of sixty (60) days (or the common
stock into which
the series A preferred stock is convertible can be freely
traded pursuant
to Rule 144(k) under the Securities Act).
|
Redemption.
In the
event of:
· |
a
consolidation, merger, or other business combination
involving Chembio
Diagnostics, Inc.,
|
· |
the
sale of more than 50% of our assets; or
|
· |
the
closing of a purchase, tender or exchange offer made
to and accepted by
holders of more than 50% of our outstanding shares of
common
stock;
|
each
holder of series A preferred stock has the right to require us
to redeem all or
a portion of such holder’s shares of series A preferred stock at a price per
share of series A preferred stock equal to 100% of the then current
liquidation
preference amount for the series A preferred stock, plus any
accrued and unpaid
dividends; provided that we will have the sole option to pay
the redemption
price in cash or shares of common stock. If we elect to pay the
redemption price
in shares of common stock, the price per share will be based
upon the lesser of
the conversion price for the series A preferred stock or the
closing bid price
for the common stock, in each case measured on the day preceding
the date of
delivery of the notice of redemption by such holder. In the event
we elect to
pay the redemption price in shares of common stock, demand registration
rights
will be granted on those additional shares.
Upon
the
occurrence of any of the following events:
· |
the
lapse or unavailability of this registration statement;
|
· |
the
suspension from listing of the common stock for a period
of seven (7)
consecutive days;
|
· |
our
failure or inability to comply with a conversion request
from a holder of
series A preferred stock; or
|
· |
our
material breach of any of our representations or warranties
contained in
the series A preferred stock documentation that continues
uncured for a
period of ten (10) days;
|
each
holder of series A preferred stock has the right to require us
to redeem all or
a portion of that holder’s shares of series A preferred stock at a price per
share of series A preferred stock equal to 120% of the then current
liquidation
preference amount for the series A preferred stock, plus any
accrued and unpaid
dividends; provided that with respect to some of the triggering
events
referenced above, we will have the sole option to pay the redemption
price in
cash or shares of common stock. If we elect to pay the redemption
price in
shares of common stock, the price per share will be based upon
the lesser of the
conversion price for the series A preferred stock and the closing
bid price for
the common stock, in each case measured on the day preceding
the date of
delivery of the notice of redemption by such holder. In the event
we elect to
pay the redemption price in shares of common stock, demand registration
rights
will be granted on those additional shares.
Rank;
Liquidation Preference.
The
holders of our series A preferred stock rank prior to the holders
of our common
stock and, unless otherwise consented to by the holders of series
A preferred
stock, prior to all other classes of capital stock that we may
establish, other
than our series B preferred stock, with respect to the distribution
of its
assets upon a bankruptcy, liquidation or other similar event.
The liquidation
preference for the series A preferred stock is an amount equal
to $30,000.00 per
share plus any accrued and unpaid dividends.
Series
B Preferred Stock
Dividends.
Holders of series B preferred stock are entitled to a 9% per
annum
dividend per share. The dividend accrues and is payable semi-annually
in cash,
in shares of series B preferred stock, or in shares of common stock,
at our
option. Accrued but unpaid dividends are also payable upon the
conversion or
redemption of the shares of series B preferred stock and upon
a liquidation
event.
In
the event any dividend is issued, any holder of the majority
of the outstanding
series B preferred stock at the dividend payment date,
may elect whether to
receive dividends on series B preferred stock in cash,
in common stock or in
shares of series B preferred stock in its sole discretion.
As of the date of
this prospectus, Crestview Capital Master LLC holds a majority
of the
outstanding shares of the series B preferred
stock.
This
prospectus covers 2,521,531 shares of our common stock which
represents the
number of shares of our common stock that may be issued in payment
of three
years of dividends on the currently outstanding shares of our
series B preferred
stock assuming that each share of our series B preferred stock
remains issued
and outstanding for three years, and that we pay all of the dividends
in those
three years in shares of our common stock.
Voting
Rights.
As long as any shares of series B preferred stock are outstanding,
we
cannot take any of the following actions without the separate
class vote or
written consent of 51% of the holders of the then outstanding
shares of series B
preferred stock:
· |
amend,
alter or repeal the provisions of the series B preferred
stock so as to
adversely affect any right, preference, privilege or
voting power of the
series B preferred stock;
|
· |
authorize
or create any class of stock ranking as to dividends,
redemption or
distribution of assets upon a liquidation event, senior
to or otherwise
pari passu with the series B preferred
stock;
|
· |
amend
our articles of incorporation or by-laws so as to adversely
affect any
rights of the series B preferred stock;
|
· |
increase
the authorized number of shares of series B preferred
stock;
or
|
· |
enter
into any agreement with respect to the
foregoing.
|
Notwithstanding
the foregoing, so long as any shares of series B preferred stock
are
outstanding, the Company shall not, without the affirmative vote
of the holders
of 75% of the shares of series B preferred stock then outstanding,
(a) decrease
the dividend rate of 9% per annum; (b) amend the anti-dilution
adjustment for
subsequent equity sales; or (c) amended the terms for a forced
conversion.
Conversion.
The series B preferred stock is convertible, at the option of
the holders,
into shares of our 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 preferred stock is convertible into 81,968 shares of our common stock.
The series B preferred stock is issuable in fractional shares.
The series
B preferred stock contains adjustment provisions upon the occurrence
of stock
splits, stock dividends, combinations, reclassifications or similar
events of
our capital stock. The series B preferred stock also provides
for adjustment of
the conversion price if Company sells common stock at a price,
or issues a
security convertible into common stock with a conversion price,
less than the
then-current conversion price for the series B preferred stock.
Redemption.
In the event of:
· |
a
consolidation, merger, or other business combination
involving Chembio
Diagnostics, Inc.;
|
· |
the
sale of all or substantially all of our
assets;
|
· |
the
acquisition by another person of in excess of 50% of
our voting
securities; or
|
· |
certain
specified triggering events (involving (A) the lapse
or unavailability of
a registration statement, (B) the suspension from listing
of our common
stock for a period of seven consecutive days, (C) our
failure or inability
to comply with a conversion request from a holder of
series B preferred
stock, (D) our breach of any of our representations or
warranties
contained in the series B preferred stock documentation
that continues
uncured for a period of 30 days, or (E) our becoming
subject to certain
bankruptcy events),
|
each
holder of series B preferred stock has the right to require us
to redeem all of
that holder’s shares of series B preferred stock at a price per share of
series
B preferred stock equal to the sum of (i) the greater of (a)
$65,000 or (b) the
product of (x) the daily volume weighted average price of our
common stock as
reported on the OTC Bulletin Board on the date immediately preceding
such event
by Bloomberg Financial L.P. and (y) the quotient of $65,000 divided
by the then
current conversion price for the series B preferred stock, plus
(ii) any accrued
but unpaid dividends, plus (iii) all liquidated damages and other
amounts due in
respect of the series B preferred stock.
Rank;
Liquidation Preference.
The holders of series B preferred stock rank pari passu to the
holders of
our series A preferred stock and prior to the holders of our
common stock and,
unless otherwise consented to by the holders of series B preferred
stock, prior
to all other classes of capital stock that we may establish,
with respect to (i)
the payment of dividends and (ii) the distribution of our assets
upon a
bankruptcy, liquidation or other similar event. The liquidation
preference for
the series B preferred stock is an amount equal to $50,000 per
share plus any
accrued and unpaid dividends and liquidated damages owing thereon.
Series
C Preferred
Stock
Dividends.
Holders of series C preferred stock are entitled to a 7% per
annum
dividend per share. The dividend accrues and is payable semi-annually
in cash,
in shares of common stock or a combination thereof, at our option.
Accrued but
unpaid dividends are also payable upon the conversion or redemption
of the
shares of series C preferred stock and upon a liquidation event.
This
prospectus covers 2,165,625 shares of our common stock which
represents the
number of shares of our common stock that may be issued in payment
of three
years of dividends on the currently outstanding shares of our
series C preferred
stock assuming that each share of our series C preferred stock
remains issued
and outstanding for three years, and that we pay all of the dividends
in those
three years in shares of our common stock.
Voting
Rights.
As long as any shares of series C preferred stock are outstanding,
we
cannot take any of the following actions without the separate
class vote or
written consent of 81% of the then outstanding shares of series
C preferred
stock:
· |
amend,
alter or repeal the provisions of the series C preferred
stock so as to
adversely affect any right, preference, privilege or
voting power of the
series C preferred stock;
|
· |
authorize
or create any class of stock ranking as to dividends,
redemption or
distribution of assets upon a liquidation event, senior
to or otherwise
pari passu with the series C preferred
stock;
|
· |
amend
our articles of incorporation or by-laws so as to adversely
affect any
rights of the series B preferred stock;
|
· |
increase
the authorized number of shares of series C preferred
stock;
or
|
· |
enter
into any agreement with respect to the
foregoing.
|
Conversion.
The series C preferred stock is convertible, at the option of
the holders,
into shares of our common stock at a conversion price of $.80 per share.
Based on the original purchase price of $50,000 per share, each
share of series
C preferred stock is convertible into 62,500 shares of our common stock.
The series C preferred stock is issuable in fractional shares.
The series
C preferred stock contains adjustment provisions upon the occurrence
of stock
splits, stock dividends, combinations, reclassifications or similar
events of
our capital stock. The series C preferred stock also provides
for adjustment of
the conversion price if Company sells common stock at a price,
or issues a
security convertible into common stock with a conversion price,
less than the
then-current conversion price for the series C preferred stock.
Redemption.
In the event of:
· |
a
consolidation, merger, or other business combination
involving Chembio
Diagnostics, Inc.,
|
· |
the
sale of all or substantially all of our assets;
|
· |
the
acquisition by another person of in excess of 50% of
our voting
securities; or
|
· |
certain
specified triggering events (involving (A) the lapse
or unavailability of
a registration statement, (B) the suspension from listing
of our common
stock for a period of seven consecutive days, (C) our
failure or inability
to comply with a conversion request from a holder of
series C preferred
stock, (D) our breach of any of our representations or
warranties
contained in the series C preferred stock documentation
that continues
uncured for a period of 30 days, or (E) our becoming
subject to certain
bankruptcy events),
|
each
holder of series C preferred stock has the right to require us
to redeem all of
that holder’s shares of series C preferred stock at a price per share of
series
C preferred stock equal to the sum of (i) the greater of (a)
$65,000 or (b) the
product of (x) the daily volume weighted average price of our
common stock as
reported on the OTC Bulletin Board on the date immediately preceding
such event
by Bloomberg Financial L.P. and (y) the quotient of $65,000 divided
by the then
current conversion price for the series C preferred stock, plus
(ii) any accrued
but unpaid dividends, plus (iii) all liquidated damages and other
amounts due in
respect of the series C preferred stock.
Rank;
Liquidation Preference.
The holders of series C preferred stock rank pari passu to the
holders of
our series A preferred stock, series B preferred stock and, prior
to the holders
of our common stock, unless otherwise consented to by the holders
of series C
preferred stock, prior to all other classes of capital stock
that we may
establish, with respect to (i) the payment of dividends and (ii)
the
distribution of our assets upon a bankruptcy, liquidation or
other similar
event. The liquidation preference for the series C preferred
stock is an amount
equal to $50,000 per share plus any accrued and unpaid dividends
and liquidated
damages owing thereon.
DESCRIPTION
OF BUSINESS AND ORGANIZATION
General
We
are a
developer and manufacturer of lateral flow rapid diagnostic tests
that detect
infectious diseases. Our products are sold through private distributors
as well
as public health and non-governmental organizations. The main
products that we
actively market and that are commercially available today are
our three HIV
Rapid Tests (SURE CHECK®HIV 1/2, HIV 1/2 STAT-PAK™ and HIV 1/2 STAT-PAK™
Dipstick), and our rapid test for Chagas disease, Chagas STAT-PAK™. We also have
products under development in the areas of veterinary and human
tuberculosis,
emerging and neglected diseases, including products that are
under development
employing our patent pending Dual Path Platform.
HIV
Rapid Tests
A
major
component of our revenue growth in 2006 through June 30, 2006
has come primarily
from increased sales of our rapid HIV tests. A large percentage
of individuals
that are HIV positive worldwide are unaware of their status.
Part of the reason
for this is that even those that do get tested in public health
settings will
often not return or call back for their test results when samples
have to be
sent out to a laboratory which can take at least several days
to process. The
increased availability, greater efficacy and reduced costs for
anti-retroviral
treatments (ARVs) for HIV is also having a tremendous impact
on the demand for
being tested, as the stigma associated with the disease is lessened
and the
ability to resume normal activities is substantially improved.
Our
SURE
CHECK HIV 1/2 rapid test eliminates the need for a separate sample
collection
system when used to collect finger-stick whole blood samples.
We believe this
improves ease of use and safety. Our HIV 1/2 STAT-PAK cassette
format and HIV
1/2 STAT-PAK Dipstick format tests require that the sample (whether
finger-stick
whole blood, venous whole blood, serum or plasma) first be transferred
to the
test device, which is similar to competitive products. Both the
cassette and
dipstick formats of our HIV 1/2 STAT-PAK line is more competitively
priced and
more flexible than SURE CHECK for samples other than finger-stick
whole blood.
The HIV 1/2 STAT-PAK Dipstick, our most economical format, was
designed in order
to provide a low cost product with performance equal to our other
products for
resource-constrained markets in the developing world. All three
of our HIV tests
use a standardized test strip which we developed by using patented
materials
licensed non-exclusively to us from third parties as well as
our own proprietary
know-how and trade secrets. All three of our rapid HIV tests
are qualitative
yes/no tests for the detection of antibodies to HIV 1 & 2.
Regulatory
Status:
HIV
Tests
The
Company obtained FDA approval of the Pre-Market Application of
its SURE CHECK
HIV 1/2 and HIV 1/2 STAT-PAK products on May 25, 2006. Subsequently,
the Company
completed additional studies and submitted to the FDA a waiver
application under
the Clinical Laboratory Improvement Act (“CLIA”) for these FDA-approved products
on July 18, 2006 and July 27, 2006, respectively. A CLIA waiver
is essential in
order to market the products into public health clinics and physicians’ offices
where the level of training is traditionally less than the training
at clinical
laboratories and hospitals, which constitute the largest portion
of the
available market for these products today. The Company believes
that it has met
all material aspects of the CLIA waiver requirements, and, subject
to completing
any issues identified by the FDA in its waiver applications,
hopes to receive a
CLIA waiver in the near future.
The
Company has certificates of free sale for the FDA approved HIV
tests. All three
rapid HIV tests qualify under U.S. FDA export regulations to
sell, subject to
any required approval by the importing country, to customers
outside the U.S. To
date we have received approval from a number of potential importing
countries,
although Brazil, Nigeria and Uganda are the only countries in
which we have
significant sales. Our HIV 1/2 STAT-PAK and HIV 1/2 STAT-PAK
Dipstick products
were also evaluated by the World Health Organization (the “WHO”) in 2004, and in
2005 the WHO qualified these products for inclusion in the WHO
Bulk Procurement
Scheme, which is a pre-requisite for these products’ eligibility for
procurements from programs funded by the United Nations and their
partners’
programs. All three of our HIV tests have qualified for procurements
under the
President’s Emergency Plan for AIDS Relief.
Partners
Involved in the Products:
In
2004
we entered into a thirteen-year supply and technology transfer
agreement with
FIOCRUZ-Bio-Manguinhos, an affiliate of the Ministry of Health
of Brazil
relating to our HIV 1/2 STAT-PAK product. FIOCRUZ-Bio-Manguinhos
will supply
this product, which will eventually be produced completely in
Brazil, to the
Brazilian public health market and potentially other markets
in the region.
In
September 2005 we were designated as the confirmatory test in
Uganda’s national
rapid testing protocol, and through the offices we have established
in East
Africa and Nigeria, each staffed with experienced executives,
we hope to be
selected in more such national testing protocols. In February
2006 our HIV 1/2
STAT-PAK was designated by the Nigerian Ministry of Health in
four out of the
eight screening protocols in the Nigerian Interim Rapid Testing
Algorithm. At
the same time, we are identifying and appointing distributors
in these regions,
and are engaged with the multitude of stakeholders that are responsible
for the
delivery of rapid testing and related services in the markets.
Our focus is on
those African countries that are receiving funding from PEPFAR
and other large
relief programs.
In
January of 2006 we became one of four recommended global suppliers
to Former
President Clinton’s HIV/AIDS Initiative (“CHAI”), and through that we expect to
generate revenues in many of the nearly sixty countries that
have agreements
with CHAI.
For
the
U.S. rapid HIV test market, as described in Management’s Discussion and Analysis
below, we have very recently executed marketing and license agreements
with
Inverness Medical Innovations, Inc.
CHAGAS
RAPID TEST
The
Company has completed development of a rapid test for the detection
of
antibodies to Chagas Disease. This product, Chagas STAT-PAK,
was developed in
collaboration with a consortium of leading researchers in Latin
America that
have granted us an exclusive license to their recombinant antigens.
Chagas
Disease is endemic only in regions of Latin America yet there
are an estimated
16-18 million Chagas Disease cases resulting in approximately
20,000 deaths
annually, with an estimated 300,000 new cases each year. It is
transmitted by a
parasitic bug which lives in cracks and crevices of poor-quality
houses usually
in rural areas, through blood transfusion or congenitally from
infected mother
to fetus. There is an effective therapy available to treat the
early chronic
phase, but it only eliminates the infection if administered to
children that are
diagnosed with it. Chagas STAT-PAK is the only rapid test for
Chagas disease to
have performed well in multi-center studies in endemic regions
of Latin
America.
The
Company received, in January of 2006, an order for $1.2 million
to supply its
Chagas Disease rapid test to be delivered in the first three
quarters of 2006.
This procurement is being made by the Pan American Health Organization,
headquartered in Washington D.C., which is affiliated with the
World Health
Organization. The procurement will be used to implement a nationwide
Chagas
screening program for all children under the age of 10 in endemic
regions of
Bolivia. The Company is actively looking at developing additional
business
opportunities for this product in those regions of Latin America
that are
impacted by this disease.
Other
Products
Prior
to
2005, a majority of our revenues were from the contract manufacture
of private
label pregnancy tests for regional pharmacies, drug stores and
mass merchants in
the U.S., Europe, Canada and Central America. However, as a result
of pricing
pressures, regulatory changes and potential patent litigation
in this field, and
in order to focus our efforts on rapid HIV tests we sold substantially
all of
the business related to our private label pregnancy test. We
have retained a
profit share derived from the sales of these products by the
buyer. This has
resulted in a substantial reduction of our revenues from these
products and this
is no longer a material part of our revenue stream. We also have
other
commercially available products, such as rapid tests for Lyme
disease and other
products, the aggregate of whose revenues are currently not material
to us. We
also are involved, as described below under “Research
and Development,” in the development of new products.
Lateral
Flow Technology
All
our
current products employ lateral flow technology. Lateral flow,
whether single or
dual path, generally refers to the process of a sample flowing
from the point of
application on a test strip to provide a test result on a portion
of a strip
downstream from either the point of application of the sample
or of another
reagent. Single path lateral flow technology is well established
and widely
applied in the development of rapid diagnostic tests. The functionality
of our
lateral flow tests is based on the ability of an antibody to
bind with a
specific antigen (or vice versa) and for the binding to become
visible through
the use of the colloidal gold and/or colored latex that we use
in our products.
The colloidal gold or the colored latex produces a colored line
if the binding
has occurred (the test line), in which case it means there has
been a reactive
or positive result. In any case, a separate line (the control
line) will appear
to confirm that the test has been validly run in accordance with
the
instructions for use.
Our
lateral flow technology allows the development of easy-to-perform,
single-use
diagnostic tests for rapid, visual detection of specific antigen-antibody
complexes on a test strip. This format provides a test that is
simple (requires
neither electricity nor expensive equipment for test execution
or reading, nor
skilled personnel for test interpretation), rapid (turnaround
time approximately
15 minutes), safe (minimizes handling of specimens potentially
infected),
non-invasive (requires
5-20 microliters of whole blood easily obtained with a finger
prick, or
alternatively, serum or plasma), stable (24 months at room temperature
storage
in the case of our HIV tests), and highly reproducible.
We
can
develop and produce lateral flow tests that are qualitative
(reactive/non-reactive), as in the case of our HIV tests, and
we can develop
semi-quantitative tests, reflecting different concentrations
of the target
marker(s) using different colored latex test lines for each concentration.
We
can also develop tests for multiple conditions, using different
colored lines.
We have developed proprietary techniques that enable us to achieve
high levels
of sensitivity and specificity [see definition below] in our
diagnostic tests
using our proprietary latex and colloidal gold conjugates and
buffer systems.
These techniques include the methods we employ in manufacturing
and fusing the
reagents with the colored latex, or colloidal gold, blocking
procedures used to
reduce false positives, and methods used in treating the materials
used in our
tests to obtain maximum stability and resulting longer shelf
life. We also have
extensive experience with a variety of lateral flow devices,
including the
sample collection device used in our SURE CHECK HIV rapid test
which we believe
is easier to use than other finger-stick whole blood rapid tests.
SURE CHECK
eliminates the need for transferring finger-stick whole blood
samples from the
fingertip onto a test device, because the collection of the sample
is performed
within a tubular test chamber that contains the lateral flow
test strip. The
whole blood sample is absorbed directly onto the test strip through
a small
opening in one end of the test chamber and an absorbent pad positioned
just
inside this same end of the test chamber.
During
2005 we developed a patent-pending lateral flow platform, which
we believe
provides several advantages for next generation product development
(See“Intellectual
Property”).
The
sensitivity of a test indicates how strong the sample must be
before it can be
detected by the test. The specificity of a test measures the
ability of the test
to analyze, isolate, and detect only the
matters
targeted by the test.
Target
Market
HIV
Rapid Tests
We believe
that the prevention and treatment goals that have been established
by large
programs that are designed to provide greater access to ARVs
(Anti-Retroviral
Treatments for AIDS) and thwart the spread of HIV will drive the growth
and demand for rapid HIV tests in the coming years. Chembio is
one of only two
U.S.-based manufacturers of rapid HIV tests and the only one
with products that
it believes can meet the various demands of the global market.
Based
upon an analysis done by the Global Business Coalition of HIV/AIDS,
approximately 500 million people will need to be tested with
at least one rapid
test (also a confirmatory rapid test will be needed in the case
of a positive
result) over the next three years in order to insure that treatment
targets are
achieved.32
This is
not just because of the continuing growth in the epidemic, but
more importantly,
because anti-retroviral treatments are available, affordable
and are being
funded, so that people actually have a reason to be tested.
Because
HIV medicines have become much less expensive and more widely
available,
unprecedented multi-billion dollar financial commitments are
being allocated in
each of the next few years. Some of these commitments are being
made by The
Global Fund33
and the
U.S. Presidential Emergency Plan for AIDS Relief (“PEPFAR”).34
PEPFAR
alone has a goal to provide treatment to two million people,
and in order to
identify these two million people, rapid testing is being implemented
on a very
large scale. The U.S. is the largest donor, by far, to these
programs. Each of
these programs recognizes that a massive scale-up in the use
of rapid HIV tests
is the only way their treatment goals can hope to be achieved.
We
further believe that the global demand for rapid HIV testing
will increase at
very high rates well beyond the next few years and for the foreseeable
future.
As of the end of 2005, there were an estimated 40 million people
infected with
HIV/AIDS worldwide, of which an estimated 6 million were in need
of
antiretroviral therapy. The number of people in need of treatment
will continue
to grow as infection rates increase significantly worldwide,
and there is little
expectation for an effective vaccine anytime soon. As such, even
with relatively
low prevalence rates in Asia, UNAIDS estimates that 12 million
new infections
could occur in that region alone between 2005 and 2010.35
32
www.businessfightsaids.org/site/pp.asp?c=gwKXJfNVJtF&b=1008825 - Policy
Documents/Facilitating Access to Testing
33
www.theglobalfund.org/en
34
www.usaid.gov/our_work/global_health/aids/pepfar.html
35
www.unaids.org/html/pub/global-reports/bangkok/unaidsglobalreport2004_en_html.htm
The
Company received approval from the FDA for its SURE CHECK(R)
HIV 1/2 and HIV 1/2
STAT-PAK(TM) rapid test Pre-Market Applications on May 25, 2006.
This approval
allows the Company to market its rapid HIV tests to clinical
laboratories and
hospitals in the U.S., and allows the Company to further expand
its
international marketing efforts into countries that require regulatory
approval
in the manufacturer’s country of domicile. The U.S. market opportunity has been
developing first in the public health and hospital emergency
room segments.
However, as a result of recently revised and broadly supported
recommendations
for routine testing issued by the Centers for Disease Control
(“CDC”), we expect
the U.S. market to expand as this technology is increasingly
employed in
physicians’ offices, prisons and other venues. Before the FDA Blood Products
Advisory Committee endorsed the FDA’s recommendation to provide rapid HIV tests
in the over-the-counter markets, and before the CDC recommendations
were
published, the U.S. rapid HIV test market was estimated to become
at least a $50
million market during the next few years.36
In his
State of the Union Address in 2006, President Bush called on
Congress to reform
and reauthorize the Ryan White CARE Act, which among other things
provides
counseling and testing for those in greatest need of HIV/AIDS
assistance. The
President has also proposed to direct a total of more than $90
million to the
purchase and distribution of rapid HIV test kits, facilitating
the testing of
more than 3 million additional Americans. Test kits would be
distributed in
areas of the country with the highest rates of newly discovered
HIV cases and
the highest suspected rates of undetected cases. This legislation
is still in
negotiation as part of the overall 2007 budget negotiations.
As
a
result of the non-exclusive licenses we received from Inverness
to their lateral
flow patents to market our HIV 1/2 STAT-PAK cassette and dipstick
products
outside the U.S., we will further expand our international marketing
efforts
beyond developing countries. For example, we intend to begin
marketing in
several countries where the Inverness lateral flow patents are
issued in Europe,
Asia and Latin America.
Chagas
Rapid Test
The
Company had developed this test several years ago, but the market
for the
product was not meaningful, as most prevention efforts, which
were minimal, were
made using laboratory tests used for blood bank screening of
blood. However,
there is now a greater interest in Chembio’s rapid test because of an important
publication that demonstrated the effectiveness of the rapid
test in the
screening of blood donors (as opposed to the blood in blood banks),
and because
it can be effectively deployed in rural populations to screen
children and
pregnant women. Also, studies that have been completed at multiple
sites in
Central and South America showing sensitivity of between 98.5%
and 99.6% and
specificity between 94.8% and 99.9%, thus indicating that the
test is a good
alternative to standard laboratory testing methods. Our Chagas
disease test,
Chagas STAT-PAK™, was deployed this year to screen every child in Bolivia under
the age of 14 in rural areas. Intervention efforts with low cost
generic drugs
have been shown to cure young children as compared with latent
and recurring
infections afflicting those beyond early ages.
Other
Products Under Development
Chembio
is also developing rapid tests for other infectious diseases,
particularly rapid
tests for human and veterinary tuberculosis.
Tuberculosis
(“TB”) is the leading killer of people who have AIDS, yet there is
no rapid
screening test for TB like there is for HIV. If successful, Chembio’s TB product
development efforts will leverage the marketing and distribution
capability
which the Company has been developing for its HIV products. Chembio
had its
initial human TB product evaluated last year along side several
other rapid
tests that were evaluated by an organization affiliated with
the World Health
Organization. Although Chembio’s test was among the best performing tests, more
work is still required. Current efforts on a next generation
rapid TB test are
focused on incorporating the Dual Path Platform in order to produce
higher
sensitivity levels, particularly in HIV-TB co-infected patients
and also with
respect to antigen candidates. Given the variations in TB strains
and the
context of latent TB infection in different geographic regions
and populations,
there are debates as to what the performance standards should
be and whether
certain tests may in fact be appropriate for use in certain
regions.
Tuberculosis
is also a problem in a number of animal species either because
of potential
transmission to humans or from humans to animals (i.e., zoonotic
disease), costs
in lost agricultural productivity or because of the potential
negative impact on
the cost of the animal species themselves. For example, nonhuman
primates used
in research or in zoos are quite costly, and whole colonies can
be lost if
transmission is not effectively controlled through routine and
accurate
diagnosis. Bovine (cattle) TB can be transmitted from livestock
or deer to
humans and to other animals both domestic and wild. Under rules
established by
the Animal and Plant Health Inspection Service (“APHIS”), a state can lose the
right to move cattle across state lines if TB is detected in
two or more herds,
and such a prohibition, has recently occurred in Minnesota, Texas,
New Mexico
and Michigan. TB control of meat at slaughterhouses is dependent
upon visual
inspection. The Company believes that a more accurate and rapid
test could
conceivably complement or supplant these visual inspections.
Chembio
has already completed development of a rapid lateral-flow test
for the detection
of TB in Non-Human Primates (PrimaTB STAT-PAK™), and has a similar test near
completion for multiple host species, including cattle (BovidTB
STAT-PAK™), deer
both captive and wild species (CervidTB STAT-PAK™), camelids (CamelidTB
STAT-PAK™, elephant (ElephantTB STAT-PAK™) and other exotic wildlife. The tests
can use serum, plasma, whole blood or “meat juice,” are simple and easy to use,
have up to an 18 month shelf life at RT storage, and samples
provide definitive
results within 20 minutes, permitting easy use of the assay for
wild species as
a true capture, test and cull assay. The Company believes, subject
to USDA
approvals, that commercialization of these products may begin
in early
2007.
Non-Human
Primate Tuberculosis Test and other Veterinary Tuberculosis
Tests
The
Company amended the product license application to the USDA
for approval of its
PrimaTB STAT-PAK (the detection of active tuberculosis in non-human
primates) on
July 6, 2006, and the application was accepted by the USDA
on August 29, 2006.
As a result, the Company is preparing for the next stage of
the license process
by scheduling the clinical trials to validate reproducibility
of results during
the fourth quarter of 2006. At the same time, the Company is
working toward the
establishment license with the USDA, which is required along
with the product
license requiring an inspection by USDA officials. The inspections
of the
Company’s facility and quality system is anticipated to occur during
the fourth
quarter of 2006 or first quarter of 2007. The Company anticipates
approval of
the product upon satisfactory completion of the clinical studies
and the
facility and quality inspection during the first or second
quarter of
2007.
During
the fourth quarter of 2006, the Company will apply for a conditional
license for
approval of its VetTB STAT-PAK, which detects active tuberculosis
in elephants.
A conditional license is generally granted on a case by case
basis, and may be
granted without having completed a clinical trial, with the
condition of
completing the requirements for full licensure within one year
of receiving the
conditional license. A conditional license will allow the Company
to market the
product to select customers under the auspices of the USDA.
The Company
anticipates conditional approval during the first quarter of
2007.
36
Market
research prepared for Chembio.
Distribution
Channels&
Marketing Strategy
Approval
from the FDA of our HIV rapid tests not only permits sales in
the U.S., but also
enhances marketing capability in the international markets. HIV
1/2 STAT-PAK
(cassette) and HIV 1/2 STAT-PAK dipstick were recently made part
of the World
Health Organization (the “WHO”) 2005 Bulk Procurement Scheme. All of our rapid
HIV tests are qualified for procurement by the U.S.
Agency for International Development,
and our
FDA approvals have enabled us to obtain Certificates of Free
Sale for those
products. The WHO’s endorsement is required for virtually all international
procurements by governmental and non-governmental organizations.
The USAID
qualification allows our products to be procured with USAID and
the Center for
Disease Control funding, and the Certificate of Free Sales is
required by
certain countries to establish that the product is approved in
the country of
manufacture. These approvals and qualifications have opened up
new markets and
sales opportunities.
Our
marketing strategy is to:
· |
Expand
our international sales effort and strategic partnerships
in the
developing world for our global health rapid test products,
particularly
our HIV and Chagas Disease tests. We are actively engaged
in expanding HIV
test sales and marketing through our recently established
East and West
African offices. These offices are headed by seasoned
professionals that
have extensive marketing and/or public health experience
in Africa and are
establishing distributor relationships throughout the
continent. We also
have new collaborations and sales opportunities that
we are pursuing in
Southeast Asia, China, and South America for our HIV
and/or Chagas Disease
tests, as well as other new tests that we have under
development.
|
· |
Launch
our rapid HIV tests in the U.S., Europe and Latin America
through our
chosen marketing partners. Our agreement with Inverness
for the SURE CHECK
HIV barrel product is global, and we intend to support
their efforts in
penetrating all markets where there is an opportunity
for this premium
product. We also intend to support their marketing efforts
with respect to
the HIV STAT-PAK in the U.S., while pursing other marketing
partners and
distributors for all of our products on a global scale.
|
· |
Pursue
potential over-the-counter marketing opportunities in
the U.S. and
internationally for our HIV tests. We will determine
our strategy for
pursuing the over-the-counter market opportunity with
one or both of our
currently FDA approved (professional market) products.
Further, we will
analyze whether to focus our efforts for this market
with our oral fluid
HIV test product, which we are currently developing with
our DPP™
technology.
|
· |
Launch
our initial veterinary TB product, Prima TB Stat Pak™, within our growing
line of veterinary TB tests. We anticipate USDA approval
of our initial
product, a nonhuman primate TB test, in the first or
second quarter
of 2007. During 2007 we expect to obtain revenues from
certain other
veterinary TB products, at very favorable
margins.
|
Strategic
Alliances
Strategic
alliances are a key element in the Company’s business strategy. As described in
more detail below in Management’s Discussion and Analysis, on September 29,
2006, the Company executed several agreements by and among the
Company,
Inverness Medical Innovations, Inc. and StatSure Diagnostic Systems,
Inc.
Pursuant to these agreements, the Company will engage in marketing,
licensing
and distribution activities with these two companies. These agreements
contain
margin sharing formulae that are designed to provide Inverness,
the Company and
StatSure with reasonable profit margins after deduction for certain
unit costs
of the products. In addition, the Company has the exclusive right
and duty to
manufacture the products marketed by Inverness under all the
agreements, and it
has the right to subcontract manufacturing, but not sublicense
or subcontract
its rights or obligations.
Clinton
Foundation HIV/AIDS
Initiative
- In
January 2006 we entered into an agreement with the William J.
Clinton
Foundation’s HIV/AIDS Initiative (“CHAI”) to be recommended by CHAI to receive
the procurements from CHAI partner countries (more than 50 countries
in the
developing world and also including China, Brazil and India)
that choose to
access CHAI’s suppliers products and their preferred pricing in exchange
for
their sharing information with CHAI and permitting CHAI to fill
gaps that will
improve and scale up the country’s health care delivery systems. We
are
one
of
four companies worldwide (and the only U.S.-based manufacturer)
to
be
recommended by CHAI for sales of HIV rapid tests.
While
CHAI is not a procurer of the tests per se, it is an increasingly
major factor
in influencing which tests are to be procured. CHAI also has
major agreements
with generic HIV ARV manufacturers and manufacturers of viral
load and CD-4
monitoring diagnostic tests, and those agreements have been very
successful
models.
Brazilian
Ministry of Health
- In
addition, the Company is committed to securing alliances and
technology-transfer
agreements with government agencies and commercial entities.
For example,
Chembio signed, in early 2004, a thirteen year technology transfer,
supply and
license agreement with Bio-Manguinhos, an affiliate of the Brazilian
Ministry of
Health (“MOH”) and the predominant supplier for meeting public health needs
in
Brazil. Over a three-year period, Chembio will transfer its proprietary
technology related to HIV 1/2 STAT-PAK to Bio-Manguinhos in exchange
for
commitments to purchase at least one million rapid tests. This
purchase
commitment was met during 2005, though we expect substantial
additional
procurements prior to the completion of the technology transfer
agreement,
currently anticipated for early 2007. Thereafter, Bio-Manguinhos
will have the
right to produce its own rapid tests and Chembio will receive
royalties for ten
years.
Competition
The
diagnostics industry is a multi-billion dollar international
industry and is
intensely competitive. Many of our competitors are substantially
larger and have
greater financial, research, manufacturing, and marketing resources.
Industry
competition in general is based on the following:
· |
Scientific
and technological capability;
|
· |
The
ability to develop and market products and
processes;
|
· |
The
ability to obtain FDA or other required regulatory
approvals;
|
· |
The
ability to manufacture products that meet applicable
FDA requirements,
(i.e. FDA’s Quality System Regulations) (see Governmental Regulation
section);
|
· |
Access
to adequate capital;
|
· |
The
ability to attract and retain qualified personnel;
and
|
· |
The
availability of patent protection.
|
We
believe our scientific and technological capabilities and our
proprietary
know-how relating to lateral flow rapid tests, particularly for
HIV, Chagas
disease and tuberculosis (both human and veterinary), are very
strong.
Our
ability to develop and market other products is in large measure
dependent on
our having additional resources and/or collaborative relationships.
Some of our
product development efforts have been funded on a project or
milestone basis. We
believe that our proprietary know-how in lateral flow technology
is instrumental
in our obtaining the collaborations we have and that we continue
to pursue.
Prior
to
2005, we had very limited experience with regard to obtaining
FDA or other
required regulatory approvals, and no experience with obtaining
pre-marketing
approval of a biologic product such as HIV. (See the “Governmental Regulation”
section for definition of pre-marketing approval). For this reason,
during 2004
and 2005 we hired employees and consultants that collectively
have that
experience from other companies. We believe this has been critical
in our
progress toward obtaining these approvals during the last year
and in ensuring
that we manufacture our products in accordance with FDA, USDA
and other
regulatory requirements.
Our
access to capital is much less than that of several of our competitors,
and this
is a competitive disadvantage. We believe however that our access
to capital may
increase since we have obtained FDA approval of our rapid HIV
tests, and this
access will continue to develop as we obtain additional requisite
regulatory
approvals related to our other products, including those that
we have under
development (See Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations - Overview
and in
particular the last paragraph).
To
date,
we believe we have been competitive in the industry in attracting
and retaining
qualified personnel. Because of the greater financial resources
of many of our
competitors, we may not be able to complete effectively for the
same individuals
to the extent that a competitor uses its substantial resources
to attract any
such individuals. With respect to the availability of patent
protection, we do
not have our own portfolio of patents or the financial resources
to develop
and/or acquire a portfolio of patents similar to those of our
larger
competitors. We have been able to obtain patent protection by
entering into
licensing arrangements.
Competitive
factors specifically related to our HIV tests are product quality,
price and
ease of use. Product quality for an HIV rapid test primarily
means accuracy
(sensitivity and specificity), early detection of cases, time
elapsed between
testing and confirmation of results, and product shelf life.
We
believe that our product offerings and business model positions
us to compete
effectively and win a meaningful share of this expanding market.
The
leading products in the international market are UniGold®, produced by Trinity
Biotech in Ireland, and Determine®, produced by Inverness in Tokyo. Until last
year, the Determine business was owned by Abbot Diagnostics before
it was sold
to Inverness Medical Innovations. In connection with this transaction,
Abbott
retained the distribution rights to the Determine product for
approximately
three years. The Determine and UniGold products are well established
in many of
the developing world markets, often as the screening and confirmatory
tests,
respectively. Inverness’ Orgenics subsidiary in Israel also has a rapid HIV
test, Double Check Gold, and this is one of the other three products
recommended
by CHAI; the other two companies whose products were selected
by CHAI are based
in India and China, respectively, and they have not yet established
apparent
marketing efforts outside their countries, although they are
qualified by the
World Health Organization. In the developed world, particularly
the U.S., our
competitors are Orasure Technologies with OraQuick®, and Trinity with its
UniGold® product, both of which are FDA-approved, CLIA-waived products.
Although
we do not believe Inverness plans to submit either the Determine
or the Orgenics
product to the FDA, our agreements with Inverness provide that
in the event such
submissions are made, (or in any case if Inverness markets a
competitive product
in the U.S.), we have the right to terminate our agreement with
Inverness or
make their marketing rights non-exclusive. In either case, we
can retain a
license under the Inverness lateral flow patents to market the
products under a
Chembio brand and/or through third party distribution partners.
We
are
targeting the developing world markets that are being funded
by PEPFAR and The
Global Fund where Determine and UniGold are the established tests.
However,
neither one of those products contains a true IgG control. This
means that the
control line does not confirm that the test was run properly
with the patient
sample; it only confirms that the buffer solution was applied.
Thus the
appearance of the control line in these tests does not necessarily
mean that the
test was validly performed, so it may not be a true non-reactive
or negative
result, and this can lead to potential false negative results.
Orasure
has been focusing on building its brand and market share in the
U.S. market, and
successfully so. Its non-U.S. sales of their rapid HIV test are
not significant,
and we believe its product is neither suitable nor cost competitive
to
participate in the international market. Orasure has been successful
in bringing
attention to the need and availability of rapid HIV testing in
the U.S. Its main
advantage is the fact that its test can be used with oral fluid
samples, though
its FDA approved sensitivity is 99.3% with these samples. OraQuick
is not
approved for use with serum samples which may limit its marketability
in certain
settings.
Chembio’s
HIV products’ shelf life is 24 months, which is double that of UniGold and
four
times that of Orasure’s product. Our products have been approved by the FDA for
finger-stick whole blood, venous whole blood, serum and plasma.
We believe that
our SURE CHECK barrel format is extremely convenient, easier
to use than
OraQuick on finger-stick whole blood samples, is much more cost
competitive, and
provides a safe, closed system.
We
believe that having high level executives in the field in East
and West Africa
that are engaged with public health officials, NGOs and other
organizations
provides us with a competitive advantage in those markets. To
the best of our
knowledge, none of our competitors have actually done a technology
transfer
which we can now replicate in other markets of our choosing.
Even
though our rapid tuberculosis test for humans and animals is
still under
development, we believe we are in a leadership position as it
relates to these
products. We are not aware of any rapid whole blood test that
has the
sensitivity and specificity levels necessary to replace or complement
the
current sputum smear microscopy method being employed in the
high incidence
tuberculosis countries; and this is what we believe our rapid
tuberculosis test,
when fully developed and evaluated, will be able to do. We are
also not aware of
any rapid whole blood test to detect active pulmonary tuberculosis
in non-human
primates and/or other animals for which Chembio is developing
rapid tuberculosis
tests.
Research
and Development
We
are
focusing our research and development efforts on new rapid tests
that will
leverage our expertise and sales channels. Our research and development
activities have been in three disease areas: HIV, Human and Veterinary
Tuberculosis, and neglected diseases such as Chagas Disease (See
section
entitled General).
HIV
Our
HIV
development efforts are on developing different specialty next
generation rapid
tests such as tests for accurately screening newborns and confirmatory
tests.
Prototypes have been developed using our patent-pending lateral
flow technology
(See Intellectual Property).
Tuberculosis
Our
tuberculosis rapid tests for humans are being designed to significantly
increase
the accuracy of existing tuberculosis screening methods and technologies.
Our
initial tuberculosis test was developed pursuant to Phase I and
II Small
Business Innovative Research grants from the National Institute
of Health from
1998 until 2002, and our current test, TB STAT-PAK II, was completed
in 2003.
This test was evaluated by the World Health Organization in 2005
alongside more
than fifteen other tests from various manufacturers, and although
it was among
the best performers, its sensitivity and specificity were not
high enough as
compared to the benchmarks employed to result in a recommendation
by the World
Health Organization to switch from the current methodologies
(i.e., Acid Fast
staining smears) to our test or to any of the other tests in
this evaluation.
This result was particularly true when the test was used on co-infected
HIV/TB
populations in sub-Saharan Africa, where millions are infected
with both
diseases.
In
addition to our research and development efforts for tuberculosis
tests for
humans, we have developed a test for detecting active pulmonary
tuberculosis in
non-human primates (monkeys) (i.e., PrimaTB STAT-PAK). We submitted
an amendment
to our product license application for review to the U.S. Department
of
Agriculture (“USDA”) during the third quarter of 2006, and we hope to obtain a
licensure of this product during the first or second quarter
of 2007. We are
also engaged in collaborations related to the detection of active
pulmonary
tuberculosis in other animals such as cattle, deer, camels, elephants
and other
exotic species. We plan on leveraging our current technology
for licensure of
these additional species TB tests. We do not anticipate any material
revenues
from these efforts before mid to late 2007.
During
2005 and 2004, $1,364,898 and $1,508,849, respectively, was spent
on research
and development activities. A significant portion of these expenditures
have
been on our human and non-human primate tuberculosis product
development
efforts.
Employees
At
September 29, 2006, we employed 83 people, including 81 full-time
employees. In
May 2004, we entered into employment agreements with Avi Pelossof,
VP Sales,
Marketing and Business Development, and Javan Esfandiari, Director
of Research
and Development. In May 2006, we entered into an employment agreement
with
Lawrence Siebert, President and Chairman.
Governmental
Regulation
The
Company’s existing and proposed diagnostic products are regulated by
the U.S.
Food and Drug Administration (“FDA”), U.S. Department of Agriculture (“USDA”),
certain state and local agencies, and/or comparable regulatory
bodies in other
countries. This regulation governs almost all aspects of development,
production
and marketing, including product testing, authorizations to market,
labeling,
promotion, manufacturing and record keeping. The Company’s FDA and USDA
regulated products require some form of action by each agency
before they can be
marketed in the U.S., and, after approval or clearance, the Company
must
continue to comply with other FDA requirements applicable to
marketed products,
e.g. CLIA regulations (for medical devices). Both before and
after approval or
clearance, failure to comply with the FDA’s requirements can lead to significant
penalties.
Most
of
the Company’s diagnostic products are regulated as medical devices, and some
are
regulated as biologics. There are two review procedures by which
medical devices
can receive FDA clearance or approval. Some products may qualify
for clearance
under Section 510(k) of the Federal Food, Drug and Cosmetic Act,
in which the
manufacturer provides a pre-market notification that it intends
to begin
marketing the product, and shows that the product is substantially
equivalent to
another legally marketed product (i.e., that it has the same
intended use and is
as safe and effective as a legally marketed device and does not
raise different
questions of safety and effectiveness). In some cases, the submission
must
include data from human clinical studies. Marketing may commence
when the FDA
issues a clearance letter finding such substantial equivalence.
An applicant
must submit a 510(k) application at least 90 days before marketing
of the
affected product commences. Although FDA clearance may be granted
within that
90-day period, in some cases as much as a year or more may be
required before
clearance is obtained, if at all.
If
the
medical device does not qualify for the 510(k) procedure (either
because it is
not substantially equivalent to a legally marketed device or
because it is
required by statute and the FDA’s implementing regulations to have an approved
application), the FDA must approve a pre-market approval (PMA)
application
before marketing can begin. Pre-market approvals must demonstrate,
among other
matters, that the medical device provides a reasonable assurance
of safety and
effectiveness. A pre-market approval is typically a complex submission,
including the results of preclinical and clinical studies. Preparing
a
pre-market approval is a detailed and time-consuming process.
Once a pre-market
approval has been submitted, the FDA is required to review the
submission within
a statutory period of time. However, the FDA’s review may, and often is, much
longer, often requiring one year or more, and may include requests
for
additional data.
Every
company that manufactures medical devices distributed in the
U.S. must comply
with the FDA’s Quality System Regulations. These regulations govern the
manufacturing process, including design, manufacture, testing,
release,
packaging, distribution, documentation and purchasing. Compliance
with the
Quality System Regulations is required before the FDA will approve
an
application, and these requirements also apply to marketed products.
Companies
are also subject to other post-market and general requirements,
including
compliance with restrictions imposed on marketed products, compliance
with
promotional standards, record keeping and reporting of certain
adverse reactions
or events. The FDA regularly inspects companies to determine
compliance with the
Quality System Regulations and other post-approval requirements.
Failure to
comply with statutory requirements and the FDA’s regulations can lead to
substantial penalties, including monetary penalties, injunctions,
product
recalls, seizure of products, and criminal prosecution.
The
Clinical Laboratory Improvement Act of 1988 (“CLIA”) prohibits laboratories from
performing in vitro tests for the purpose of providing information
for the
diagnosis, prevention or treatment of any disease or impairment
of, or the
assessment of, the health of human beings unless there is in
effect for such
laboratories a certificate issued by the U.S. Department of Health
and Human
Services (via the FDA) applicable to the category of examination
or procedure
performed. Although a certificate is not required for the Company,
it considers
the applicability of the requirements of CLIA in the design and
development of
its products. The statutory definition of “laboratory” is very broad, and many
of our customers are considered labs. A CLIA waiver will remove
certain quality
control and other requirements that must be met for certain customers
to use the
Company’s products and this is in fact critical to the marketability
of a
product into the point of care diagnostics market.
In
addition, the FDA regulates the export of medical devices that
have not been
approved for marketing in the U.S.. The Federal Food, Drug and
Cosmetic Act
contains general requirements for any medical device that may
not be sold in the
U.S. and is intended for export. Specifically, a medical device
intended for
export is not deemed to be adulterated or misbranded if the product:
(1)
complies with the specifications of the foreign purchaser; (2)
is not in
conflict with the laws of the country to which it is intended
for export; (3) is
prominently labeled on the outside of the shipping package that
it is intended
for export; and (4) is not sold or offered for sale in the U.S..
Some medical
devices face additional statutory requirements before they can
be exported. If
an unapproved device does not comply with an applicable performance
standard or
pre-market approval requirement, is exempt from either such requirement
because
it is an investigational device, or is a banned device, the device
may be deemed
to be adulterated or misbranded unless the FDA has determined
that exportation
of the device is not contrary to the public health and safety
and has the
approval of the country to which it is intended for export. However,
the Federal
Food, Drug and Cosmetic Act does permit the export of devices
to any country in
the world, if the device complies with the laws of the importing
country and has
valid marketing authorization in one of several “listed” countries under the
theory that these listed countries have sophisticated mechanisms
for the review
of medical devices for safety and effectiveness.
The
Company is also subject to regulations in foreign countries governing
products,
human clinical trials and marketing, and may need to obtain approval
or
evaluations by international public health agencies, such as
the World Health
Organization, in order to sell diagnostic products in certain
countries.
Approval processes vary from country to country, and the length
of time required
for approval or to obtain other clearances may in some cases
be longer than that
required for U.S. governmental approvals. On the other hand,
the fact that our
HIV diagnostic tests are of value in the AIDS epidemic may lead
to some
government process being expedited. The extent of potentially
adverse
governmental regulation affecting Chembio that might arise from
future
legislative or administrative action cannot be predicted.
Prior
to
receiving FDA approval, the Company’s HIV rapid tests had been evaluated and
approved for marketing in several foreign jurisdictions, including
Brazil,
Mexico, India and a number of other nations in the developing
world. Chembio
completed clinical trials for the SURE CHECK HIV and HIV 1/2
STAT PAK rapid
tests in 2004 and filed the pre-market approval application with
the FDA for
approval of these products in February 2005. A facility inspection
took place in
September 2005 and an amendment was made in October 2005 to add
an HIV-2 claim
to the application. The Company’s pre-market application was approved by the FDA
on May 25, 2006, and it filed its CLIA waivers in July, 2006. The Company
also has its first veterinary tuberculosis rapid test under review
by the USDA,
and expects to have its facility inspected by this agency in
late 2006 or early
2007.
Environmental
Laws
To
date,
we have not encountered any costs relating to compliance with
any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Subject
to our available financial resources, our intellectual property
strategy is: (1)
to pursue licenses, trade secrets and know-how within the area
of lateral flow
technology; and (2) to develop and acquire proprietary positions
to reagents and
new hardware platforms for the development and manufacture of
rapid diagnostic
tests.
Trade
Secrets and Know-How
We
believe that we have developed a substantial body of trade secrets
and know-how
relating to the development of lateral flow diagnostic tests,
including but not
limited to the sourcing and optimization of materials for such
tests, and how to
maximize sensitivity, speed-to-result, specificity, stability
and
reproducibility. The
Company possesses know-how to develop tests for multiple conditions
using
colored latex which is proprietary. Our buffer formulations enable
extremely
long shelf lives of our HIV rapid tests and we believe that this
provides us
with an important competitive advantage.
Lateral
Flow Technology and Reagent Licenses
Although
we own no issued patents covering lateral flow technology, we
have obtained
non-exclusive licenses from Inverness Medical Innovations, Inc.
and Abbott
Laboratories with respect to their portfolios of lateral flow
patents. The issue
of potential patent challenges is ongoing for us as well as for
our competitors,
and we continue to monitor the situation, consult with patent
counsel, and seek
licenses and/or redesigns of products that we believe to be in
the best
interests of the Company and our stockholders. Because of the
costs and other
negative consequences of time-consuming litigation regardless
of whether we
would ultimately prevail, if we foresee a significant possibility
of patent
infringement litigation, our first priority will be to attempt
to obtain a
license on reasonable terms. Nevertheless there is no assurance
that Abbott’s
and/or Inverness’ lateral flow patents will not be challenged or that other
patents containing claims relevant to the Company’s products will be not be
granted and that licenses to such patents if any will be available
on reasonable
terms, if any.
In
the
event that it is determined that a license is required and it
is not possible to
negotiate a license agreement under a necessary patent, we may
be able to modify
our HIV rapid test products and other products such that a license
would not be
necessary. However, this alternative could delay or limit our
ability to sell
these products in the U.S. and other markets, which would adversely
affect our
results of operations, cash flows and business.
During
2005 and 2006 the Company made substantial additions to its intellectual
property portfolio as a result of the development of a new rapid
test platform
that showed improved sensitivity as compared with conventional
platforms in a
number of preliminary studies using well characterized HIV, Tuberculosis
and
other samples. This technology has formed the basis of two patent
applications
that were filed and will likely result in additional applications
covering
additional uses of this technology platform. The Company anticipates
signing new
development projects based upon these new technologies in the
near future that
will provide new product applications and marketing opportunities.
The Company
believes that this new lateral flow platform is outside of the
scope of
currently issued patents in the field of lateral flow technology,
thereby
offering the possibility of a greater freedom to operate. There
is no assurance
that the patent application will be granted, or that its claims
won’t be
modified upon review, or that the Company’s patents or its products
incorporating the patent claims will not be challenged at some
time in the
future.
We
have
also filed two patents relating to our veterinary tuberculosis
rapid tests and
improvements to the sample collection method in our Sure Check
HIV device.
The
peptides used in our HIV rapid tests are patented by Adaltis
Inc. and are
licensed to us under a 10-year non-exclusive license agreement
dated August 30,
2002, which was recently amended. We also have licensed the antigens
used in our
tuberculosis and Chagas disease tests. We
have
concluded license agreements related to intellectual property
rights associated
with HIV- 1, and are negotiating the terms of a license agreement for
HIV-2, which we hope to close during late 2006 or early 2007.
Our
Business Prior to the Merger
We
were
incorporated on May 14, 1999 in the state of Nevada under the name “Trading
Solutions.com, Inc.” We were originally organized to develop a trading school
designed to educate people interested in online investing. We
offered courses
for beginners as well as experienced traders, consisting of theory
sessions
linked closely with practical hands-on training. We offered individual
training,
small group sessions and seminars focusing on online trading
and various
computer-related subjects.
We
were
not successful with our online trading school, and on August 18, 2001, we
entered into an exchange agreement with Springland Beverages,
Inc., an Ontario,
Canada corporation. Pursuant to the agreement, we exchanged 15,542,500
shares of
common stock for all the issued and outstanding shares of Springland
Beverages,
Inc., making Springland our wholly-owned subsidiary. Concurrent
with the
agreement, there was a change in control and we changed our business
plan to
focus on developing and marketing soft drinks. Springland Beverages,
Inc. was
not able to implement its business plan and failed to achieve
profitable
operations. On March 28, 2003, we sold the subsidiary back to its
president, leaving us with no immediate potential revenue sources.
Since
the
formation of Chembio Diagnostic Systems Inc. in 1985, it has
been involved in
developing, manufacturing, selling and distributing tests, including
rapid
tests, for a number of diseases and for pregnancy.
The
Merger
On
May 5, 2004, Chembio Diagnostic Systems Inc. completed the merger
through
which it became our wholly-owned subsidiary, and through which
the management
and business of Chembio Diagnostic Systems Inc. became our management
and
business. As part of this transaction, we changed our name to
Chembio
Diagnostics, Inc.
Glossary
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human
Immunodeficiency Virus, HIV.
|
ANTIBODY
|
A
protein which is a natural part of the human immune
system produced by
specialized cells to neutralize antigens, including
viruses and bacteria
that invade the body. Each antibody producing cell
manufactures a unique
antibody that is directed against, binds to and eliminates
one, and only
one, specific type of antigen.
|
ANTIGEN
|
Any
substance which, upon entering the body, stimulates
the immune system
leading to the formation of antibodies. Among the more
common antigens are
bacteria, pollens, toxins, and viruses.
|
ARVs
|
Anti-Retroviral
Treatments for AIDS
|
CD-4
|
The
CD4+ T-lymphocyte is the primary target for HIV infection
because of the
affinity of the virus for the CD4 surface marker. Measures of CD4+
T-lymphocytes are used to guide clinical and therapeutic
management of
HIV-infected persons.
|
CDC
|
U.S.
Centers for Disease Control and Prevention
|
CHAGAS
DISEASE
|
Chagas
Disease is an infection caused by the parasite Trypanosoma
cruzi.
Worldwide, it is estimated that 16 to 18 million people
are infected with
Chagas disease; of those infected, 50,000 will die
each
year.
|
CHAI
|
Clinton
HIV/AIDS Initiative
|
CLIA
|
Clinical
Laboratory Improvement Act
|
DIAGNOSTIC
|
Pertaining
to the determination of the nature or cause of a disease
or condition.
Also refers to reagents or procedures used in diagnosis
to measure
proteins in a clinical sample.
|
EITF
|
Emerging
Issues Task Force
|
FASB
|
Financial
Accounting Standards Board
|
FDA
|
U.S.
Food and Drug Administration
|
FDIC
|
Federal
Deposit Insurance Corporation
|
HIV
|
Human
Immunodeficiency Virus. HIV (also called HIV-1), a retrovirus,
causes AIDS. A similar retrovirus, HIV-2, causes a variant disease,
sometimes referred to as West African AIDS. HIV infection leads to
the destruction of the immune system.
|
IgG
|
IgG
or Immunoglobulin are proteins found in human blood.
This protein is
called an “antibody” and is an important part of the body’s defense
against disease. When the body is attacked by harmful
bacteria or viruses,
antibodies help fight these invaders.
|
MOH
|
Ministry
of Health
|
MOU
|
Memoranda
of Understanding
|
NGO
|
Non-Governmental
Organization
|
OTC
|
Over-the-Counter
|
PEPFAR
|
The
President’s Emergency Plan for AIDS Relief
|
PMA
|
Pre-Marketing
Approval
|
PROTOCOL
|
A
procedure pursuant to which an immunodiagnostic test
is performed on a
particular specimen in order to obtain the desired
reaction.
|
REAGENT
|
A
chemical added to a sample under investigation in order
to cause a
chemical or biological reaction which will enable measurement
or
identification of a target substance.
|
RETROVIRUS
|
A
type of virus which contains the enzyme Reverse Transcriptase
and is
capable of transforming infected cells to produce diseases
in the host
such as AIDS.
|
Ryan
White CARE Act
|
The
Ryan White Comprehensive AIDS Resources Emergency (CARE)
Act is Federal
legislation that addresses the unmet health needs of
persons living with
HIV disease by funding primary health care and support
services. The CARE
Act was named after Ryan White, an Indiana teenager
whose courageous
struggle with HIV/AIDS and against AIDS-related discrimination
helped
educate the nation.
|
SAB
|
Staff
Accounting Bulletin
|
SENSITIVITY
|
Refers
to the ability of an assay to detect and measure small
quantities of a
substance of interest. The greater the sensitivity,
the smaller the
quantity of the substance of interest the assay can
detect. Also
refers to the likelihood of detecting the antigen when
present.
|
SFAS
|
Statement
of Financial Accounting Standards
|
SPECIFICITY
|
The
ability of an assay to distinguish between similar
materials. The
greater the specificity, the better an assay is at
identifying a substance
in the presence of substances of similar makeup.
|
SPUTUM
|
Expectorated
matter; saliva mixed with discharges from the respiratory
passages
|
TB
|
Tuberculosis
(TB) is a disease caused by bacteria called Mycobacterium
tuberculosis.
The bacteria usually attack the lungs. But, TB bacteria
can attack any
part of the body such as the kidney, spine, and brain.
If not treated
properly, TB disease can be fatal. TB is spread through
the air from one
person to another. The bacteria are put into the air
when a person with
active
TB disease
of
the lungs or throat coughs or sneezes. People nearby
may breathe in these
bacteria and become infected.
|
ALGORITHM
|
For
rapid HIV testing this refers both to method or protocol
for using rapid
tests from different manufacturers in combination to
screen and confirm
patients at the point of care, and may also refer to
the specific tests
that have been selected by an agency or ministry of
health to be used in
this way.
|
UNAIDS
|
Joint
United Nations Program on HIV/AIDS
|
USAID
|
U.S.
Agency for International Development
|
USDA
|
U.S
Department of Agriculture
|
WHO
|
World
Health Organization
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus and the materials incorporated herein by reference
contain
forward-looking statements that involve substantial risks and
uncertainties. You
can identify these statements by forwarding-looking words such
as “may,” “will,”
“expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue” and other
similar words. You should read statements that contain these
words carefully
because they discuss our future expectations, make projections
of our future
results of operations or of our financial condition or state
other
“forward-looking” information. We believe that it is important to communicate
our future expectations to our investors. However, there may
be events in the
future that we are not able to accurately predict or control.
Our actual results
could differ materially from the expectations we describe in
our forward-looking
statements as a result of certain factors, as more fully described
in the “Risk
Factors” section of this prospectus and elsewhere in the documents we
file with
the SEC that are incorporated herein.
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 in
accordance with
accounting principles generally accepted in the U.S.. The preparation
of
financial statements in conformity with accounting principles
generally accepted
in the U.S. of America requires us to make estimates and assumptions
that affect
the reported amounts of assets and liabilities, disclosure of
any contingent
liabilities at the financial statement date and reported amounts
of revenue and
expenses during the reporting period. 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.
Our critical
accounting policies, the policies we believe are most important
to the
presentation of our financial statements and require the most
difficult,
subjective and complex judgments, are outlined below in ‘‘Critical Accounting
Policies,’’ and have not changed significantly.
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
following management discussion and analysis relates to the business
of the
Company and its subsidiaries, which develop, manufacture and
market lateral flow
rapid diagnostic tests that detect infectious diseases
and
other conditions in humans and animals.
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 Chembio Diagnostic Systems Inc. (CDS)
or the private
labels of its distributors or their customers. The Company’s main products
presently commercially available are its three HIV Rapid Tests
(SURE CHECK(R)
HIV 1/2, HIV 1/2 STAT-PAK(TM) and HIV 1/2 STAT-PAK Dipstick)
and Chagas STAT
PAK(TM), a rapid test for Chagas Disease. In 2005, the Company
sold
substantially all of the business related to its private label
pregnancy test
and is focusing on the products mentioned above together with
certain products
and technologies under development.
The
financial statements have been prepared
in conformity with accounting principles generally accepted in
the United States
of America, which contemplate continuation of the Company as
a going concern.
Although the Company’s revenues and gross margins increased significantly in
recent periods, it has sustained significant operating losses
in the six months
of 2006 and the years 2005 and 2004. At June 30, 2006, the Company
had a
Stockholders’ Deficiency of $1,634, and a working capital deficiency of
$614,253. After giving account to the series C 7% convertible
preferred stock
offering (the “Series C Offering”), the Company believes its resources are
sufficient to fund its needs through the end of 2007. The Company’s 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) its investments in
research and
development, facilities, marketing, regulatory approvals and
other investments
it may determine to make; and (4) the investment in capital equipment
and the
extent to which it improves cash flow through operating efficiencies.
There are
no assurances that the Company will be successful in raising
sufficient
capital.
On
March
30, 2006, the Company sold $1 million of additional Series B
Preferred Stock to
a Series B Preferred shareholder pursuant to provisions of the
January 2005
Series B 9% Preferred Stock financing agreements. Such provisions
were exclusive
to said shareholder.
On
May
30, 2006, the Company received approval of its Pre-Market Applications
(“PMAs”)
from the FDA for its SURE CHECK(R) HIV 1/2 and HIV 1/2 STAT-PAK(TM)
rapid tests.
The approved PMAs allow the Company to market its rapid HIV tests
to clinical
laboratories and hospitals in the United States. FDA approval
also allows the
Company to further expand its international marketing efforts
into countries
that require regulatory approval in the manufacturer’s country of
domicile.
On
June
29, 2006, the Company borrowed $1,300,000. The loan was repaid
in part on
September 27, 2006 and the balance converted on October 5, 2006
and is secured
by a lien on the assets of the Company. See
Note
1 of the financial statements for further details.
On
September 29, 2006 and October 5, 2006 the Company completed
the Series C
Offering for $8,150,000. Some of the proceeds were used to repay
the loan
borrowed on June 29, 2006. The Company believes the Series C offering will
be enough to supply the Company’s cash needs through the end of
2007.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 AS COMPARED
WITH THE YEAR
ENDED DECEMBER 31, 2004
Revenues:
Revenues
are comprised of $3,359,532 in net product sales, $250,000 in
license revenue
and $331,198 in grants and development income for the year ended
December 31,
2005 as compared with $2,749,143 in net product sales, no license
revenue and
$556,789 in grant and development income for the year ended December
31, 2004.
The increase in sales is attributable to increased sales of our
HIV product of
$1,158,000 which was partially offset by decreased sales of our
pregnancy test
kit of $443,000 and decreases in other product sales aggregating
$94,000. The
increase in license revenue of $250,000 is due to a technology
transfer
agreement. The Company does not expect that this particular license
revenue will
continue in the future. The decrease in grant and development
income of $225,591
was due to grants received in 2004 that weren’t continued or awarded in 2005. A
substantial portion of the grant-related income is not expected
to continue in
2006.
Net
product sales for 2005 increased 22% compared to 2004. HIV net
product sales
increased 93% in 2005 compared to 2004. The Company believes
that sales of its
HIV products will continue to increase in 2006 both as a result
of the
international marketing strategies that were implemented in 2005
and from the
sales to the U.S. market after anticipated approval from the
U.S. Food and Drug
Administration (FDA). The Company also received its first significant
order for
its Chagas test (Chagas is a disease which is primarily found
in Latin America),
in the amount of $1.2 million which it expects to ship in the
first half of
2006.
Net
product sales for the three months ended December 31, 2005 increased
27% to
$1,356,000 compared to the same period in 2004. HIV product sales
increased 64%
to $1,223,000 for the three months ended December 31, 2005 compared
to the same
period in 2004.
Gross
Margin:
Gross
margin on net product sales for the year ended December 31, 2005
was 22.3%, as
compared to 5.4% for the year ended December 31, 2004. The increase
in gross
margin percentage is primarily attributable to the increased
sales of HIV
products, which were at a higher margin than other product lines;
in addition,
because sales volume in 2004 was lower, fixed overhead expenses
per dollar of
sales were disproportionately high.
The
gross
margin on net product sales for the three months ended December
31, 2005
improved to 38.1% from 30.8% in the comparable 2004 period.
Research
and Development:
Research
and development expenses for
the
year ended December 31, 2005 were
$1,364,898 compared with $1,508,849 for
the
year ended December 31, 2004.
This
category includes costs incurred for regulatory approvals, product
evaluations
and registrations. Expenses for Clinical & Regulatory Affairs, totaled
$411,000 for
the
year ended December 31, 2005,
a
decrease of $472,000 compared to the
year
ended December 31, 2004.
This
category also includes costs for clinical studies which decreased
by $437,000
and a reduction in outside regulatory consultants of $77,000.
The costs related
to the clinical trials and consulting in 2004 were related to
the evaluation of
the Company’s HIV tests in preparation of its FDA Pre-Marketing Approval
(“PMA”)
application submitted in February of 2005. Expenses other than
Clinical &
Regulatory increased $329,000 and were related to increased salaries
and
wage-related costs of $211,000 for new hires in the R&D group, increased
travel and entertainment of $46,000 and grant payments to a university
of
$35,000.
The
Company presently plans to increase its spending on research
and development
because it believes such spending will result in the development
of new and
innovative products. The Company will continue to focus its development
efforts
on its tuberculosis related products and new lateral flow technologies,
some of
which have patents pending.
The
Company currently has several R&D projects underway. Some highlights
include:
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis
in
non-human primate whole blood samples
The
Company has filed an application with the United States Department
of
Agriculture (USDA) to license its rapid test, Prima TB STAT-PAK™. A final set of
clinical trials is scheduled for the second quarter of 2006,
that, if
successful, would lead to a conditional license (the ability
to sell the product
commercially with USDA approval on an order by order basis) by
late in the
fourth quarter of 2006. The Company anticipates that additional
commercialization will begin in the first and second quarters
of 2007, although
there are no assurances that it will be successful.
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis
in
multiple host species
Chembio
has completed development and is approaching the final validation
stage on a
series of rapid lateral-flow tests for the detection of veterinary
TB in
multiple host species including; cattle, cervids, badgers, camels,
elephants,
and exotic wildlife species. The name for the technology is VetTB
STAT-PAK™.
Application to the USDA is targeted for the fourth quarter of
2006 for the
Elephant TB assay with the others to follow in early 2007. The
Company
anticipates commercialization of these products to start in the
first quarter of
2007, although there are no assurances that it will be successful.
New
Generation Rapid Tests Based Upon Patent Pending Dual Path Platform
(DPP™)
The
Company has done substantial laboratory work on prototypes of
its new
patent-pending Dual Path lateral flow rapid test platform. This
work has
confirmed the advantages of this new platform in terms of sensitivity
in the HIV
area. The Company believes that this platform may provide the
level of
sensitivity that will be needed in order to complete development
of a human TB
rapid test which could not be achieved with sufficient sensitivity
based upon
the existing platform.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense increased $966,637 to $3,265,235
in the year
ended December 31, 2005 compared with 2004. This increase was
attributable to
increased staff in the accounting, administration and sales and
marketing
departments of $375,000 and related recruiting expenses of $89,000.
Increased
sales resulted in an increase in royalties and commissions of
$319,000. In
addition there was an increase of $174,000 in costs regarding
investor
relations, $62,000 of which resulted from an increase in the
number of members
of the Company’s Board of Directors, $22,000 from increased insurance liability
cost, $34,000 related to Sarbanes-Oxley compliance and increased
legal and
accounting expenses of $237,000 related 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 in
officers’ salaries of $240,000, mostly due to the inclusion in 2004 of
the cost
of common stock issued to a former officer.
As
the
Company’s sales of its HIV rapid test products increase, it expects selling,
general and administrative expense to also increase. This will
be in large
measure due to increased costs for commissions and royalties
on intellectual
property licenses. At the end of 2005, the Company renegotiated
one of its
license agreements to provide for a decrease of 50% in the royalty
rate, from
10% to 5% of sales of HIV products, in exchange for $350,000
in up front cash
payments. Such payment is being amortized over the life of the
royalty
agreement.
Other
Income and Expense:
Interest
expense decreased by $174,875 for the year ended December 31,
2005 compared with
the year ended December 31, 2004. This was primarily attributable
to the
conversion during 2004 of $1,694,000 of existing debt of Chembio
Diagnostic
Systems, Inc, into Series A Preferred Stock. Interest income
for the year
December 31, 2005 increased $32,000 due to the availability of
additional funds.
In addition, approximately $22,000 and $209,000 is attributable
to settlements
of old outstanding payables due that were settled during the
years 2005 and
2004, respectively and are reflected in other income as settlement
of accounts
payable.
RESULTS
OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2006 AS COMPARED WITH THE THREE MONTHS
ENDED JUNE 30, 2005
Revenues:
Revenues
are comprised of $1,572,000 in net product sales and $65,000
in grants and
development income for the three months ended June 30, 2006,
as compared with
$814,000 in net product sales and $91,000 in grant and development
income for
the three months ended June 30, 2005. The increase in net product
sales is
attributable to increased sales of our HIV tests of $391,000
and increased sales
of our Chagas tests of $447,000 from $11,000 to $458,000, partially
offset by
decreased sales of our pregnancy test kit (a deemphasized product)
of $48,000
and decreases in other product sales aggregating $32,000. The
decrease in grant
and development income of $26,000 was due to certain grants received
in 2005
that were not continued or awarded in 2006.
Net
product sales for the three month period ended June 30, 2006
increased 93%
compared to the same period in 2005. HIV net product sales increased
79% in this
period compared to the same period in 2005. The Company believes
that sales of
its HIV products will continue to increase in 2006 as compared
to 2005 both as a
result of the international marketing strategies that were implemented
in 2005
and from the sales in the U.S. market due to the approval from
the U.S. Food and
Drug Administration (FDA). The Chagas net product sales increase
was a result of
the Company obtaining its first significant order for this product,
in the
amount of $1.2 million of which it shipped $480,000 in the first
quarter of 2006
and $450,000 in the second quarter of 2006. The Company shipped
the balance of
this order in the third quarter of 2006.
Gross
Margin:
Gross
margin on net product sales for the three months ended June 30,
2006 was 31.8%,
as compared to 21.8% for the three months ended June 30, 2005.
The increase in
gross margin percentage is attributable to the increased sales
of HIV products,
which were at a higher margin than other product lines, and because
sales volume
in 2005 was significantly lower, fixed overhead expenses per
dollar of sales
were disproportionately high.
Research
and Development:
Research
and development expenses for
the
three months ended June 30, 2006 were
$351,000 compared with $427,000 for
the
three months ended June 30, 2005.
This
category includes costs incurred for regulatory approvals, product
evaluations
and registrations. Expenses for Clinical & Regulatory Affairs totaled
$101,000 for
the
three months ended June 30, 2006,
a
decrease of $70,000 compared to the
three
months ended June 30, 2005.
Most of
this decrease is due to reductions in costs for clinical studies
of $65,000. The
costs related to the clinical trials and consulting in 2005 were
related to the
evaluation of the Company’s HIV tests in relation of its FDA Pre-Marketing
Approval application which was submitted in February of 2005.
Expenses
other than Clinical & Regulatory Affairs decreased $6,000 and were related
to a reduction in the cost of materials of $6,000, reduction
in grant funding of
$30,000 and a reduction in travel and entertainment costs of
$13,000 offset by
increased salaries and wage-related costs of $23,000 for new
hires in the
R&D group and the cost related to employee stock options vesting
in the
period of $18,000.
The
Company presently plans to increase its spending on research
and development
because it believes such spending will result in the development
of new and
innovative products. The Company will continue to focus its development
efforts
on its tuberculosis related products and new lateral flow technologies,
some of
which have patents pending.
The
Company currently has several R&D projects underway. Some highlights
include:
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis
in
non-human primate whole blood samples
The
Company has filed an application with the United States Department
of
Agriculture (USDA) to license its rapid assay, PrimaTB STAT-PAK(TM).
A final set
of clinical reproducibility trials is scheduled to start during
the third
quarter of 2006, that, if successful, would lead to a conditional
license (the
ability to sell the product commercially worldwide with USDA
approval on an
order by order basis) by late fourth quarter of 2006. The Company
anticipates
that additional commercialization will begin in the first quarter
of 2007,
although there are no assurances that it will be successful.
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis
in
multiple host species
Chembio
has completed development and is in final validation stage on
a series of rapid
lateral-flow assays for the detection of veterinary TB in multiple
host species
including; cattle, cervids, badgers, camels, elephants, and exotic
wildlife
species. The name for the technology is VetTB STAT-PAK(TM). Application
to the
USDA is targeted for the fourth quarter of 2006 for the Elephant
TB assay with
the others to follow in early 2007. The Company anticipates commercialization
of
these products to start in the first and second quarters of 2007,
although there
are no assurances that it will be successful.
Dual
Path Platform (DPP(TM))
During
the second quarter of 2006 significant progress was made in developing
prototypes of this new patent-pending platform, including the
testing of our
current HIV test strip (as
well
as our human TB and Leptospirosis assays) that
was
recently approved in this new platform. Studies were conducted
internally and
externally on stored serum samples, negative whole blood, and
serum-oral fluid
pairs, as well as against early sero-conversion panels that certain
other rapid
tests that are on the market have been tested against as well.
These studies
provide a high level of confidence that the DPP does produce
improved
sensitivity as compared with conventional single path immunochromatographic
assays, and that our existing HIV test strip know-how and regulatory
experience
will permit us to accelerate regulatory submission for a next
generation rapid
HIV test incorporating oral fluids. Similar
increases in both clinical and analytical sensitivity were observed
for our
human TB and Leptospirosis assays. We
believe we can extend this technology to many other applications
within the
infectious disease field, as well as other medical fields.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense increased $604,000 to $1,333,000
in the three
months ended June 30, 2006 compared with $729,000 for the same
period in 2005.
This increase was attributable to increased staff costs in the
accounting,
administration and sales and marketing departments of $113,000
and the cost
related to employee stock options vesting in the period of $50,000.
Increased
sales resulted in an increase in royalties and commissions of
$115,000. In
addition, there was an increase of $94,000 in costs regarding
investor
relations, $31,000 which resulted from an increase in the number
of members of
the Company’s Board of Directors, $29,000 from increased travel and
entertainment costs, $19,000 from increased trade show costs,
$14,000 in
increased license fees, increased legal expenses of $98,000 related
to patent
litigation and $35,000 related to general patent and other legal
services.
As
the
Company’s sales of its HIV rapid test products increase, it expects selling,
general and administrative expense to also increase. This will
be in large
measure due to increased costs for commissions and royalties
on intellectual
property licenses. At the end of 2005, the Company renegotiated
one of its
license agreements to provide for a decrease of 50% in the royalty
rate, from
10% to 5% of sales of HIV products, in exchange for $350,000
in cash payments
(of which $100,000 was paid in 2005, $50,000 paid in June 2006
and the balance
accrued as of June 30, 2006). Such payment is being amortized
over the life of
the royalty agreement as licensing fees.
Other
Income and Expense:
Interest
expense increased by $8,000 for the three months ended June 30,
2006 compared
with the three months ended June 30, 2005 resulting from accrued
interest
payable on license fees offset by reductions in interest expense
of leases.
Interest income for the three months ended June 30, 2006 decreased
$15,000 due
to less availability of funds to invest. In addition the Company
sold a piece of
equipment which was fully depreciated for $5,000.
RESULTS
OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 2006 AS COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 2005
Revenues:
Revenues
are comprised of $2,742,000 in net product sales and $133,000
in grants and
development income for the six months ended June 30, 2006 as
compared with
$1,160,000 in net product sales, $250,000 license revenue and
$227,000 in grant
and development income for the six months ended June 30, 2005.
The increase in
net product sales is attributable to increased sales of our HIV
tests of
$839,000 and increased sales of our Chagas tests of $906,000
from $36,000 to
$942,000, partially offset by decreased sales of our pregnancy
test kit (a
deemphasized product) of $110,000 and decreases in other product
sales
aggregating $53,000. The decrease in license revenue of $250,000
is due to a
technology transfer agreement which took place in 2005. The Company
does not
expect that this particular license revenue will continue in
the future. The
decrease in grant and development income of $94,000 was due to
certain grants
received in 2005 that weren’t continued or awarded in 2006.
Net
product sales for the six month period ended June 30, 2006 increased
136%
compared to the same period in 2005. HIV net product sales increased
144% in
this period compared to the same period in 2005. The Company
believes that sales
of its HIV products will continue to increase in 2006 as compared
to 2005 both
as a result of the international marketing strategies that were
implemented in
2005, and from the sales in the U.S. market due to the approval
from the U.S.
Food and Drug Administration (FDA). The Chagas net product sales
increase was a
result of the Company obtaining its first significant order for
this product, in
the amount of $1.2 million, of which it shipped $930,000 in the
six months of
2006 and shipped the balance in the third quarter of 2006.
Gross
Margin:
Gross
margin on net product sales for the six months ended June 30,
2006 was 31.6%, as
compared to 5.1% for the six months ended June 30, 2005. The
increase in gross
margin percentage is attributable to the increased sales of HIV
products, which
were at a higher margin than other product lines, and because
sales volume in
2005 was significantly lower, fixed overhead expenses per dollar
of sales were
disproportionately high.
Research
and Development:
Research
and development expenses for
the
six months ended June 30, 2006 were
$744,000 compared with $762,000 for
the
six months ended June 30, 2005.
This
category includes costs incurred for regulatory approvals, product
evaluations
and registrations. Expenses for Clinical & Regulatory Affairs, totaled
$179,000 for
the
six months ended June 30, 2006,
a
decrease of $130,000 compared to the
six
months ended June 30, 2005.
Most of
this decrease is due to reductions in costs for clinical studies
of $95,000,
salary and related expenses of $10,000 and outside regulatory
consultants of
$27,000. The costs related to the clinical trials and consulting
in 2005 were
related to the evaluation of the Company’s HIV tests in relation of its FDA
Pre-Marketing Approval application which was submitted in February
of 2005.
Expenses
other than Clinical & Regulatory Affairs increased $113,000 and were related
to increased salaries and wage-related costs of $73,000 for new
hires in the
R&D group, the cost related to employee stock options vesting in
the period
of $48,000, increased cost of materials of $50,000, net of a
reduction in travel
and entertainment costs of $21,000 and a reduction in grant funding
of
$35,000.
The
Company presently plans to increase its spending on research
and development
because it believes such spending will result in the development
of new and
innovative products. The Company will continue to focus its development
efforts
on its tuberculosis related products and new lateral flow technologies,
some of
which have patents pending.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense increased $1,346,000 to $2,631,000
in the six
months ended June 30, 2006 compared with $1,285,000 for the same
period in 2005.
This increase was attributable to increased staff costs in the
accounting,
administration and sales and marketing departments of $260,000
and the cost
related to employee stock options vesting in the period of $103,000.
Increased
sales resulted in an increase in royalties and commissions of
$309,000. In
addition, there was an increase of $190,000 in costs regarding investor
relations, $73,000 which resulted from an increase in the number
of members of
the Company’s Board of Directors, $52,000 from increased travel and
entertainment costs, $33,000 related to marketing consultants,
$21,000 from
increased trade show costs, $35,000 in increased license fees,
increased legal
expenses of $164,000 related to patent litigation and $84,000
related to general
patent and other legal services.
Other
Income and Expense:
Interest
expense increased by $11,000 for the six months ended June 30,
2006 compared
with the six months ended June 30, 2005 resulting from accrued
interest payable
on license fees offset by reductions in interest expense of leases.
Interest
income for the six months ended June 30, 2006 decreased $24,000
due to less
availability of funds to invest. In addition the Company sold
a piece of
equipment which was fully depreciated for $5,000.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had a working capital deficiency of $614,000 at June
30, 2006 and a
working capital surplus of $650,000 at December 31, 2005. On
September 29, 2006
and October 5, 2006, the Company completed the Series C Offering
for $8,150,000.
On
June
29, 2006, the Company borrowed $1,300,000 as described in the
Overview section
above and more fully in Note 1 of the financial statements. On
March
30, 2006, the Company completed a transaction related to the
Series B Offering
which raised $1,000,000 before costs in the form of 9% Convertible
Series B
Preferred Stock and associated warrants (“Series B Offering”). The proceeds from
the Series C Offering, the June 29, 2006 bridge loan and the
Series B Offering
have been and are being used primarily for general corporate
purposes including
for sales and marketing, research and development, intellectual
property, and
also for working capital, investor relations and capital
expenditures.
The
Company believes its resources are sufficient to fund its needs
through the end
of 2007 and it is considering alternatives to provide for its
additional capital
requirements in the future in order to continue as a going concern.
Its
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) its investments
in research
and development, facilities, marketing, regulatory approvals,
and other
investments it may determine to make; and (4) the investment
in capital
equipment and the extent to which it improves cash flow through
operating
efficiencies. There are no assurances that it will be successful
in raising
sufficient capital.
The
following table lists the future payments required on the Company’s debt and any
other contractual obligations as of June 30, 2006:
OBLIGATIONS
|
|
Total
|
|
Less
than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Greater
than
5
Years
|
|
Long
Term Debt(1)
|
|
$
|
1,453,160
|
|
$
|
1,420,000
|
|
$
|
33,160
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Leases (2)
|
|
$
|
64,126
|
|
$
|
40,532
|
|
$
|
23,594
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Leases
|
|
$
|
75,337
|
|
$
|
75,337
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
Long Term Obligations(3)
|
|
$
|
1,185,717
|
|
$
|
838,442
|
|
$
|
259,775
|
|
$
|
25,000
|
|
$
|
62,500
|
|
Total
Obligations
|
|
$
|
2,778,340
|
|
$
|
2,374,311
|
|
$
|
316,529
|
|
$
|
25,000
|
|
$
|
62,500
|
|
(1)
|
This
includes the $1,300,000 borrowed on June 29, 2006 (see
Note 1) and accrued
interest (see Note 3).
|
(2)
|
This
represents capital leases used to purchase capital
equipment.
|
(3)
|
This
represents contractual obligations for fixed cost licenses
and employment
contracts.
|
RECENT
DEVELOPMENTS AND CHEMBIO’S
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Please
see section entitled Overview above.
During
the fourth quarter of 2006, the Company expects to start marketing
its SURE
CHECK HIV 1/2 and HIV 1/2 STAT-PAK in the U.S. These are the
products for which
it has received FDA approval.
Based
upon the expected CLIA waivers referred to in the Overview section
above, the
Company is developing plans for marketing its HIV products in
the U.S. and is
considering entering into marketing arrangements with major companies
who market
diagnostic products in the U.S.
There
have been many U.S. based developments recently regarding HIV
testing. For
example, the United States Centers for Disease Control recently
issued final
revised recommendations advocating routine HIV testing for all
Americans between
the ages of 13 and 64, a White House 2007 budget request for
$90 million to test
an additional three million Americans using rapid HIV tests is
being negotiated
by Senate and House conference committees, and the FDA adopted
guidelines
recommended by its Blood Products Advisory Committee that set
forth the
conditions under which rapid HIV tests could be approved for
direct
over-the-counter sales to U.S. consumers. All of these developments
bode well
for the expansion of the U.S. rapid HIV test market. However,
there are still
many obstacles and uncertainties which must be overcome before
these
developments become a reality which will result in realizable
opportunities for
the Company, and there is no assurance that any of these developments
will be
realized.
During
2005, the Company established offices in Nigeria and Tanzania
which it believes
will be significant in its continuing efforts to become part
of the national
testing protocols in many countries in Africa. The Company’s STAT-PAK is
designated as the confirmatory test in all of the national rapid
HIV testing
protocols in the Republic of Uganda, and in February of 2006
STAT-PAK was
designated in four of the eight parallel testing algorithms (two
tests used on
each patient) adopted by the Nigerian Ministry of Health in its
Interim National
Testing Algorithm. The Company is making good progress towards
having its HIV
products designated in other countries where it has focused its
efforts. The
Company has registered its products and has arrangements with
distribution
partners in certain of these countries and is in negotiations
for similar
arrangements in other countries. The Company believes that its
strategy of
establishing offices in these challenging markets is a very effective
way to
obtain sustainable and supportable business.
In
2006,
Chembio was one of four companies selected by the Clinton Foundation
HIV/AIDS
Initiative (“CHAI”) to make available low-cost rapid HIV tests in order to more
quickly and cost effectively achieve treatment objectives. Under
the CHAI
agreement, the Company has agreed to offer its HIV STAT-PAK Dipstick,
Chembio’s
lowest cost HIV rapid test product, at a reduced price in the
expectation that
the Company will receive significant order volume not otherwise
obtainable. If
these order volumes are not realized, the Company has the right
to terminate the
agreement or renegotiate pricing. Chembio is the only U.S.-based
manufacturer of
the four companies in this agreement. The CHAI Procurement Consortium
is
currently comprised of more than 50 countries in Africa, Asia,
Eastern Europe,
Latin America and the Caribbean that have Memoranda of Understanding
(MOUs) with
CHAI. Consequently, the Company is now actively engaged with
CHAI in developing
sales opportunities in many of these countries. Although in some
of these
countries the Company has already made substantive sales efforts,
there are many
more where this is not the case. There is no commitment or assurance
that either
the Company’s direct efforts to establish additional distributors and/or
local
assembly, or its activities through CHAI will materialize into
meaningful
sales.
The
Company’s technology transfer and supply agreement in Brazil is moving
forward.
The Company shipped 335,000 HIV rapid test components to this
customer in the
six months ended June 30, 2006, a 123% increase over the same
period in 2005.
The Company expects to deliver an additional $465,000 of HIV
rapid test
components during the rest of 2006, although there is no assurance
that this
will occur.
The
Company also received, in January of 2006, an order for $1.2
million to supply
its Chagas Disease rapid test. The Company shipped approximately
$930,000 in the
six months ended June 30, 2006, with the balance delivered in
the third quarter
of 2006. This procurement is being made by the Pan American Health
Organization,
headquartered in Washington D.C., which is affiliated with the
World Health
Organization. The procurement will be used to implement a nationwide
Chagas
screening program for all children under the age of 10 in endemic
regions of
Bolivia. The Company is actively looking at developing additional
business
opportunities for this product in Bolivia, and other markets
in Latin America
that are impacted by this disease.
In
September 2005, the Company hired a senior diagnostics marketing
executive to
focus on its Tuberculosis products, both for veterinary and human
TB. The
Company’s non-human primate Tuberculosis product is currently under review
by
the United States Department of Agriculture (USDA), and the Company
hopes to
receive USDA approval toward the end of 2006 provided its tests
meet certain
performance and other criteria. The Company plans to submit additional
veterinary TB products to the USDA this year, including a cattle
TB test,
subject to having the necessary performance data.
During
the second quarter of 2006, the Company made significant progress
in developing
prototypes of the Dual Path Platform (DPP(TM)). In addition to
our internal
product development efforts in the infectious disease area, based
on significant
interest for a number of different applications of this technology
from various
potential users, we believe we can also extend this technology
to other medical
fields.
On
September 29, 2006, the Company executed several agreements by
and among the
Company, Inverness Medical Innovations, Inc. (“Inverness”) and StatSure
Diagnostic Systems, Inc. (“StatSure”). Pursuant to these agreements, as
described below, the Company will engage in marketing, licensing
and
distribution activities with these two companies. These agreements
contain
margin sharing formulae that are designed to provide Inverness,
the Company and
StatSure with reasonable profit margins after deduction for certain
unit costs
of the products. In addition, the Company has the exclusive right
and duty to
manufacture the products marketed by Inverness under all the
agreements, and it
has the right to subcontract manufacturing, but not sublicense
or subcontract
its rights or obligations.
First,
the Company executed an HIV Barrel License, Marketing and Distribution
Agreement
between the Company, Inverness and StatSure. This agreement covers
the Company’s
FDA-approved SURE CHECK® HIV 1/2 (“SURE CHECK”), a lateral flow rapid HIV test
employing a proprietary barrel system that is an integrated single-use
rapid HIV
antibody detection screening test. Some terms of the agreement
are:
· |
Inverness
will market the SURE CHECK product under Inverness brands
globally
[subject only to certain existing international agreements
that the
Company and StatSure may keep in place for up to one
year];
|
· |
Inverness
will exclusively market SURE CHECK under the agreement
as well as any new
HIV products in the “barrel field” that are developed, and may not compete
with any products in this field worldwide as
defined;
|
· |
The
Company and StatSure have each granted Inverness exclusive
rights to their
intellectual property in the HIV barrel field;
and
|
· |
Inverness
has a first right to negotiate any agreements to market and
distribute any of the Company’s new HIV antibody detection tests,
including products that may incorporate the Company’s patent-pending Dual
Path Platform (DPP(TM))
|
In
addition, the Company executed an HIV Cassette License, Marketing
and
Distribution Agreement with Inverness. This agreement covers
the Company’s
FDA-approved STAT-PAK(TM) HIV 1/2, a lateral flow rapid HIV test
employing a
cassette system that is a single-use rapid HIV antibody detection
screening
test. Some of the terms of the agreement are:
· |
Inverness
will market this product in the U.S. market only, and
the Company has a
non-exclusive license under the Inverness lateral flow
patents to continue
to market the product under the Company’s brand in the rest of the world;
and
|
· |
Inverness
may bring a competitive HIV cassette product to the U.S.
market, but in
that event the Company may expand its lateral flow license
for this
product to the U.S. and have other options under the
agreement.
|
The
Company and Inverness also executed a Non-Exclusive License,
Marketing and
Distribution Agreement, which covers the Company’s FDA-approved STAT-PAK(TM) HIV
1/2. Some of the terms of this agreement are as follows:
· |
The
Company received a non-exclusive license under the Inverness
lateral flow
patents for its HIV 1/2 Dipstick for marketing outside
the U.S.;
|
· |
The
Company received a worldwide non-exclusive license to
manufacture and
market a number of other Company-branded products, including
all the
Company’s rapid tests for human and veterinary and tuberculosis,
Chagas
disease, and tests for other defined emerging and neglected
diseases;
and
|
· |
Inverness
has the right to market each of these products (except
the HIV 1/2 STAT
PAK Dipstick) under an Inverness brand pursuant to an
agreed-upon pricing
and margin sharing formula similar to the other
agreements.
|
The
Company and StatSure also entered into a Settlement Agreement
pursuant to which
all matters in their litigation regarding StatSure’s barrel patent and other
matters were settled. Under the terms of this agreement, the
parties will
equally share in the profits relating to SURE CHECK after reimbursement
to the
Company of its manufacturing and related costs, as defined, and
the parties will
act jointly in the HIV barrel field. The settlement combines
each companies’ HIV
barrel intellectual property, including an exclusive manufacturing
license from
StatSure to the Company of its barrel patent for all HIV applications,
thereby
ensuring the Company’s exclusive right to manufacture, as well as Inverness’
right to market though the marketing license that StatSure granted
Inverness
under the three way agreement. In addition, pursuant to this
Agreement, StatSure
and the Company will share equally the net sales to Inverness
of SURE CHECK
after these deductions.
Critical
Accounting Policies and Estimates
The
preparation of the financial statements in conformity with accounting
principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the amounts reported in
the financial
statements and accompanying notes. Actual results could differ
materially from
those estimates.
The
Company believes that there are several accounting policies that
are critical to
understanding its 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. These
policies, and
the related procedures, are described in detail below.
Revenue
Recognition -
The
Company sells its products directly through its sales force and
through
distributors. Revenue from direct sales of its product is recognized
upon
shipment to the customer. Income from research grants when earned.
Grants are
invoiced after expenses are incurred. Sales are recorded net
of discounts,
rebates and returns.
The
Company recognizes income from research grants when earned. Grants
are invoiced
after expenses are incurred. Any grants funded in advance are
deferred until
earned.
Research
& Development Costs -
Research
and development activities consist primarily of new product development,
continuing engineering for existing products, regulatory and
clinical trial
costs. Costs related to research and development efforts on existing
or
potential products are expensed as incurred.
Valuation
of Inventories -
Inventories
are stated at the lower of cost or market, using the first-in,
first-out method
(FIFO) to determine cost. The Company’s policy is to periodically evaluate the
market value of the inventory and the stage of product life cycle,
and record a
reserve for any inventory considered slow moving or obsolete.
Allowance
for doubtful accounts -
The
Company’s policy is to review its accounts receivable on a periodic basis,
no
less than monthly. On a quarterly basis an analysis is made of
the adequacy of
its allowance for doubtful accounts and adjustments are made
accordingly. The
current allowance is approximately 3.99% of accounts receivable.
Income
Taxes
-
Income
taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” SFAS
No. 109 requires the asset and liability method of accounting
for deferred
income taxes. Deferred tax assets and liabilities are determined
based on the
difference between the financial statement and tax bases of assets
and
liabilities. Deferred tax assets or liabilities at the end of
each period are
determined using the tax rate expected to be in effect when taxes
are actually
paid or recovered. For example, if the Company does not become
profitable it may
be unable to utilize its deferred tax asset, which approximates
$6,128,000 at
December 31, 2005.
SFAS
109
also requires that a valuation allowance be established when
it is more likely
than not that all or a portion of a deferred tax asset will not
be realized. A
review of all available positive and negative evidence needs
to be considered,
including a company’s current and past performance, the market environment in
which the company operates, length of carryback and carryforward
periods and
existing contracts that will result in future profits.
Forming
a
conclusion that a valuation allowance is not needed is difficult
when there is
negative objective evidence such as cumulative losses in recent
years.
Cumulative losses weigh heavily in the overall assessment. As
a result, the
Company determined that it was appropriate to establish a valuation
allowance
for the full amount of its deferred tax assets.
The
above
listing is not intended to be a comprehensive list of all of
the Company’s
accounting policies. In many cases, the accounting treatment
of a particular
transaction is specifically dictated by accounting principles,
generally
accepted in the United States of America, with no need for management’s judgment
in their application. There are also areas in which management’s judgment in
selecting any viable alternative would not produce a materially
different
result. See the Company’s audited financial statements and notes thereto which
contain accounting policies and other disclosures required by
accounting
principles, generally accepted in the United States of America.
DESCRIPTION
OF PROPERTY
Our
administrative offices and research facilities are located in
Medford, New York.
We lease approximately 14,000 square feet of industrial space
for $8,167 per
month. The space is utilized for research and development (approximately
1,600
square feet), offices (approximately 4,700 square feet) and production
(approximately 7,700 square feet). The lease term expires on
April 30, 2007 with
a right to renew for an additional two years. Additional space
may be required
as we expand our research and development activities. We do not
foresee any
significant difficulties in obtaining any required additional
facilities.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Mark
L.
Baum, our former president prior to the merger and a former director
of Chembio
Diagnostics, Inc., entered into a nine-month employment agreement
with Chembio
Diagnostics, Inc., effective upon the closing of the merger,
pursuant to which
Mr. Baum received 400,000 shares of our common stock as well
as a warrant to
acquire 425,000 shares of common stock at $.60 per share and
a warrant to
acquire an additional 425,000 shares of common stock at $.90
per share. The
warrants expire five years after the date of grant. Pursuant
to the employment
agreement, Mr. Baum was to advise Chembio Diagnostics, Inc. concerning
management, marketing, strategic planning, corporate structure,
business
operations, expansion of services, acquisitions and business
opportunities,
matters related to our public reporting obligations, and our
overall needs
through February 5, 2005. Mr. Baum also invested $65,000 in the private
placement of series A preferred stock, pursuant to which he received
2.167
shares of series A preferred stock convertible into 108,350 shares
of common
stock, and a warrant to purchase 130,020 shares of common stock.
Mr. Baum also
owns 300,000 shares of our common stock in addition to the stock
and warrants
described above. In November of 2004 as payment of dividends
on the series A
preferred, Mr. Baum received 4,333 shares of common stock. Prior to the
merger, Mr. Baum was the sole director and officer of Chembio Diagnostics,
Inc. On March 18, 2005, as compensation for Mr. Baum’s service on the Board of
Directors of Chembio Diagnostics, Inc., the exercise price of
Mr. Baum’s warrant
to acquire 425,000 shares of common stock at $.90 per share was
reduced to $.75
per share. Mr. Baum received no other compensation for his services
on the Board
of Directors.
Lawrence
A. Siebert, the president and chairman of the board of directors
of the Company
beginning at the time of and after the merger, and the president
and chairman of
Chembio Diagnostic Systems Inc. since May 2002, held two promissory
notes issued
by Chembio Diagnostic Systems Inc. One note was issued on August
1, 1999 in the
original principal amount of $338,125, bearing interest at a
rate of 11% per
annum. The other was issued on April 25, 2001 in the original
principal amount
of $795,937, bearing interest at a rate of 12% per annum. Mr.
Siebert converted
the entire outstanding principal amount of the 11% note and $561,875
principal
amount of the 12% note into 30 shares of the Company’s series A preferred stock,
together with warrants to acquire 1,800,000 shares of common
stock at $.90 per
share, pursuant to the Company’s private placement of its series A preferred
stock on May 5, 2004. The shares of series A preferred stock held by Mr.
Siebert are convertible into 1,547,100 shares of the Company’s common stock. The
remaining debt of $234,062 held by Mr. Siebert was exchanged
on December 29,
2004 into 7.80208 shares of the Company’s series A preferred stock, together
with warrants to acquire 468,125 shares of common stock at $.90
per share,
pursuant to the terms of the Company’s private placement of its series A
preferred stock on May 5, 2004. As of September 30, 2006,
$126,501.94 of accrued interest on the debt is also due to Mr.
Siebert, but is not accruing interest. The accrued interest will
be paid out
according to the terms of the Company’s private placement of its series B
preferred stock on January 28, 2005. Mr. Siebert also invested
$50,000 in our
series B preferred stock private placement pursuant to which
he received 1 share
of series B preferred stock convertible into 81,967 shares of
common stock and a
warrant to purchase 77,868 shares of common stock.
Mr.
Siebert also invested $18,700 in Chembio Diagnostic Systems Inc.
pursuant to a
private placement of convertible notes on March 22, 2004. Mr. Siebert
converted the entire principal amount of the note that he received,
together
with accrued interest thereon, into .942 shares of the Company’s series A
preferred stock, together with warrants to acquire 56,520 shares
of common stock
at $.90 per share, pursuant to the Company’s private placement of its series A
preferred stock on May 5, 2004. In November of 2004 as payment of dividends
on the series A preferred he received 61,884 shares of common
stock. Mr. Siebert
exercised a warrant to purchase 66,869 shares of common stock
on December 30,
2004 at a price of $0.45 per share. These shares were gifted
by Mr. Siebert to a
third party. In May of 2005 as payment of dividends on the series
A preferred he
received 72,234 shares of common stock. In July of 2005 as payment
of dividends
on the series B preferred he received .03871 shares of series
B preferred stock.
In November of 2005 as payment of dividends on the series A preferred
he
received 77,488 shares of common stock. In January of 2006 as
payment of
dividends on the series B preferred he received .04674 shares
of series B
preferred stock. In May of 2006 as payment of dividends on the
series A
preferred, Mr. Siebert received 77,488 shares of common stock.
In June of 2006
as payment of dividends on the series A preferred and series
B preferred, Mr.
Siebert received 22,714 shares of common stock. In July and August
of 2006 as
payment of dividends on the series B preferred, Mr. Siebert received
3,295
shares of common stock.
Mr.
Siebert prior to March 22, 2004 had either advanced funds to Chembio
Diagnostic Systems, Inc. or paid vendors directly on Chembio
Diagnostic Systems,
Inc.’s behalf. The total amount so paid or advanced and not repaid
totaled
$182,181 as of September 30, 2006.
Richard
J. Larkin, the Chief Financial Officer of the Company, invested
$10,000 in
Chembio Diagnostic Systems Inc. pursuant to the March 22, 2004 private
placement of convertible notes. Mr. Larkin converted the entire
principal amount
of the note that he received, together with accrued interest
thereon, into .504
shares of the Company’s series A preferred stock, together with warrants to
acquire 30,240 shares of common stock at $.90 per share, pursuant
to the
Company’s private placement of its series A preferred stock on May 5, 2004.
In November of 2004 as payment of dividends on the series A preferred
he
received 1,007 shares of common stock. In May of 2005 as payment
of dividends on
the series A preferred he received 999 shares of common stock.
In November of
2005 as payment of dividends on the series A preferred he received
1,007 shares
of common stock. In May of 2006 as payment of dividends on the
series A
preferred, Mr. Larkin received 1,077 shares of common stock.
In June of 2006 as
payment of dividends on the series A preferred and series B preferred,
Mr.
Larkin received 265 shares of common stock.
Avi
Pelossof, the vice president of sales and marketing of the Company,
invested
$4,000 in the Company pursuant to the March 22, 2004 private placement of
convertible notes. Mr. Pelossof converted the entire principal
amount of the
note that he received, together with accrued interest thereon,
into .202 shares
of the Company’s series A preferred stock, together with warrants to acquire
22,555 shares of common stock at $.90 per share, pursuant to
the Company’s
private placement of its series A preferred stock on May 5, 2004. In
November of 2004 as payment of dividends on the series A preferred
he received
403 shares of common stock. In May of 2005 as payment of dividends
on the series
A preferred he received 399 shares of common stock. In November
of 2005 as
payment of dividends on the series A preferred he received 403
shares of common
stock. In May 2006, as payment of dividends on the series A preferred,
Mr.
Pelossof received 403 shares of common stock. In June of 2006
as payment of
dividends on the series A preferred and series B preferred he
received 106
shares of common stock.
Dr.
Gary Meller, a non-employee director of the Company, currently
serves as a
limited partner and a member of the Advisory Board of Crestview
Capital Master
LLC, referred to herein as Crestview, which was the lead investor,
investing $3
million, in our series B preferred stock private placement
in January 2005, and
which subsequently invested an additional $1 million in our
series B preferred
in March 2006. Crestview also invested $2 million in our series
C preferred
stock private placement. in September
2006.
As
referred to above, in January 2005, for a purchase price of
$3 million, we
issued Crestview 60 shares of our series B preferred stock,
and warrants to
purchase 4,672,130 shares of our common stock at a warrant
exercise price of
$.61 per share. In July 2005, we issued Crestview dividends
on these series B
preferred shares in the form of 2.32274 additional series B
preferred
shares.
In
March 2006, for a purchase price of $1 million, we issued Crestview
20 shares of
series B preferred shares with warrants to purchase 1,557,377
shares of common
stock at a warrant exercise price of $.61 per share. These
shares were issued in
connection with the Company’s January 2005 private placement as described
herein. Subsequently, in July 2006, we issued dividends on all of
Crestview's shares in the form of 220,301 shares of common stock. In
September 2006, for a purchase price of $2 million, we issued
40 shares of
series C preferred shares to Crestview together with warrants
to purchase
625,000 shares of common stock at an exercise price of $1.00
per
share.
The
series B preferred shares owned by Crestview are convertible
into a total of
6,747,748 shares of common stock, and the series C preferred
shares owned by
Crestview are convertible into a total of 2,500,000 shares of
common stock.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.” Prior
to May 14, 2004, our common stock was traded on the OTC Bulletin Board
under the symbol “TSUN.” For the periods indicated, the following table sets
forth the high and low bid prices per share of our common stock.
These prices
represent inter-dealer quotations without retail markup, markdown,
or commission
and may not necessarily represent actual transactions. We completed
a 1 for 17
reverse stock split on March 12, 2004, and all of the prices in this table
have been adjusted to reflect this split.
Fiscal
Year 2006
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$0.75
|
$0.33
|
Second
Quarter
|
$1.15
|
$0.65
|
Third
Quarter
|
$0.85
|
$0.68
|
Fiscal
Year 2005
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$0.90
|
$0.50
|
Second
Quarter
|
$0.87
|
$0.54
|
Third
Quarter
|
$0.66
|
$0.52
|
Fourth
Quarter
|
$0.62
|
$0.30
|
Fiscal
Year 2004
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$3.00
|
$0.34
|
Second
Quarter
|
$2.00
|
$1.00
|
Third
Quarter
|
$1.54
|
$1.01
|
Fourth
Quarter
|
$1.29
|
$0.55
|
Trades
of our common stock are subject to Rule 15g-9
of the Securities and Exchange Commission, known as the Penny
Stock Rule. This
rule imposes requirements on broker/dealers who sell securities
subject to the
rule to persons other than established customers and accredited
investors. For
transactions covered by the rule, brokers/dealers must make a
special
suitability determination for purchasers of the securities and
receive the
purchaser’s written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer
practices in
connection with transactions in “penny stocks.” Penny stocks generally are
equity securities with a price of less than $5.00 (other than
securities
registered on certain national securities exchanges or quoted
on the NASDAQ
system, provided that current price and volume information with
respect to
transactions in that security is provided by the exchange or
system),
except
for securities of companies that have tangible net assets in
excess of
$2,000,000 or average revenue of at least $6,000,000 for the
previous three
years.
The
Penny Stock Rule requires a broker/ dealer, prior to a transaction
in a penny
stock not otherwise exempt from the rules, to deliver a standardized
risk
disclosure document prepared by the Commission that provides
information about
penny stocks and the nature and level of risks in the penny stock
market. The
broker/dealer also must provide the customer with current bid
and offer
quotations for the penny stock, the compensation of the broker/dealer
and its
salesperson in the transaction, and monthly account statements
showing the
market value of each penny stock held in the customer’s account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing
prior to
effecting the transaction and must be given to the customer in
writing before or
with the customer’s confirmation. These disclosure requirements have the effect
of reducing the level of trading activity in the secondary market
for our common
stock. As a result of these rules, investors may find it difficult
to sell their
shares.
Holders
As
of
October 5, 2006, there were approximately 790 record owners of
our common
stock.
Dividends
The
Company has never paid cash dividends on its common stock and
has no plans to do
so in the foreseeable future. Our future dividend policy will
be determined by
our board of directors and will depend upon a number of factors,
including our
financial condition and performance, our cash needs and expansion
plans, income
tax consequences, and the restrictions that applicable laws,
our current
preferred stock instruments, and our future credit arrangements
may then
impose.
Currently
under Nevada law, a dividend may not be made by a corporation
if, after giving
it effect:
· |
the
corporation would not be able to pay its debts as they
become due in the
usual course of business; or
|
· |
except
as otherwise specifically allowed by the corporation’s articles of
incorporation, the corporation’s total assets would be less than the sum
of its total liabilities plus the amount that would be
needed, if the
corporation were to be dissolved at the time of distribution,
to satisfy
the preferential rights upon dissolution of stockholders
whose
preferential rights are superior to those receiving the
distribution.
|
The
certificates of designation authorizing our series A and series
B preferred
stock also prohibit us from making any distribution with respect
to any equity
securities that by their terms do not rank senior to the series
A or series B
preferred stock.
Equity
Compensation Plan Information as of June 30, 2006
Equity
Compensation Plan Information
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance
under Equity
Compensation Plans (Excluding Securities Reflected
in Column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders
|
1,637,250
|
$0.69
|
1,362,750
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
Total
|
1,637,250
|
$0.69
|
1,362,750
|
EXECUTIVE
COMPENSATION
The
following table summarizes the annual compensation paid to Chembio
Diagnostics,
Inc.’s named executive officers for the three years ended December 31,
2005, 2004 and 2003:
|
|
|
|
Annual
Comp
|
|
Long-Term
Compensation Awards—Securities Underlying
|
|
Name
and Position
|
|
Year
|
|
Salary
|
|
Stock
Options
|
|
Lawrence
A. Siebert, President, CEO, Chairman of Board of Chembio
Diagnostics, Inc.
(1)
|
|
|
2005
2004
2003
|
|
$
|
160,151
145,994
140,641
|
|
|
—
160,000
—
|
|
Avi
Pelossof, Vice President of Chembio Diagnostics, Inc.
(2)
|
|
|
2005
2004
2003
|
|
$
|
154,165
154,635
83,077
|
|
|
50,000
250,000
—
|
|
Javan
Esfandiari, Vice President of Chembio Diagnostic Systems,
Inc.
(3)
|
|
|
2005
2004
2003
|
|
$
|
155,046
129,323
88,269
|
|
|
50,000
110,000
—
|
|
Richard
Bruce, Vice President of Chembio Diagnostic Systems,
Inc. (4)
|
|
|
2005
2004
2003
|
|
$
|
116,765
114,286
110,326
|
|
|
25,000
35,000
—
|
|
Richard
J. Larkin, CFO of Chembio Diagnostics, Inc.(5)
|
|
|
2005
2004
2003
|
|
$
|
123,673
97,385
19,594
|
|
|
50,000
—
50,000
|
|
(1)
|
Mr.
Siebert currently is a director, the President and
Chief Executive Officer
of Chembio Diagnostics, Inc., and the President of
Chembio Diagnostic
Systems Inc. The compensation information represents
compensation earned
while employed by Chembio Diagnostic Systems Inc. In
2004, Mr. Siebert
received, prior to the merger, 50,000 options exercisable
at $0.75 and
10,000 options exercisable at $1.00. In addition as
part of his contract
signed in May 2004, Mr. Siebert received 50,000 options
with an exercise
price of $1.20 per share, becoming exercisable in May
2005 and 50,000
options with an exercise price of $1.50 per share becoming
exercisable in
May of 2006.
|
(2)
|
Mr.
Pelossof currently is a Vice President of both Chembio
Diagnostics, Inc.
and Chembio Diagnostic Systems, Inc. The compensation
information
represents compensation earned while employed by Chembio
Diagnostic
Systems Inc. In 2004, Mr. Pelossof received, prior
to the merger, 40,000
options exercisable at $0.75 and 10,000 options exercisable
at $1.00. In
addition as part of his contract signed in May 2004,
Mr. Pelossof received
100,000 options exercisable at $0.60 per share, becoming
exercisable in
May 2004, 50,000 options exercisable with an exercise
price of $0.90 per
share, becoming exercisable in May 2005 and 50,000
options with an
exercise price of $1.35 per share becoming exercisable
in May of 2006. In
May 2005, Mr. Pelossof received 25,000 options with
an exercise price of
$0.80 per share, becoming exercisable in January 2006
and 25,000 options
with an exercise price of $0.80 per share becoming
exercisable in January
of 2007.
|
(3)
|
Mr.
Esfandiari currently is a Vice President of Chembio
Diagnostics, Inc. and
Chembio Diagnostic Systems, Inc. The compensation information
represents
compensation earned while employed by Chembio Diagnostic
Systems Inc. In
2004, Mr. Esfandiari received, prior to the merger,
30,000 options
exercisable at $0.75 and 5,000 options exercisable
at $1.00. In addition
as part of his contract signed in May 2004, Mr. Esfandiari
received 25,000
options exercisable at $0.90 per share, becoming exercisable
in May 2005,
25,000 options with an exercise price of $1.20 per
share, becoming
exercisable in May 2006 and 25,000 options with an
exercise price of $1.50
per share becoming exercisable in May of 2007. In May
2005, Mr. Esfandiari
received 25,000 options with an exercise price of $0.80
per share,
becoming exercisable in January 2006 and 25,000 options
with an exercise
price of $0.80 per share becoming exercisable in January
of 2007.
|
(4)
|
Mr.
Bruce currently is a vice president of Chembio Diagnostic
Systems Inc. The
compensation information represents compensation earned
while employed by
Chembio Diagnostic Systems Inc. Mr. Bruce received,
prior to the merger,
20,000 options exercisable at $0.588, 10,000 options
exercisable at $0.75
and 5,000 options exercisable at $1.00. In May 2005,
Mr. Bruce received
12,500 options with an exercise price of $0.80 per
share, becoming
exercisable in January 2006 and 12,500 options with
an exercise price of
$0.80 per share becoming exercisable in January of
2007.
|
(5)
|
Mr.
Larkin currently is the Chief Financial Officer of
both Chembio
Diagnostics, Inc. and Chembio Diagnostic Systems, Inc.
The compensation
information represents compensation earned while employed
by Chembio
Diagnostic Systems Inc. In 2003, Mr. Larkin received,
prior to the merger,
50,000 options exercisable at $0.45. In May 2005, Mr.
Larkin received
25,000 options with an exercise price of $0.80 per
share, becoming
exercisable in January 2006 and 25,000 options with
an exercise price of
$0.80 per share becoming exercisable in January of
2007.
|
The
following table sets forth certain information regarding stock
options granted
to the named executive officers during the year ended of December
31,
2005.
|
Individual
Grants
|
Name
|
Number
of Securities Underlying Options/SARs Granted
(#)
|
Percentage
of Total Options/ SARs Outstanding
|
Exercise
or Base Price ($/Sh)
|
Expiration
Date
|
Avi
Pelossof
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Avi
Pelossof
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Javan
Esfandiari
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Javan
Esfandiari
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Richard
Bruce
|
12,500
|
.87%
|
0.80
|
5/17/10
|
Richard
Bruce
|
12,500
|
.87%
|
0.80
|
5/17/10
|
Richard
J. Larkin
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Richard
J. Larkin
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
The
following table sets forth certain information regarding stock
options granted
to the named executive officers during the six months ended of
June 30,
2006.
|
Individual
Grants
|
Name
|
Number
of Securities Underlying Options/SARs Granted
(#)
|
Percentage
of Total Options/ SARs Outstanding
|
Exercise
or Base Price ($/Sh)
|
Expiration
Date
|
Lawrence
A. Siebert (1)
|
50,000
|
3.05%
|
0.75
|
11/19/07
|
Lawrence
A. Siebert (1)
|
10,000
|
0.61%
|
0.75
|
12/31/08
|
Lawrence
A. Siebert (1)
|
10,000
|
0.61%
|
0.75
|
05/04/11
|
Lawrence
A. Siebert (1)
|
50,000
|
3.05%
|
0.75
|
05/28/11
|
Lawrence
A. Siebert (1)
|
50,000
|
3.05%
|
0.75
|
05/28/11
|
Avi
Pelossof
|
25,000
|
1.53%
|
0.62
|
03/24/11
|
Avi
Pelossof
|
25,000
|
1.53%
|
0.62
|
03/24/11
|
Avi
Pelossof (1)
|
40,000
|
2.44%
|
0.75
|
11/19/07
|
Avi
Pelossof (1)
|
10,000
|
0.61%
|
0.75
|
12/31/08
|
Avi
Pelossof (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
Avi
Pelossof (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
Avi
Pelossof (1)
|
10,000
|
0.61%
|
0.75
|
05/04/11
|
Avi
Pelossof (1)
|
50,000
|
3.05%
|
0.75
|
05/27/11
|
Avi
Pelossof (1)
|
22,500
|
1.37%
|
0.75
|
05/27/11
|
Avi
Pelossof (1)
|
27,500
|
1.68%
|
0.75
|
05/27/11
|
Javan
Esfandiari
|
18,750
|
1.15%
|
0.62
|
03/24/11
|
Javan
Esfandiari
|
18,750
|
1.15%
|
0.62
|
03/24/11
|
Javan
Esfandiari (1)
|
30,000
|
1.83%
|
0.75
|
03/31/08
|
Javan
Esfandiari (1)
|
5,000
|
0.31%
|
0.75
|
12/31/08
|
Javan
Esfandiari (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
Javan
Esfandiari (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
Javan
Esfandiari (1)
|
5,000
|
0.31%
|
0.75
|
05/04/11
|
Javan
Esfandiari (1)
|
25,000
|
1.53%
|
0.75
|
05/28/11
|
Javan
Esfandiari (1)
|
25,000
|
1.53%
|
0.75
|
05/28/11
|
Javan
Esfandiari (1)
|
25,000
|
1.53%
|
0.75
|
05/28/11
|
Richard
Bruce
|
12,500
|
0.76%
|
0.62
|
03/24/11
|
Richard
Bruce
|
12,500
|
0.76%
|
0.62
|
03/24/11
|
Richard
Bruce (1)
|
20,000
|
1.22%
|
0.75
|
04/17/07
|
Richard
Bruce (1)
|
10,000
|
0.61%
|
0.75
|
12/31/07
|
Richard
Bruce (1)
|
5,000
|
0.31%
|
0.75
|
12/31/08
|
Richard
Bruce (1)
|
12,500
|
0.76%
|
0.75
|
05/17/10
|
Richard
Bruce (1)
|
12,500
|
0.76%
|
0.75
|
05/17/10
|
Richard
Bruce (1)
|
5,000
|
0.31%
|
0.75
|
05/04/11
|
Richard
J. Larkin
|
18,750
|
1.15%
|
0.62
|
03/24/11
|
Richard
J. Larkin
|
18,750
|
1.15%
|
0.62
|
03/24/11
|
Richard
J. Larkin (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
Richard
J. Larkin (1)
|
25,000
|
1.53%
|
0.75
|
05/17/10
|
(1)
|
On
April 17, 2006, the Compensation Committee of the Company
approved the
cancellation of each employee stock option award issued
under the 1999
Equity Incentive Plan where the exercise price was
greater than $0.75 per
share of the Company’s common stock, and the issuance of a new stock
option award under the 1999 Equity Incentive Plan,
for the same number of
shares of the Company’s common stock, with an exercise price of $0.75 per
share of the Company’s common stock for each cancelled stock option award.
The market price of the common stock of the Company
on April 17, 2006 was
$0.72 per share. In total, stock option awards to acquire
795,000 shares
of Company common stock were cancelled, and stock option
awards to acquire
795,000 shares of Company common stock were issued.
Other than the change
in the exercise price, all of the terms and conditions
in each newly
issued stock option award are identical to the cancelled
stock option
award it replaces, with the following exceptions: (i)
Lawrence A.
Siebert’s stock option award for 50,000 shares of the Company’s common
stock, exercisable on May 28, 2006 and terminating
on May 28, 2011 was
replaced with a stock option award for 50,000 shares
of the Company’s
common stock, exercisable on January 1, 2007 and terminating
on May 28,
2011; (ii) Avi Pelossof’s stock option awards for 72,500 shares of the
Company’s common stock, exercisable on May 28, 2005 and on
May 28, 2006
and both terminating on May 28, 2011 was replaced with
a stock option
award for 72,500 shares of the Company’s common stock, exercisable on
January 1, 2007 and terminating on May 28, 2011.
|
There
were no options were exercised by the named executive officers
in the 2005
fiscal year nor in the six months ended June 30, 2006.
Employment
Agreements
Mr.
Siebert.
On June
15, 2006, Mr. Siebert and the Company entered into an employment
agreement,
effective May 10, 2006, which terminates on May 10, 2008. Pursuant
to the
employment agreement, Mr. Siebert serves as the President and
Chief Executive
Officer of the Company and is entitled to receive a base compensation
of
$240,000 per year, subject to review by the Board of Directors
of the Company at
the end of the first twelve months. Mr. Siebert also shall be
eligible for a
bonus of up to 50% of his salary, consisting of (i) a bonus of
up to 25% of his
salary that is at the complete discretion and determination of
the board of
directors, and (ii) a bonus of up to an additional 25% of his
salary that will
be determined based upon revenue and earnings performance criteria
established
each year by the board of directors. Mr. Siebert is eligible
to participate in
any profit sharing, stock option, retirement plan, medical and/or
hospitalization plan, and/or other benefit plans except for disability
and life
insurance that the Company may from time to time place in effect
for the
Company’s executives during the term of Mr. Siebert’s employment agreement. If
Mr. Siebert’s employment agreement is terminated by the Company without cause,
or if Mr. Siebert terminates his employment agreement for a reasonable
basis,
including within 12 months of a change in control, the Company
is required to
pay as severance Mr. Siebert’s salary for six months. Mr. Siebert has agreed for
a period of two years after the termination of his employment
with the Company
not to induce customers, agents, or other sources of distribution
of the
Company’s business under contract or doing business with the Company
to
terminate, reduce, alter, or divert business with or from the
Company.
Mr.
Pelossof.
On May
5, 2004, Mr. Pelossof and the Company entered into an employment
agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant
to the
employment agreement, Mr. Pelossof serves as the Vice President
of Sales,
Marketing and Business Development of the Company. On June 15, 2006, the
board of directors amended this agreement, and increased Mr. Pelossof’s
salary from a base compensation of $120,000 per year, to a base
salary of
$170,000 per year. Mr. Pelossof is also eligible for a bonus
of up to 25% of his
salary, consisting of (i) a bonus of up to 12.5% of his salary
that is at the
complete discretion and determination of the board of directors,
and (ii) a
bonus of up to an additional 12.5% of his salary that will be
determined based
upon revenue and earnings performance criteria established each
year by the
board of directors. Mr. Pelossof is eligible to participate in
any profit
sharing, stock option, retirement plan, medical and/or hospitalization
plan,
and/or other benefit plans except for disability and life insurance
that the
Company may from time to time place in effect for the Company’s executives
during the term of Mr. Pelossof’s employment agreement. If Mr. Pelossof’s
employment agreement is terminated by the Company without cause,
or if Mr.
Pelossof terminates his employment agreement for a reasonable
basis, including
within 12 months of a change in control, the Company is required
to pay as
severance Mr. Pelossof’s salary for six months. Mr. Pelossof has agreed for a
period of two years after the termination of his employment with
the Company not
to induce customers, agents, or other sources of distribution
of the Company’s
business under contract or doing business with the Company to
terminate, reduce,
alter, or divert business with or from the Company.
Mr.
Esfandiari.
On May
5, 2004, Mr. Esfandiari and the Company entered into an employment
agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant
to the
employment agreement, Mr. Esfandiari serves as the Director of
Research &
Development for the Company. On June 15, 2006, the board of directors
amended
this agreement, and increased Mr. Esfandiari’s salary from a base compensation
of $115,000 per year, subject to periodic review by the Board
of Directors of
the Company120,000 per year, to a base salary of $160,000 per
year. Mr.
Esfandiari is also eligible for a bonus of up to 25% of his salary,
consisting
of (i) a bonus of up to 12.5% of his salary that is at the complete
discretion
and determination of the board of directors, and (ii) a bonus
of up to an
additional 12.5% of his salary that will be determined based
upon revenue and
earnings performance criteria established each year by the board
of directors.
Mr. Esfandiari is eligible to participate in any profit sharing,
stock option,
retirement plan, medical and/or hospitalization plan, and/or
other benefit plans
except for disability and life insurance that the Company may
from time to time
place in effect for the Company’s executives during the term of Mr. Esfandiari’s
employment agreement. If Mr. Esfandiari’s employment agreement is terminated by
the Company without cause, or if Mr. Esfandiari terminates his
employment
agreement for a reasonable basis, including within 12 months
of a change in
control, the Company is required to pay as severance Mr. Esfandiari’s salary for
six months. Mr. Esfandiari has agreed for a period of two years
after the
termination of his employment with the Company not to induce
customers, agents,
or other sources of distribution of the Company’s business under contract or
doing business with the Company to terminate, reduce, alter,
or divert business
with or from the Company.
Director
Compensation
All
non-employee directors are paid an annual retainer of $18,000,
paid
semi-annually, and 36,000 stock options, with an exercise price
equal to the
market price on the date of the grant. One-third of each non-employee
director’s
stock options are exercisable on the date of grant, one-third
become exercisable
on the first anniversary of the date of grant, and one-third
become exercisable
on the second anniversary of the date of grant. The audit committee
chair
director is paid an annual retainer of $2,500, paid semi-annually.
In addition,
the non-employee directors are paid $1,000 in cash for each meeting
of the Board
of Directors attended, and paid $500 in cash for each telephonic
Board of
Directors meeting. The non-employee directors who are members
of a committee of
the Board of Directors are paid $500 in cash for each committee
meeting
attended, or $750 in cash for each committee meeting attended
if that
non-employee director is the committee chairman. In addition,
in December 2005,
each of the three non-employee directors was granted options
to purchase 15,000
shares of the Company’s common stock at an exercise price equal to the market
price of the underlying common stock on the date of grant.
FINANCIAL
Statements
See
the
Consolidated Financial Statements beginning on page F-1, “Index to Consolidated
Financial Statements.”
EXPERTS
Lazar,
Levine & Felix LLP, a registered independent public accounting firm, have
audited our consolidated balance sheet of Chembio Diagnostics,
Inc. and
subsidiaries as of December 31, 2005 and the consolidated statements
of
operations, stockholders’ equity (deficit), and cash flows for the two years in
the period ended December 31, 2005 as set forth in this Prospectus.
The
financial statements are included in reliance on such report
given upon the
authority of Lazar, Levine & Felix LLP as experts in accounting and
auditing. Lazar, Levine & Felix LLP does not have any ownership interest in
us.
LEGAL
MATTERS
The
validity of the issuance of the shares of common stock offered
hereby and other
legal matters in connection herewith have been passed upon for
us by Patton
Boggs LLP. A partner of Patton Boggs LLP owns 82,101 shares of
common stock,
1.44731 shares of series A preferred stock (which are convertible
into 72,365
shares of common stock) and a warrant to purchase 94,930 shares
of our common
stock. Patton Boggs LLP owns 37,319 shares of common stock.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified by our bylaws against
amounts actually
and necessarily incurred by them in connection with the defense
of any action,
suit or proceeding in which they are a party by reason of being
or having been
directors or officers of Chembio Diagnostics, Inc. or of our
subsidiary. Our
articles of incorporation provide that none of our directors
or officers shall
be personally liable for damages for breach of any fiduciary
duty as a director
or officer involving any act or omission of any such director
or officer.
Insofar as indemnification for liabilities arising under the
Securities Act of
1933, as amended, may be permitted to such directors, officers
and controlling
persons pursuant to the foregoing provisions, or otherwise, we
have been advised
that in the opinion of the Securities and Exchange Commission
such
indemnification is against public policy as expressed in the
Securities Act and
is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities,
other than the
payment by Chembio Diagnostics, Inc. of expenses incurred or
paid by such
director, officer or controlling person in the successful defense
of any action,
suit or proceeding, is asserted by such director, officer or
controlling person
in connection with the securities being registered, we will,
unless in the
opinion of counsel the matter has been settled by controlling
precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification
by it is against public policy as expressed in the Securities
Act and will be
governed by the final adjudication of such issue.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On
June
1, 2004, our Board of Directors voted to replace Madsen & Associates, CPA’s,
Inc., certified public accountants, and to retain Lazar, Levine
& Felix LLP
as our principal accountant. Lazar, Levine & Felix LLP had been the
principal accountant of Chembio Diagnostic Systems Inc. since
2000. There were
no disagreements between us and Madsen, whether resolved or not
resolved, on any
matter of accounting principles or practices, financial statement
disclosure or
auditing, scope or procedure which, if not resolved, would have
caused them to
make reference to the subject matter of the disagreement in connection
with
their reports. During its tenure, Madsen’s audit opinion on our financial
statements did not contain an adverse opinion or a disclaimer
of opinion, nor
was it modified as to audit scope or accounting principles. Madsen’s reports did
include an explanatory paragraph where they expressed substantial
doubt about
our ability to continue as a going concern.
Prior
to
retaining Lazar, Levine & Felix, LLP, management did not consult Lazar,
Levine & Felix LLP regarding the application of accounting principles
to a
specific completed or contemplated transaction or the type of
audit opinion that
might be rendered, nor concerning any matter that was the subject
of any
disagreement or event.
ADDITIONAL
INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 under
the Securities
Act for the common stock offered by this prospectus. This prospectus,
which is a
part of the registration statement, does not contain all of the
information in
the registration statement and the exhibits filed with it, portions
of which
have been omitted as permitted by SEC rules and regulations.
For further
information concerning us and the securities offered by this
prospectus, please
refer to the registration statement and to the exhibits filed
with it.
Statements contained in this prospectus as to the content of
any contract or
other document referred to are not necessarily complete. In each
instance, we
refer you to the copy of the contracts and/or other documents
filed as exhibits
to the registration statement and these statements are qualified
in their
entirety by reference to the contract or document.
The
registration statement, including all exhibits, may be inspected
without charge
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C.
20549.
Copies of these materials may also be obtained from the SEC’s Public Reference
at 100 F Street, NE, Washington D.C. 20549, upon the payment
of prescribed fees.
You may obtain information on the operation of the Public Reference
Room by
calling the SEC at 1-800-SEC-0330. The registration statement,
including all
exhibits and schedules and amendments, has been filed with the
SEC through the
Electronic Data Gathering, Analysis and Retrieval system, and
is publicly
available through the SEC’s Website located at http://www.sec.gov.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
Index
to
Consolidated Financial Statements
—INDEX—
CONSOLIDATED
FINANCIAL STATEMENTS FOR DECEMBER 31, 2005
|
Page(s)
|
|
|
Report
of Registered Independent Public Accounting Firm
|
F-2
|
|
|
Financial
Statements:
|
|
|
|
Consolidated
Balance Sheet
December
31, 2005
|
F-3
|
|
|
Consolidated
Statements of Operations
Years
ended December 31, 2005 and 2004
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)
|
|
Year
ended December 31, 2004
|
F-5
|
|
|
Consolidated
Statements Of Changes in Stockholders’ Equity (Deficit)
|
F-6
|
Year
ended December 31, 2005
|
|
|
|
Consolidated
Statements of Cash Flows
Years
ended December 31, 2005 and 2004
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-18
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS FOR JUNE 30, 2006
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2006 (unaudited) and
December 31,
2005.
|
F-19
|
|
|
Consolidated
Statements of Operations (unaudited) for the Three
and Six Months ended
June 30, 2006 and 2005.
|
F-20
|
|
|
Consolidated
Statements of Cash Flows (unaudited) for the Six Months
ended June 30,
2006 and 2005.
|
F-21
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
F-22
- F-29
|
REPORT
OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
To
The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiaries
Medford,
New York
We
have
audited the consolidated balance sheet of Chembio Diagnostics,
Inc. and
Subsidiaries (the “Company”) as of December 31, 2005 and the consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
two years in the period ended December 31, 2005. These financial
statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the
Public Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. The Company
is not
required to have, nor were we engaged to perform, an audit of
its internal
control over financial reporting. Our audits included consideration
of internal
control over financial reporting as a basis for designing audit
procedures that
are appropriate in the circumstances, but not for the purpose
of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in
the financial statements, assessing the accounting principles
used and
significant estimates made by management, as well as evaluating
the overall
financial statement presentation. We believe that our audits
provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the consolidated financial position of Chembio
Diagnostics,
Inc. and Subsidiaries as of December 31, 2005, and the consolidated
results of
its operations and its cash flows for the two years in the period
ended December
31, 2005 in conformity with accounting principles generally accepted
in the
United States of America.
The
accompanying financial statements have been prepared assuming
that Chembio
Diagnostics, Inc. and Subsidiaries
will
continue as a going concern. As discussed in Note 1 to the financial
statements,
the Company has suffered recurring losses from operations. If
such losses
continue and the Company is unable to raise sufficient capital,
its ability to
continue as a going concern would be in doubt. Management’s plans in regard to
these matters are also described in Note 1. The financial statements
do not
include any adjustments that might result from the outcome of
this
uncertainty.
LAZAR
LEVINE & FELIX LLP
/s/
LAZAR LEVINE & FELIX LLP
New
York,
New York
February
3, 2006
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEET
|
|
AS
OF DECEMBER 31, 2005
|
|
|
|
|
|
-
ASSETS -
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$
|
232,148
|
|
Accounts
receivable, net of allowance for doubtful accounts
of
$20,488
|
|
|
1,255,073
|
|
Inventories
|
|
|
687,983
|
|
Prepaid
expenses and other current assets
|
|
|
292,989
|
|
TOTAL
CURRENT ASSETS
|
|
|
2,468,193
|
|
|
|
|
|
|
FIXED
ASSETS, net of accumulated depreciation
|
|
|
438,632
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
109,581
|
|
|
|
|
|
|
|
|
$
|
3,016,406
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY-
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,477,925
|
|
Current
portion of accrued interest payable
|
|
|
120,000
|
|
Current
portion of obligations under capital leases
|
|
|
38,368
|
|
Payable
to related party
|
|
|
182,181
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
1,818,474
|
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
Obligations
under capital leases, net of current portion
|
|
|
44,417
|
|
Accrued
interest, net of current portion
|
|
|
100,812
|
|
TOTAL
LIABILITIES
|
|
|
1,963,703
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
Preferred
Stock - 10,000,000 shares authorized:
|
|
|
|
|
Series
A 8% Convertible - $.01 par value: 158.68099 shares
issued and
outstanding. Liquidation preference $4,822,957
|
|
|
2,628,879
|
|
Series
B 9% Convertible - $.01 par value: 102.19760 shares
issued and
outstanding. Liquidation preference-$5,341,896
|
|
|
3,173,239
|
|
Common
stock - $.01 par value; 100,000,000 shares authorized
8,491,429 shares
issued and outstanding.
|
|
|
84,914
|
|
Additional
paid-in capital
|
|
|
14,034,099
|
|
Accumulated
deficit
|
|
|
(18,868,428
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
1,052,703
|
|
|
|
|
|
|
|
|
$
|
3,016,406
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
FOR
THE YEARS ENDED
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
REVENUES:
|
|
|
|
|
|
Net
sales
|
|
$
|
3,359,532
|
|
$
|
2,749,143
|
|
License
revenue
|
|
|
250,000
|
|
|
-
|
|
Research
grants and development income
|
|
|
331,198
|
|
|
556,789
|
|
TOTAL
REVENUES
|
|
|
3,940,730
|
|
|
3,305,932
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,608,584
|
|
|
2,601,847
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,332,146
|
|
|
704,085
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,265,235
|
|
|
2,298,598
|
|
Research
and development expenses
|
|
|
1,364,898
|
|
|
1,508,849
|
|
|
|
|
4,630,133
|
|
|
3,807,447
|
|
LOSS
FROM OPERATIONS
|
|
|
(3,297,987
|
)
|
|
(3,103,362
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
Settlement
of accounts payable
|
|
|
21,867
|
|
|
209,372
|
|
Interest
income
|
|
|
39,803
|
|
|
8,126
|
|
Interest
(expense)
|
|
|
(15,683
|
)
|
|
(190,558
|
)
|
Loss
on retirement of fixed assets
|
|
|
-
|
|
|
(22,469
|
)
|
LOSS
BEFORE INCOME TAXES
|
|
|
(3,252,000
|
)
|
|
(3,098,891
|
)
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(3,252,000
|
)
|
|
(3,098,891
|
)
|
|
|
|
|
|
|
|
|
Dividends
payable in stock to preferred stockholders
|
|
|
818,321
|
|
|
240,001
|
|
Dividend
accreted to preferred stock for associated costs
and a beneficial
conversion feature
|
|
|
2,698,701
|
|
|
1,703,072
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(6,769,022
|
)
|
$
|
(5,041,964
|
)
|
Basic
and diluted loss per share
|
|
$
|
(0.88
|
)
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
Weighted
number of shares outstanding, basic and
diluted
|
|
|
7,705,782
|
|
|
5,966,769
|
|
The
accompanying notes are an integral part of these financial
statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
FOR
THE YEAR ENDED DECEMBER 31,
2004
|
|
|
Series
A Preferred Stock
|
|
Common
Stock
|
|
Additional
paid in capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Balance
at December 31, 2003
|
|
|
-
|
|
$
|
-
|
|
|
4,902,608
|
|
$
|
49,026
|
|
$
|
4,550,975
|
|
$
|
(7,057,442
|
)
|
$
|
(2,457,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
73.33330
|
|
|
2,200,000
|
|
|
-
|
|
|
-
|
|
|
(418,862
|
)
|
|
-
|
|
|
(418,862
|
)
|
Conversion
of debt
|
|
|
90.29853
|
|
|
2,372,958
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
(1,920,460
|
)
|
|
-
|
|
|
-
|
|
|
1,920,460
|
|
|
-
|
|
|
1,920,460
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
(1,964,740
|
)
|
|
-
|
|
|
-
|
|
|
1,964,740
|
|
|
-
|
|
|
1,964,740
|
|
Accretion
of preferred dividend
|
|
|
-
|
|
|
58,114
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(240,001
|
)
|
|
(240,001
|
)
|
Accretion
of beneficial conversion
|
|
|
-
|
|
|
1,703,072
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,703,072
|
)
|
|
(1,703,072
|
)
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt
|
|
|
-
|
|
|
-
|
|
|
826,741
|
|
|
8,267
|
|
|
322,430
|
|
|
-
|
|
|
330,697
|
|
For
Fees
|
|
|
-
|
|
|
-
|
|
|
65,667
|
|
|
657
|
|
|
(657
|
)
|
|
-
|
|
|
-
|
|
Upon
conversion of Preferred
|
|
|
(1.25942
|
)
|
|
(21,914
|
)
|
|
62,971
|
|
|
630
|
|
|
21,284
|
|
|
-
|
|
|
21,914
|
|
Preferred
dividend
|
|
|
-
|
|
|
-
|
|
|
303,145
|
|
|
3,031
|
|
|
178,856
|
|
|
|
|
|
181,887
|
|
For
services
|
|
|
-
|
|
|
-
|
|
|
679,142
|
|
|
6,791
|
|
|
358,454
|
|
|
-
|
|
|
365,245
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Issued
for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
91,589
|
|
|
-
|
|
|
91,589
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
66,869
|
|
|
669
|
|
|
29,422
|
|
|
-
|
|
|
30,091
|
|
To
debt holders, pre-merger
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,650
|
|
|
-
|
|
|
60,650
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,098,891
|
)
|
|
(3,098,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
162.37241
|
|
$
|
2,427,030
|
|
|
6,907,143
|
|
$
|
69,071
|
|
$
|
9,079,341
|
|
$
|
(12,099,406
|
)
|
$
|
(2,950,994
|
)
|
The
accompanying notes are an integral part of these financial
statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
FOR
THE YEAR ENDED DECEMBER 31, 2005
|
|
Series
A Preferred
|
|
Series
B Preferred
|
|
Common
Stock
|
|
Additional
paid
in capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Amount
|
|
Amount
|
|
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 Series A Preferred to
permanent
equity
|
|
|
162.37241
|
|
|
2,427,030
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,427,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
-
|
|
|
-
|
|
|
100.95000
|
|
|
5,047,500
|
|
|
-
|
|
|
-
|
|
|
(321,639
|
)
|
|
-
|
|
|
4,725,861
|
|
For
fees
|
|
|
-
|
|
|
-
|
|
|
4.98000
|
|
|
249,000
|
|
|
-
|
|
|
-
|
|
|
(249,000
|
)
|
|
-
|
|
|
-
|
|
Exchanged
from Series A Preferred to Series B Preferred
|
|
|
(0.66666
|
)
|
|
(11,600
|
)
|
|
0.40000
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
(8,400
|
)
|
|
-
|
|
|
-
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,349,893
|
)
|
|
-
|
|
|
-
|
|
|
2,349,893
|
|
|
-
|
|
|
-
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,437,035
|
)
|
|
-
|
|
|
-
|
|
|
2,437,035
|
|
|
-
|
|
|
-
|
|
Series
B Preferred dividend
|
|
|
-
|
|
|
-
|
|
|
4.06988
|
|
|
435,509
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(435,509
|
)
|
|
-
|
|
Accretion
of beneficial conversion
|
|
|
-
|
|
|
261,666
|
|
|
-
|
|
|
2,437,035
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,698,701
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
conversion of Preferred
|
|
|
(3.02476
|
)
|
|
(52,631
|
)
|
|
(8.20228
|
)
|
|
(228,877
|
)
|
|
823,654
|
|
|
8,237
|
|
|
273,271
|
|
|
-
|
|
|
-
|
|
Series
A Preferred dividend
|
|
|
-
|
|
|
4,414
|
|
|
-
|
|
|
-
|
|
|
630,632
|
|
|
6,306
|
|
|
372,092
|
|
|
(382,812
|
)
|
|
-
|
|
For
services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
95,000
|
|
|
950
|
|
|
52,300
|
|
|
-
|
|
|
53,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
90,288
|
|
|
-
|
|
|
90,288
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,000
|
|
|
350
|
|
|
24,850
|
|
|
-
|
|
|
25,200
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(65,932
|
)
|
|
-
|
|
|
(65,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,252,000
|
)
|
|
(3,252,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
158.68099
|
|
$
|
2,628,879
|
|
|
102.19760
|
|
$
|
3,173,239
|
|
|
8,491,429
|
|
$
|
84,914
|
|
$
|
14,034,099
|
|
$
|
(18,868,428
|
)
|
$
|
1,052,703
|
|
The
accompanying notes are an integral part of these financial
statements.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
FOR
THE YEARS ENDED:
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
(REVISED)
|
|
Net
loss
|
|
$
|
(3,252,000
|
)
|
$
|
(3,098,891
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
98,508
|
|
|
109,965
|
|
Loss
on retirement of fixed assets
|
|
|
-
|
|
|
22,469
|
|
Provision
for doubtful accounts
|
|
|
4,120
|
|
|
(1,136
|
)
|
Increase
in accrued interest
|
|
|
-
|
|
|
93,918
|
|
Expenses
related to shares, options and warrants issued
for
services
|
|
|
77,606
|
|
|
451,622
|
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,094,137
|
)
|
|
118,814
|
|
Restricted
cash
|
|
|
250,000
|
|
|
(250,000
|
)
|
Inventory
|
|
|
(149,336
|
)
|
|
(72,149
|
)
|
Accounts
payable and accrued expenses
|
|
|
212,939
|
|
|
(26,632
|
)
|
Grant
and other current liabilities
|
|
|
-
|
|
|
(12,648
|
)
|
Other
|
|
|
(153,060
|
)
|
|
(55,288
|
)
|
Net
cash used in operating activities
|
|
|
(4,005,360
|
)
|
|
(2,647,807
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(348,741
|
)
|
|
(60,552
|
)
|
Net
cash used in investing activities
|
|
|
(348,741
|
)
|
|
(60,552
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Sale
of Series B Preferred Stock and associated warrants,
net of cash cost of
financing of $321,639
|
|
|
4,725,861
|
|
|
-
|
|
Payment
of obligations to bank
|
|
|
-
|
|
|
(67,434
|
)
|
Payment
of capital lease obligation
|
|
|
(42,511
|
)
|
|
(55,410
|
)
|
Payment
of accrued interest
|
|
|
(112,138
|
)
|
|
-
|
|
Proceeds
from working capital loan
|
|
|
161,917
|
|
|
295,000
|
|
Payment
of working capital loan
|
|
|
(206,917
|
)
|
|
(250,000
|
)
|
Proceeds
from sale of common stock including bridge loan
|
|
|
-
|
|
|
330,698
|
|
Exercise
of warrants
|
|
|
25,200
|
|
|
30,091
|
|
Sale
of Series A Preferred Stock including bridge loan,
net of the cost of
financing of $418,856
|
|
|
-
|
|
|
2,460,251
|
|
Net
cash provided by financing activities
|
|
|
4,551,412
|
|
|
2,743,196
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
197,311
|
|
|
34,837
|
|
Cash
- beginning of the period
|
|
|
34,837
|
|
|
-
|
|
|
|
|
|
|
|
|
|
CASH
- end of the period
|
|
$
|
232,148
|
|
$
|
34,837
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
124,805
|
|
$
|
1,985
|
|
Cash
paid during the period for corporate taxes
|
|
|
3,763
|
|
|
1,693
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Common
Stock issued as payment for financing fees
|
|
$
|
-
|
|
$
|
39,400
|
|
Warrants/Options
issued as payment for consulting services
|
|
|
24,363
|
|
|
42,237
|
|
Warrants
issued for shareholder consent to merger
|
|
|
|
|
|
144,643
|
|
Warrants
issued as payment for financing fees
|
|
|
364,268
|
|
|
337,973
|
|
Long
term debt converted to Series A Preferred Stock
|
|
|
-
|
|
|
1,693,851
|
|
Series
B Preferred issued as payment for financing fees
|
|
|
249,000
|
|
|
-
|
|
Series
A Preferred and associated warrants exchanged for
Series B Preferred and
associated warrants
|
|
|
20,000
|
|
|
-
|
|
Dividend
and beneficial conversion accreted to Series A
and Series B Preferred
Stock
|
|
|
3,517,022
|
|
|
1,373,750
|
|
Series
B Preferred issued as payment of Series B dividend
|
|
|
203,493
|
|
|
-
|
|
Common
Stock issued as payment of Series A Preferred dividend
|
|
|
378,398
|
|
|
181,887
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
financial
statements.
|
|
|
|
|
|
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
1
|
—
|
DESCRIPTION
OF BUSINESS:
|
Chembio
Diagnostics, Inc. (the Company) and its subsidiaries develop,
manufacture, and
market lateral flow rapid diagnostic tests that detect infectious
diseases.
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 Chembio Diagnostic Systems, Inc. (CDS)
or the private
labels of its distributors or their customers. The products are
used in the
diagnosis of infectious diseases and other conditions in humans
and animals. The
Companies main products presently commercially available are
its three HIV Rapid
Tests (SURE CHECK® HIV, HIV 1/2 STAT-PAK™ and HIV 1/2 STAT-PAK Dipstick) and its
rapid test for Chagas Disease.
The
accompanying consolidated financial statements have been prepared
in conformity
with accounting principles generally accepted in the United States
of America,
which contemplate continuation of the Company as a going concern.
Although the
Company’s revenues and gross margins increased significantly in 2005
as compared
to 2004, it has sustained significant operating losses in 2005
and 2004. At
December 31, 2005, the Company had a positive stockholders’ equity of $1,053,000
and working capital of $650,000. The
Company believes its resources are sufficient to fund its needs
through early
2006 and it is considering alternatives to provide for its capital
requirements
for the balance of 2006 and beyond
in order
to continue as a going concern.
The
Company’s 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) its
investments in
research and development, facilities, marketing, regulatory approvals,
and other
investments it may determine to make, and (4) the investment
in capital
equipment and the extent to which it improves cash flow through
operating
efficiencies. There are no assurances that the Company will be
successful in
raising sufficient capital.
RECENT
DEVELOPMENTS:
On
March
30, 2006, the Company sold $1 million of additional Series B
Preferred stock to
a Series B Preferred shareholder pursuant to provisions of the
January 2005
Series B 9% Preferred Stock financing agreements. Such provisions
were exclusive
to said shareholder. The Company is continuing to pursue additional
financing
opportunities in order to provide for its longer term financing
needs.
Approximately $140,000 of these proceeds will be used to pay
cash dividends
which were accrued as of December 31, 2005.
NOTE
|
2
|
—
|
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.
Placement
Agents were paid a cash commission of 5% of the gross cash proceeds
and 4.98
shares of 9 % Series B Preferred Stock and warrants to purchase
388,588 shares
of Common Stock. 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. See also note 13.
NOTE
|
3
|
—
|
MERGER
TRANSACTION:
|
Chembio
Diagnostics, Inc. (the Company) was formerly known as Trading
Solutions.com,
Inc. On May 5, 2004, the Company issued 4,000,000 shares of its
Common Stock to
acquire all the outstanding Common Stock of Chembio Diagnostic
Systems, Inc.
(CDS) and assumed all outstanding options and warrants of CDS.
On May 5, 2004,
New Trading Solutions, Inc., a wholly owned subsidiary of the
Company merged
with and into 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. For financial reporting purposes,
the
acquisition has been treated as a recapitalization of Chembio
Diagnostics, Inc.
with CDS, as the acquiror. The earnings per share presented in
the statement of
operations for periods prior to 2005 reflect the shares outstanding
as if the
merger had taken place as of January 1, 2004.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
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.
NOTE
|
4
|
—
|
SIGNIFICANT
ACCOUNTING POLICIES:
|
(a) |
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the
Company, and its
subsidiaries all wholly owned. All intercompany transactions
and balances have
been eliminated in consolidation.
Inventories
are stated at the lower of cost or market. Cost is determined
on the first-in,
first-out method.
Fixed
assets are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight line method over the estimated useful
lives of the
respective assets, which range from three to seven years. Leasehold
improvements
are amortized over the useful life of the asset or the lease
term, whichever is
shorter.
The
preparation of financial statements in conformity with accounting
principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of
assets and
liabilities and disclosure of contingent assets and liabilities
at the date of
the financial statements and the reported amounts of revenues
and expenses
during the reporting period. Actual results could differ from
those
estimates.
The
Company accounts for income taxes under the provisions of Statement
of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are determined
based on the
difference between the financial statement carrying amounts and
the tax bases of
assets and liabilities using enacted tax rates in effect in the
years in which
the differences are expected to reverse.
(f) |
Research
and Development:
|
Research
and development costs are charged to expense as incurred.
(g) |
Stock
Based Compensation:
|
The
Company accounts for stock-based employee compensation under
Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
its related interpretations. The Company has adopted the disclosure-only
provisions of SFAS No. 123, as amended, “Accounting for Stock-Based
Compensation.” See also note 4(m).
(h) |
Statement
of Cash Flows:
|
For
purposes of the statements of cash flows the Company considers
all highly liquid
investments with an original maturity of three months or less
to be cash
equivalents.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
Company recognizes revenue in accordance with Securities and
Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB
104, revenue is recognized when there is persuasive evidence
of an arrangement,
delivery has occurred or services have been rendered, the sales
price is
determinable, and collectibility is reasonably assured. Revenue
typically is
recognized at time of shipment. Sales are recorded net of discounts,
rebates and
returns.
The
Company recognizes income from research grants when earned. Grants
are invoiced
after expenses are incurred. Any grants funded in advance are
deferred until
earned.
(j) |
Comprehensive
Income:
|
The
Company adopted SFAS No. 130 “Reporting Comprehensive Income”, which prescribes
standards for reporting other comprehensive income and its components.
The
Company currently does not have any items of other comprehensive
income and
accordingly no separate statements are required.
(k) |
Concentrations
of Credit Risk:
|
Financial
instruments which potentially subject the Company to concentrations
of credit
risk consist principally of temporary cash investments and trade
receivables.
The Company places its temporary cash instruments with well-known
financial
institutions and, at times, may maintain balances in excess of
the $100,000 FDIC
Insurance limit. The Company monitors the credit ratings of the
financial
institutions to mitigate this risk. Concentration of credit risk
with respect to
trade receivables is principally mitigated by the Company’s obtaining of letters
of credit from certain foreign customers, and its diverse customer
base both in
number of customers and geographic locations.
Fair
values of cash, accounts receivable, prepaid expenses and other
current assets
and accounts payable reflected in these financial statements
approximate
carrying value as these are short-term in nature.
(m) |
Recent
Accounting Pronouncements Affecting the
Company:
|
SFAS
No.
154, Accounting Changes and Error Corrections - a replacement
of APB Opinion No.
20 (Accounting Changes) and FASB No. 3 (Reporting Accounting
Changes in Interim
Financial Statements) was issued in June 2005. It changes requirements
for the
accounting for and reporting of a change in accounting principle.
This Statement
requires retrospective application to prior periods’ financial statements of
changes in accounting principle unless it is impracticable to
determine either
the period-specific effects or the cumulative effect of the change.
When it is
impracticable to determine the period-specific effects of an
accounting change
on one or more individual prior periods presented, this Statement
requires that
the new accounting principle be applied to the balances of assets
and
liabilities as of the beginning of the earliest period for which
retrospective
application is practicable and that a corresponding adjustment
be made to the
opening balance of retained earnings (or other appropriate components
of equity
or net assets in the statement of financial position) for that
period rather
than being reported in an income statement. When it is impracticable
to
determine the cumulative effect of applying a change in accounting
principle to
all prior periods, this Statement requires that the new accounting
principle be
applied as if it were adopted prospectively from the earliest
date
practicable.
SFAS
No.
154 is effective for accounting changes and error corrections
made in fiscal
years beginning after December 15, 2005 (calendar year 2006).
Early adoption is
permitted.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
A
revision of SFAS No. 123 “Share-Based Payment” (No. 123R) was issued in December
of 2004. The revised statement establishes standards for the
accounting for
transactions in which an entity exchanges its equity investments
for goods and
services. It also addresses transactions in which an entity receives
goods or
services that are exchanged for or that may be settled by the
issuance of 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 of an equity
instrument
based on its current fair value; the fair value of that award
will be remeasured
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 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 for periods beginning after December
15, 2005.
The adoption of SFAS 123R in 2006, is expected to have an impact
on the results
of operations of the Company which will be calculated starting
in the first
reporting period of 2006.
The
Company’s Series A and Series B Preferred Stock both 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 December 31, 2005,
such conditions no
longer apply; accordingly, the Series A and Series B Preferred
have been
reclassified to permanent equity at December 31, 2005.
Prior
years financial statements have been reclassified to conform
with current year
presentation.
(p) |
Geographic
Information:
|
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for the way that business enterprises report
information
about operating segments in 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.
The
Company produces only one group of similar products known collectively
as “rapid
medical tests”. As per the provisions of SFAS 131, management believes that
it
operates in a single business segment. Net sales by geographic
area are as
follows:
|
|
For
the years ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Africa
|
|
|
|
|
$
|
802,925
|
|
|
|
|
$
|
120,002
|
|
Asia
|
|
|
|
|
|
124,467
|
|
|
|
|
|
215,131
|
|
Australia
|
|
|
|
|
|
10,585
|
|
|
|
|
|
25,478
|
|
Europe
|
|
|
|
|
|
125,135
|
|
|
|
|
|
157,516
|
|
Middle
East
|
|
|
|
|
|
55,652
|
|
|
|
|
|
69,737
|
|
North
America
|
|
|
|
|
|
503,456
|
|
|
|
|
|
994,540
|
|
South
America
|
|
|
|
|
|
1,737,312
|
|
|
|
|
|
1,166,739
|
|
|
|
|
|
|
$
|
3,359,532
|
|
|
|
|
$
|
2,749,143
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
(q) |
Accounts
payable and accrued
liabilities
|
Accounts
payable and accrued liabilities:
Accounts
payable - suppliers
|
|
$
|
550,247
|
|
Accrued
commissions
|
|
|
171,587
|
|
Accrued
royalties
|
|
|
381,510
|
|
Accrued
payroll and other taxes
|
|
|
63,146
|
|
Accrued
vacation
|
|
|
145,566
|
|
Accrued
legal and accounting
|
|
|
50,024
|
|
Accrued
expenses - other
|
|
|
115,845
|
|
TOTAL
|
|
$
|
1,477,925
|
|
The
following weighted average shares were used for the computation
of basic and
diluted earnings per share:
|
|
For
the years ended
|
|
|
December
31, 2005
|
December
31, 2004
|
Basic
|
|
7,705,782
|
5,966,769
|
|
|
|
|
Diluted
|
|
7,705,782
|
5,966,769
|
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 years ended December 31, 2005
and December 31,
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:
|
|
For
the years ended
|
|
|
December
31, 2005
|
December
31, 2004
|
Stock
Options
|
|
1,430,375
|
1,300,250
|
Warrants
|
|
21,327,972
|
12,226,054
|
Preferred
Stock
|
|
16,311,602
|
8,118,611
|
NOTE
|
5
|
—
|
EMPLOYEE
STOCK OPTION PLAN:
|
As
part
of the merger (see note 3), the Company adopted the 1999 Stock
Option Plan (the
“Plan”) of CDS covering 1,500,000 shares of Common Stock. Under the
terms the
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 2005 stockholders’ meeting. 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.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
|
|
For
the years ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Net
loss attributable to common stockholders, as reported
|
|
$
|
(6,769,022
|
)
|
$
|
(5,041,964
|
)
|
Add:
Stock-based compensation included in reported net loss
|
|
|
-
|
|
|
969
|
|
Deduct:
Total stock based compensation expense determined under
the fair value
based method for all awards (no tax effect)
|
|
|
(180,195
|
)
|
|
(490,348
|
)
|
Pro
forma net loss attributable to common stockholders
|
|
$
|
(6,949,217
|
)
|
$
|
(5,531,343
|
)
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted loss per share - as reported
|
|
$
|
(0.88
|
)
|
$
|
(0.85
|
)
|
Basic
and diluted loss per share - pro forma
|
|
$
|
(0.90
|
)
|
$
|
(0.93
|
)
|
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:
|
·
|
For
the year ended December 31, 2005: expected volatility
of 110.28%;
risk-free interest rate of 3.69% to 4.46%; expected
lives of 3 to 5 years
and no dividends.
|
|
·
|
For
the year ended December 31, 2004: expected volatility
of 82.6%; risk-free
interest rate of 3.31%; expected lives of 4 to 7 years
and no
dividends.
|
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.
The
Company granted 481,500 options under the Plan during the year
ended December
31, 2005 at exercise prices ranging from $0.35 per share to $0.80
per
share.
Plan
activity is summarized as follows:
|
|
Number
of shares
|
|
Weighted
Average Exercise Price
|
Options
outstanding at December 31, 2003
|
|
365,000
|
|
$
2.75
|
Granted
|
|
740,000
|
|
0.95
|
Canceled
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
-
|
Options
outstanding at December 31, 2004
|
|
1,105,000
|
|
$
1.55
|
Granted
|
|
481,500
|
|
0.74
|
Canceled
|
|
(300,750
|
)
|
1.75
|
Exercised
|
|
-
|
|
-
|
Options
outstanding at December 31, 2005
|
|
1,285,750
|
|
$
1.20
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
Additional
Plan information as of December 31, 2005 is as follows:
Range
of Exercise Prices
|
Options
Outstanding
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (yrs)
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
$2.17
— 4.00
|
202,500
|
$3.12
|
2.05
|
202,500
|
$3.08
|
$0.90
— 1.50
|
310,000
|
$1.20
|
5.40
|
160,000
|
$1.02
|
$0.75
— 1.50
|
530,750
|
$0.79
|
4.60
|
176,000
|
$0.76
|
$0.35
— 0.60
|
242,500
|
$0.52
|
5.12
|
222,500
|
$0.51
|
|
1,285,750
|
$1.20
|
4.49
|
761,000
|
$1.36
|
NOTE
|
6
|
—
|
RELATED
PARTIES:
|
The
Company’s former president, also a former director received, in March
2005, as
compensation for his service on the Board of Directors, a reduction
from $.90
per share to $.75 per share in the exercise price of a warrant
to acquire
425,000 shares of Common Stock. The
Company is accounting for these warrants as variable from the
date of the
modification to the date the award is exercised, forfeited, or
expires
unexercised. At December 31, 2005 the stock price was less than
the revised
exercise price; therefore there was no adjustment to compensation
is
required.
Such
warrants remain unexercised as of December 31, 2005.
The
Company has a liability to its President for i) funds advanced
by him to it or
paid directly by him to vendors on its behalf of $182,000 (non-interest
bearing
and payable on demand) and ii) $165,000 of accrued interest on
prior debt that
is not accruing additional interest. The accrued interest is
being repaid
according to the terms related to the Series B offering (see
notes 2 and 9).
Inventories
consist of:
Raw
Materials
|
|
$
|
425,758
|
|
Work
in Process
|
|
|
86,001
|
|
Finished
Goods
|
|
|
176,224
|
|
|
|
$
|
687,983
|
|
Fixed
assets consist of:
Machinery
and equipment
|
|
$
|
604,243
|
|
Furniture
and fixtures
|
|
|
126,277
|
|
Computer
and telephone equipment
|
|
|
94,283
|
|
Leasehold
improvements
|
|
|
131,157
|
|
Tooling
|
|
|
41,900
|
|
|
|
|
997,860
|
|
Less
accumulated depreciation and amortization
|
|
|
(559,228
|
)
|
|
|
$
|
438,632
|
|
Included
in the above fixed assets is $74,183, net of accumulated depreciation
of
$84,058, of assets held under capital leases as of December 31,
2005.
Depreciation for the 2005 and 2004 years aggregated $98,508 and
$109,965,
respectively.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
In
connection with the Series B offering (see note 2) interest payable
on certain
debt was agreed to be paid over
33
months in installments of $10,000 per month and a final payment
of $2,950 in the
34th
month.
These
payments are subordinate to the redemption rights of the Series
B Preferred
stockholders. No interest accrues on this payable.
NOTE
|
10
|
—
|
OBLIGATIONS
UNDER CAPITAL LEASES:
|
The
Company is obligated under capitalized leases for certain computer
and telephone
equipment.
Future
minimum lease payments under these capitalized lease obligations,
including
interest as of December 31, 2005 were as follows:
Year
ending December 31,
2006
|
|
$
|
45,546
|
|
2007
|
|
|
40,113
|
|
2008
|
|
|
7,260
|
|
|
|
|
92,919
|
|
Less:
imputed interest
|
|
|
10,134
|
|
Present
value of future minimum lease payments
|
|
|
82,785
|
|
Less:
current maturities
|
|
|
38,368
|
|
|
|
$
|
44,417
|
|
These
leases have interest rates ranging from 8% - 15%.
NOTE
|
11
|
—
|
RESEARCH
GRANTS AND DEVELOPMENT
CONTRACTS:
|
In
2005
and 2004 the Company received research grants and development
contracts in the
amount of $331,198 and $556,789 respectively. A substantial portion
of the
revenues realized in 2005 is not expected to recur in 2006.
No
provision for Federal income taxes was required for the years
ended December 31,
2005 or 2004, due to the Company’s operating losses. At December 31, 2005, the
Company has unused net operating loss carryforwards of approximately
$14,500,000
which expire at various dates through 2024. Most of this amount
is subject to
annual limitations under certain provisions of the Internal Revenue
Code related
to “changes in ownership”. In addition the Company has a research and
development credit carryforward of approximately $288,000.
As
of
December 31, 2005 and 2004, the deferred tax assets related to
the
aforementioned carryforwards have been fully offset by valuation
allowances,
since significant utilization of such amounts is not presently
expected in the
foreseeable future.
Deferred
tax assets and valuation allowances consist of:
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Net
operating loss carryforwards
|
|
$
|
5,800,000
|
|
$
|
4,424,000
|
|
Research
and development credit
|
|
|
288,000
|
|
|
230,000
|
|
Other
|
|
|
40,000
|
|
|
73,000
|
|
Gross
deferred tax assets
|
|
|
6,128,000
|
|
|
4,727,000
|
|
Valuation
allowances
|
|
|
(6,128,000
|
)
|
|
(4,727,000
|
)
|
Net
deferred tax assets
|
|
|
-
|
|
|
-
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
13
|
—
|
STOCKHOLDERS’
EQUITY:
|
During
2005 the Company issued 95,000 shares of its Common Stock to
consultants as
compensation. The shares were valued from $0.43 to $0.75 per
share and were
expensed over the lives of the related contracts.
In
2005
Series A Preferred shareholders converted 3.02476 shares into
151,237 shares of
Common Stock. Series B Preferred shareholders converted 8.20228
shares into
672,417 shares of Common Stock and warrants were exercised to
purchase 35,000
shares of Common Stock at an exercise price of $0.72 per share.
On
May
14, 2005 and November 15, 2005 the Company issued 312,773 and
317,859 shares,
respectively, of its Common Stock as payment of dividends on
its series A
preferred stock.
The
warrants to purchase 8,280,550 shares of Common Stock issued
in connection with
the Series B offering 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.
In
March
2005, the Company re-priced certain warrants - see note 6.
During
2005, the Company issued warrants to purchase 133,656 shares
of Common
Stock
at
exercise prices from $0.55 to $0.70 per share to
a
distributor as payment for commissions. The value of these warrants
was
expensed.
|
(c)
|
Other
Common Stock Options
|
During
2005 the Company issued options to purchase 20,000 shares of
Common Stock to
advisory board members. These options were valued at $6,969 and
are being
expensed over the vesting periods.
|
(d)
|
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:
The 8% per annum dividend is payable semi-annually, in cash or,
at the Company’s
option, in Common Stock. To date all dividends have been paid
in Common
Stock.
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 holders have the right, under certain conditions, to require
redemption of
all or a portion of such holder’s shares of Series A Preferred Stock. The Series
A Preferred Stock is not currently redeemable and there is no
likelihood 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 $394.05 per
share, an
aggregate for all such shares of $4,822,957). Accrued but unpaid
dividends of
$62,528 are included in the preferred stock carrying value as
at December 31,
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
became
effective. The amount accreted back to the preferred and charged
to dividends in
2005 was $261,666.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
|
(e)
|
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
2) 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 its 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. To date all dividends have
been paid in
Preferred Shares.
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 81,967 shares of Common Stock.
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 likelihood
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 $2,270.27 per share,
an aggregate for
all such shares of $5,341,896). Accrued but unpaid dividends
of $232,016 are
included in the preferred stock carrying value as at December
31, 2005. The
accrued but unpaid dividend was paid on January 2, 2006 by the
issuance of
4.60249 shares Series B Preferred Stock.
On
July
1, 2005, the Company issued 4.06988 shares of Series B Preferred
Stock as
payment of dividends on the Company’s Series B Preferred Stock. No cash was
exchanged in this issuance.
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.
NOTE
|
14
|
—
|
COMMITMENTS
AND CONTINGENCIES:
|
Employment
Contracts:
The
Company has contracts with three key employees. The contracts
call for salaries
presently aggregating $420,000 per year. Two contracts expire
in May of 2006 and
one contract expires in May of 2007.
Pension
Plan:
The
Company has a 401(k) plan established for its employees. The
Company has the
option to make matching contributions to the plan. The Company
has not elected
to make any matching contributions for the years ended December
31, 2005 and
2004 and accordingly no expense has been recorded.
Obligations
Under Operating Leases:
The
Company leases office and manufacturing facilities. The following
is a schedule
of future minimum rental commitments:
Year
ending December 31,
2006
|
99,837
|
2007
|
25,113
|
|
$124,950
|
Rent
expense aggregated $97,000 and 88,000 for the years ended December
31, 2005 and
2004, respectively.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
Economic
Dependency:
The
Company had sales to three customers in excess of 10% of total
sales in the year
ended December 31, 2005. Sales to these customers aggregated
approximately
$1,125,000, $474,000 and $412,000, respectively.
The
Company had sales to two customers in excess of 10% of total
sales in the year
ended December 31, 2004. Sales to these customers aggregated
approximately
$1,071,000 and $309,000, respectively.
The
Company had no purchases from any vendor in excess of 10% of
total purchases for
the years ended December 31, 2005 and 2004.
Governmental
Regulation:
All
of
the Company’s existing and proposed diagnostic products are regulated by
the
Food and Drug Administration (FDA), U.S. Department of Agriculture,
certain
state and local agencies, and/or comparable regulatory bodies
in other
countries. Most aspects of development, production, and marketing,
including
product testing, authorizations to market, labeling, promotion,
manufacturing,
and record keeping are subject to review. After marketing approval
has been
granted, Chembio must continue to comply with governmental regulations.
Failure
to comply with these regulations can result in significant
penalties.
The
Company is involved in a patent litigation with Saliva Diagnostic
Systems, Inc.
(“SDS”), the assignee of a 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 SDS’s patent, that such patent is invalid, and that it is
unenforceable due to inequitable procurement. SDS 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 SDS and took several other actions based upon SDS’s representations regarding
its alleged patent.
In
response to the Company’s aforementioned request for relief, the Court has
decided that it is not yet prepared to rule on the significant
issues in the
case. The Company does not believe that the Court’s decision adversely affects
the strength of its position. Accordingly, we are not presently
appealing this
decision, although we believe we have a meritorious basis for
future appeal. The
discovery phase of the litigation is proceeding pursuant to a
scheduling order
and trial is presently expected to convene in late 2006.
NOTE 16 — SUBSEQUENT
EVENTS
(a) |
During
January of 2006, holders of Series B Preferred shares
converted 6.70680
shares into approximately 550,000 shares of Common
Stock.
|
(b) |
Please
see note 1 Recent
Developments.
|
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
-
ASSETS -
|
|
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,289,298
|
|
$
|
232,148
|
|
Accounts
receivable, net of allowance for doubtful accounts
of $27,366 and $20,488
for 2006 and 2005, respectively
|
|
|
918,239
|
|
|
1,255,073
|
|
Inventories
|
|
|
918,657
|
|
|
687,983
|
|
Deferred
financing cost
|
|
|
328,341
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
210,934
|
|
|
292,989
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,665,469
|
|
|
2,468,193
|
|
|
|
|
|
FIXED
ASSETS,
net of accumulated depreciation of $543,330 and $559,228
for 2006 and
2005, respectively
|
|
|
621,395
|
|
|
438,632
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
376,319
|
|
|
109,581
|
|
|
|
|
|
|
|
$
|
4,663,183
|
|
$
|
3,016,406
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIENCY)-
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
2,637,009
|
|
$
|
1,477,925
|
|
Accrued
interest payable
|
|
|
120,000
|
|
|
120,000
|
|
Loan
payable
|
|
|
1,300,000
|
|
|
-
|
|
Current
portion of obligations under capital leases
|
|
|
40,532
|
|
|
38,368
|
|
Payable
to related party
|
|
|
182,181
|
|
|
182,181
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,279,722
|
|
|
1,818,474
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
|
|
|
Obligations
under capital leases - net of current portion
|
|
|
23,594
|
|
|
44,417
|
|
Liabilities
in respect to warrants
|
|
|
328,341
|
|
|
-
|
|
Accrued
interest, net of current portion
|
|
|
33,160
|
|
|
100,812
|
|
TOTAL
LIABILITIES
|
|
|
4,664,817
|
|
|
1,963,703
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
Preferred
Stock - 10,000,000 shares authorized:
|
|
|
|
|
|
|
|
Series
A 8% Convertible - $.01 par value: 149.92119 and 158.68099
shares issued
and outstanding as of 2006 and 2005 , respectively.
Liquidation preference
of $4,553,204
|
|
|
2,499,913
|
|
|
2,628,879
|
|
Series
B 9% Convertible - $.01 par value: 113.93591 and 102.19760
shares issued
and outstanding as of 2006 and 2005, respectively.
Liquidation preference
of $5,937,289
|
|
|
3,529,493
|
|
|
3,173,239
|
|
Common
stock - $.01 par value; 100,000,000 shares authorized
10,669,185 and
8,491,429 shares issued and outstanding as of 2006
and 2005,
respectively
|
|
|
106,692
|
|
|
84,914
|
|
Additional
paid-in capital
|
|
|
16,006,080
|
|
|
14,034,099
|
|
Accumulated
deficit
|
|
|
(22,143,812
|
)
|
|
(18,868,428
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
(1,634
|
)
|
|
1,052,703
|
|
|
|
|
|
|
|
$
|
4,663,183
|
|
$
|
3,016,406
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
(UNAUDITED)
|
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,572,442
|
|
$
|
814,307
|
|
$
|
2,741,511
|
|
$
|
1,160,432
|
|
License
revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
250,000
|
|
Research
grants and development income
|
|
|
64,794
|
|
|
91,382
|
|
|
133,392
|
|
|
227,142
|
|
TOTAL
REVENUES
|
|
|
1,637,236
|
|
|
905,689
|
|
|
2,874,903
|
|
|
1,637,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,072,802
|
|
|
636,380
|
|
|
1,874,930
|
|
|
1,100,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
564,434
|
|
|
269,309
|
|
|
999,973
|
|
|
536,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
351,465
|
|
|
426,782
|
|
|
744,271
|
|
|
761,532
|
|
Selling,
general and administrative expenses
|
|
|
1,333,321
|
|
|
729,435
|
|
|
2,630,968
|
|
|
1,285,495
|
|
|
|
|
1,684,786
|
|
|
1,156,217
|
|
|
3,375,239
|
|
|
2,047,027
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,120,352
|
)
|
|
(886,908
|
)
|
|
(2,375,266
|
)
|
|
(1,510,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of fixed asset
|
|
|
5,000
|
|
|
400
|
|
|
5,000
|
|
|
400
|
|
Interest
income
|
|
|
289
|
|
|
15,613
|
|
|
886
|
|
|
25,081
|
|
Interest
(expense)
|
|
|
(12,312
|
)
|
|
(4,247
|
)
|
|
(21,710
|
)
|
|
(10,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(1,127,375
|
)
|
|
(875,142
|
)
|
|
(2,391,090
|
)
|
|
(1,495,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,127,375
|
)
|
|
(875,142
|
)
|
|
(2,391,090
|
)
|
|
(1,495,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
payable in stock to preferred stockholders
|
|
|
207,937
|
|
|
212,061
|
|
|
420,860
|
|
|
394,239
|
|
Dividend
accreted to preferred stock for associated costs
and a beneficial
conversion feature
|
|
|
-
|
|
|
-
|
|
|
463,434
|
|
|
2,698,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(1,335,312
|
)
|
$
|
(1,087,203
|
)
|
$
|
(3,275,384
|
)
|
$
|
(4,588,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(.13
|
)
|
$
|
(.15
|
)
|
$
|
(.34
|
)
|
$
|
(.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
number of shares outstanding, basic and
diluted
|
|
|
10,024,545
|
|
|
7,413,129
|
|
|
9,517,323
|
|
|
7,180,780
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
(UNAUDITED)
|
|
|
Six
months ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,391,090
|
)
|
$
|
(1,495,127
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
84,790
|
|
|
38,865
|
|
Provision
for doubtful accounts
|
|
|
6,878
|
|
|
(2,321
|
)
|
Common
stock, options and warrants issued as compensation
|
|
|
281,470
|
|
|
-
|
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
329,956
|
|
|
(117,650
|
)
|
Restricted
cash
|
|
|
-
|
|
|
250,000
|
|
Inventories
|
|
|
(230,674
|
)
|
|
(25,536
|
)
|
Prepaid
expenses and other current assets
|
|
|
82,055
|
|
|
16,532
|
|
Other
assets and deposits
|
|
|
-
|
|
|
(84,543
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,004,284
|
|
|
(336,572
|
)
|
Net
cash used in operating activities
|
|
|
(832,331
|
)
|
|
(1,756,352
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(267,553
|
)
|
|
(239,648
|
)
|
Net
cash used in investing activities
|
|
|
(267,553
|
)
|
|
(239,648
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Sale
of Series B Preferred Stock and associated warrants,
net of cash cost of
financing for the periods ended in 2006 and 2005
of $2,750 and $321,639,
respectively
|
|
|
997,250
|
|
|
4,725,861
|
|
Proceeds
from bridge loan
|
|
|
1,300,000
|
|
|
-
|
|
Proceeds
from exercise of warrants
|
|
|
86,321
|
|
|
25,196
|
|
Payment
of capital lease obligation
|
|
|
(18,659
|
)
|
|
(28,097
|
)
|
Proceeds
from working capital loan
|
|
|
-
|
|
|
161,917
|
|
Payment
of working capital loan
|
|
|
-
|
|
|
(206,917
|
)
|
Payment
of accrued interest
|
|
|
(67,652
|
)
|
|
(59,790
|
)
|
Payment
of dividends
|
|
|
(140,226
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,157,034
|
|
|
4,618,170
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
1,057,150
|
|
|
2,622,170
|
|
Cash
- beginning of the period
|
|
|
232,148
|
|
|
34,837
|
|
|
|
|
|
|
|
|
|
CASH
- end of the period
|
|
$
|
1,289,298
|
|
$
|
2,657,007
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
12,312
|
|
$
|
68,465
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Stock
issued as payment for financing fees
|
|
$
|
-
|
|
$
|
15,000
|
|
Warrants
issued as payment for financing fees
|
|
|
-
|
|
|
364,268
|
|
Preferred
B issued as payment for financing fees
|
|
|
100,000
|
|
|
249,000
|
|
Preferred
A and associated warrants exchanged for Preferred
B and associated
warrants
|
|
|
-
|
|
|
20,000
|
|
Warrants
issued with bridge loan
|
|
|
328,341
|
|
|
-
|
|
Cost
of royalty rate reduction accrued and included
in other
assets
|
|
|
200,000
|
|
|
-
|
|
Value
of warrants issued allocated to additional paid
in capital
|
|
|
481,470
|
|
|
2,349,893
|
|
Accreted
beneficial conversion to preferred stock
|
|
|
463,434
|
|
|
2,698,701
|
|
Accreted
dividend to preferred stock
|
|
|
420,860
|
|
|
394,239
|
|
Common
stock issued as payment of dividend
|
|
|
189,218
|
|
|
187,679
|
|
Preferred
B issued as payment of dividend
|
|
|
89,899
|
|
|
-
|
|
Preferred
A converted to common stock
|
|
|
122,006
|
|
|
42,088
|
|
Preferred
B converted to common stock
|
|
|
360,651
|
|
|
197,566
|
|
See
notes accompanying the financial statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
NOTE
|
1
|
—
|
Description
of Business:
|
Chembio
Diagnostics, Inc. and its subsidiaries (the Company) develop,
manufacture, and
market lateral flow rapid diagnostic tests that detect infectious
diseases and
other conditions in humans and animals. 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 Chembio
Diagnostic Systems, Inc. (CDS) or the private labels of its distributors
or
their customers. The Company’s main products presently commercially available
are its three HIV Rapid Tests (SURE CHECK(R) HIV 1/2, HIV 1/2
STAT-PAK(TM) and
HIV 1/2 STAT-PAK Dipstick) and its rapid test for Chagas Disease.
The
accompanying consolidated financial statements have been prepared
in conformity
with accounting principles generally accepted in the United States
of America,
which contemplate continuation of the Company as a going concern.
Although the
Company’s revenues and gross margins increased significantly in recent
periods,
it has sustained significant operating losses in the six months
of 2006 and the
years 2005 and 2004. At June 30, 2006, the Company had a Stockholders’
Deficiency of $1,634 and a working capital deficiency of $614,253.
The Company
believes its resources are sufficient to fund its needs through
late third
quarter of 2006 and it is considering alternatives to provide
for its capital
requirements for the balance of 2006 and beyond in order to continue
as a going
concern. The Company’s 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) its
investments in research and development, facilities, marketing,
regulatory
approvals, and other investments it may determine to make, and
(4) the
investment in capital equipment and the extent to which it improves
cash flow
through operating efficiencies. There are no assurances that
the Company will be
successful in raising sufficient capital.
RECENT
DEVELOPMENTS:
On
May
30, 2006, the Company received approval of its Pre-Market Applications
(PMAs)
from the U. S. Food Drug Administration (FDA) for its SURE CHECK(R)
HIV 1/2 and
HIV 1/2 STAT-PAK(TM) rapid tests. The approved PMAs allow Chembio
to market its
rapid HIV tests to clinical laboratories and hospitals in the
United States. FDA
approval also allows Chembio to further expand its international
marketing
efforts into countries that require regulatory approval in the
manufacturer’s
country of domicile.
On
June
29, 2006, the Company entered into Agreements for the private
placement of up to
$1,800,000 of secured debentures, of which $1,300,000 was then
borrowed. The
principal and accrued interest under this obligation is due on
September 29,
2006 and is secured by a lien on all assets of the Company. The
Company also
issued warrants for the purchase of its Common Stock in connection
with this
transaction; each $1,000 of debenture entitles the lender to
a warrant to
purchase 400 shares of common stock at an exercise price of $0.75
per share with
a term of exercise of five years.
The
lenders also have a right to participate in future equity financings
on the same
terms and conditions as the offer, up to the lesser of $2,000,000
or 40% of the
offering amount. The lenders may also convert the outstanding
secured debentures
and accrued interest into securities being offered in the future
by the Company
on the same terms and conditions as the other participants, at
a discounted rate
of 12.5%.
The
related Agreements require the Company to register and maintain
the registration
of the shares underlying the aforementioned warrants. The Company
will incur
cash penalties if it fails to do so.
Pursuant
to the provisions of Statement of Financial Accounting Standards
No. 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19:
“Accounting for Derivative Financial Instruments Indexed to, and
Potentially
Settled in, a Company’s Own Stock” (“EITF 00-19”), the Company has recorded the
value of the warrants, $328,341, as deferred financing costs
with a
corresponding credit to a long term derivative liability on the
Consolidated
Balance Sheet as of June 30, 2006. The debt discount will be
amortized on a
straight-line basis over the life of the underlying debt.
The
liability for the value of the warrants will be
“marked to market” in future accounting periods until such time as the warrants
are exercised or they meet the criteria for equity
classification.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
NOTE
|
2
|
—
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES:
|
|
(a)
|
Basis
of Presentation:
|
The
consolidated interim financial information as of June 30, 2006
and for the three
and six-month periods ended June 30, 2006 and 2005 has been prepared
without
audit, pursuant to the rules and regulations of the Securities
and Exchange
Commission (the “SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and
regulations, although we believe that the disclosures made are
adequate to
provide for fair presentation. The interim financial information
should be read
in conjunction with the Financial Statements and the notes thereto,
included in
the Company’s Annual Report on Form 10-KSB for the fiscal year ended December
31, 2005, previously filed with the SEC.
In
the
opinion of management, all adjustments (which include normal
recurring
adjustments) necessary to present a fair statement of consolidated
financial
position as of June 30, 2006, and consolidated results of operations
and cash
flows for the three and six-month periods ended June 30, 2006
and 2005, as
applicable, have been made. The interim results of operations
are not
necessarily indicative of the operating results for the full
fiscal year or any
future periods.
Inventory
consists of the following at:
|
|
June
30, 2006
|
|
December
31, 2005
|
|
Raw
Materials
|
|
$
|
561,281
|
|
$
|
425,758
|
|
Work
in Process
|
|
|
143,183
|
|
|
86,001
|
|
Finished
Goods
|
|
|
214,193
|
|
|
176,224
|
|
|
|
$
|
918,657
|
|
$
|
687,983
|
|
In
June
2006, the Company retired fully depreciated fixed assets with
an original cost
of $100,687.
The
following weighted average number of 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, 2006
|
June
30, 2005
|
|
June
30, 2006
|
June
30, 2005
|
Basic
|
10,024,545
|
7,413,129
|
|
9,517,323
|
7,180,780
|
|
|
|
|
|
|
Diluted
|
10,024,545
|
7,413,129
|
|
9,517,323
|
7,180,780
|
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, 2006 and 2005
is the same as basic loss per share, since the effect of including
such
potential Common Stock equivalents was anti-dilutive as the Company
incurred
losses for all periods presented. Such securities, shown below,
presented on a
common share equivalent basis, have been excluded from the per
share
computations:
|
For
the three months ended
|
For
the six months ended
|
|
June
30, 2006
|
June
30, 2005
|
June
30, 2006
|
June
30, 2005
|
1999
Plan Stock Options
|
1,619,500
|
1,256,500
|
1,461,500
|
1,256,500
|
Other
Stock Options
|
144,625
|
144,625
|
144,625
|
144,625
|
Warrants
|
23,351,159
|
21,363,966
|
22,457,650
|
21,363,966
|
Convertible
Preferred Stock
|
17,204,644
|
16,100,290
|
16,572,985
|
16,100,290
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
|
(e)
|
Employee
Stock Option Plan:
|
Effective
January 1, 2006, the Company’s Plan is accounted for in accordance with the
recognition and measurement provisions of Statement of Financial
Accounting
Standards (“FAS”) No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”),
which replaces FAS No. 123, Accounting for Stock-Based Compensation,
and
supersedes Accounting Principles Board Opinion (“APB”) No. 25, Accounting for
Stock Issued to Employees, and related interpretations. FAS 123(R)
requires
compensation costs related to share-based payment transactions,
including
employee stock options, to be recognized in the financial statements.
In
addition, the Company adheres to the guidance set forth within
Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107 (“SAB 107”), which
provides the Staff’s views regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations
with respect to
the valuation of share-based payments for public companies.
Prior
to
January 1, 2006, the Company accounted for similar transactions
in accordance
with APB No. 25 which employed the intrinsic value method of
measuring
compensation cost. Accordingly, compensation expense was not
recognized for
fixed stock options if the exercise price of the option equaled
or exceeded the
fair value of the underlying stock at the grant date.
While
FAS
No. 123 encouraged recognition of the fair value of all stock-based
awards on
the date of grant as expense over the vesting period, companies
were permitted
to continue to apply the intrinsic value-based method of accounting
prescribed
by APB No. 25 and disclose certain pro-forma amounts as if the
fair value
approach of SFAS No. 123 had been applied. In December 2002,
FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure,
an amendment
of SFAS No. 123, was issued, which, in addition to providing
alternative methods
of transition for a voluntary change to the fair value method
of accounting for
stock-based employee compensation, required more prominent pro-forma
disclosures
in both the annual and interim financial statements. The Company
complied with
these disclosure requirements for all applicable periods prior
to January 1,
2006.
In
adopting FAS 123(R), the Company applied the modified prospective
approach to
transition. Under the modified prospective approach, the provisions
of FAS
123(R) are to be applied to new awards and to awards modified,
repurchased, or
cancelled after the required effective date. Additionally, compensation
cost for
the portion of awards for which the requisite service has not
been rendered that
are outstanding as of the required effective date shall be recognized
as the
requisite service is rendered on or after the required effective
date. The
compensation cost for that portion of awards shall be based on
the grant-date
fair value of those awards as calculated for either recognition
or pro-forma
disclosures under FAS 123.
As
a
result of the adoption of FAS 123(R), the Company’s results for the three and
six month period ended June 30, 2006 include share-based compensation
expense
totaling approximately $89,000 and $214,000, respectively. Such
amounts have
been included in the Consolidated Statements of Operations within
cost of goods
sold ($11,000 and $22,000), research and development ($18,000
and $56,000) and
selling, general and administrative expenses ($60,000 and $136,000).
No income
tax benefit has been recognized in the income statement for share-based
compensation arrangements due to history of operating losses.
Stock
option compensation expense in the first and second quarters
of 2006 represent
the estimated fair value of options outstanding which are being
amortized on a
straight-line basis over the requisite vesting period of the
entire award.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
The
weighted average estimated fair value of stock options granted
in the three and
six months ended June 30, 2006 and 2005 was $.54 and $.53 and
$.51 and $.53 per
share, respectively. The fair value of options at the date of
grant was
estimated using the Black-Scholes option pricing model. During
2006, the Company
took into consideration guidance under SFAS 123(R) and SAB 107
when reviewing
and updating assumptions. The expected volatility is based upon
historical
volatility of our stock and other contributing factors. The expected
term is
determined using the simplified method as permitted by SAB 107,
as the Company
has no history of employee exercise of options to-date.
The
assumptions made in calculating the fair values of options are
as follows:
|
June
30, 2006
|
June
30, 2005
|
Expected
term (in years)
|
4
|
5
|
Expected
volatility
|
116.20%
|
95.56%
|
Expected
dividend yield
|
0%
|
0%
|
Risk-free
interest rate
|
4.92%
|
3.72%
|
The
following table addresses the additional disclosure requirements
of 123(R) in
the period of adoption. The table illustrates the effect on net
income and
earnings per share as if the fair value recognition provisions
of FAS No. 123
had been applied to all outstanding and unvested awards in the
prior year
comparable period.
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
Net
loss attributable to common stockholders, as reported
|
|
$ |
(1,087,203
|
)
|
$ |
(4,588,607
|
)
|
Add:
Stock-based compensation included in reported net
loss
|
|
|
-
|
|
|
-
|
|
Deduct:
Total stock based compensation expense determined
under the fair value
based method for all awards (no tax effect)
|
|
|
(53,008
|
)
|
|
(86,549
|
)
|
Pro
forma net loss attributable to common stockholders
|
|
$
|
(1,140,211
|
)
|
$
|
(4,675,156
|
)
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted loss per share - as reported
|
|
$
|
(0.15
|
)
|
$
|
(0.64
|
)
|
Basic
and diluted loss per share - pro forma
|
|
$
|
(0.15
|
)
|
$
|
(0.65
|
)
|
The
Company granted 36,000 new options under the Plan during the
three months ended
June 30, 2006 at an exercise price of $0.75 per share. The Company
granted
316,000 new options under the Plan during the three months ended
March 31, 2006
at exercise
prices ranging from $0.55 per share to $0.62 per share.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
Stock
Options
|
Number
of Shares
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
Outstanding
at January 1, 2006
|
1,285,750
|
|
$1.20
|
|
|
|
|
Granted
|
1,147,250
|
|
$0.71
|
|
|
|
|
Cancelled
|
(795,250)
|
|
$1.56
|
|
|
|
|
Exercised
|
-
|
|
-
|
|
|
|
|
Forfeited/expired
|
(500)
|
|
$0.75
|
|
|
|
|
Outstanding
at June 30, 2006
|
1,637,250
|
|
$0.69
|
|
4.15
years
|
|
$117,824
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2006
|
1,164,250
|
|
$0.68
|
|
4.00
years
|
|
$
90,499
|
As
of
June 30, 2006, there was $84,475 of net unrecognized compensation
cost related
to stock options that are not vested, which is expected to be
recognized over a
weighted average period of approximately .67 years. The total
fair value of
shares vested during the three and six months ended June 30,
2006 and 2005, was
$283,613 and $397,734 and $137,655 and $153,415, respectively.
On
April
17, 2006 the Compensation Committee of the Company’s Board of Directors approved
the cancellation of all employee options where the exercise price
was greater
than $.75 per share (an aggregate of 795,250 options) and issued
new options at
an exercise price of $.75 per share with the same vesting schedule
and
expiration dates (except for 122,500 new options that were issued
with a vesting
date of January 1, 2007 which is later than the vesting date
of the options they
replaced). The expense related to this modification in the second
quarter of
2006 was $58,000.
No
options were exercised during the six months ended June 30, 2006
or June 30,
2005. Options for 500 shares expired in the three months ended
June 30,
2006.
|
(f)
|
Geographic
Information:
|
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for the way that business enterprises report
information
about operating segments in 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.
The
Company produces only one group of similar products known collectively
as “rapid
medical tests”. As per the provisions of SFAS 131, management 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, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
Africa
|
$ |
524,697
|
|
$
|
176,641
|
|
$
|
735,161
|
|
$
|
217,711
|
Asia
|
|
108,478
|
|
|
48,688
|
|
|
151,289
|
|
|
76,088
|
Australia
|
|
-
|
|
|
1,455
|
|
|
-
|
|
|
13,078
|
Europe
|
|
7,630
|
|
|
20,385
|
|
|
46,328
|
|
|
54,843
|
Middle
East
|
|
7,065
|
|
|
12,510
|
|
|
7,740
|
|
|
97,316
|
North
America
|
|
89,310
|
|
|
160,467
|
|
|
149,271
|
|
|
235,680
|
South
America
|
|
835,262
|
|
|
394,161
|
|
|
1,651,722
|
|
|
465,716
|
|
$ |
1,572,442
|
|
$
$
|
814,307
|
|
$
|
2,741,511
|
|
$
|
1,160,432
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
|
(g)
|
Accounts
payable and accrued
liabilities
|
Accounts
payable and accrued liabilities consists of:
|
|
June
30, 2006
|
|
December
31, 2005
|
|
Accounts
payable - suppliers
|
|
$
|
1,221,377
|
|
$
|
550,247
|
|
Accrued
commissions
|
|
|
186,046
|
|
|
171,587
|
|
Accrued
royalties / licenses
|
|
|
499,389
|
|
|
381,510
|
|
Accrued
payroll and other taxes
|
|
|
95,326
|
|
|
63,146
|
|
Accrued
vacation
|
|
|
171,309
|
|
|
145,566
|
|
Accrued
legal and accounting
|
|
|
101,205
|
|
|
50,024
|
|
Accrued
expenses - other
|
|
|
362,357
|
|
|
115,845
|
|
TOTAL
|
|
$
|
2,637,009
|
|
$
|
1,477,925
|
|
In
connection with the Series B offering, interest payable on certain
debt was
agreed to be paid over
33
months in installments of $10,000 per month and a final payment
of $3,160 in the
34th
month.
These
payments are subordinate to the redemption rights of the Series
B Preferred
stockholders. No interest accrues on this payable.
NOTE 4—STOCKHOLDERS’
EQUITY:
During
the three and six months ended June 30, 2006 the Company issued
113,749 and
122,082 shares, respectively of its Common Stock to a consultant
as
compensation. The shares were valued from $0.55 to $.91 per share
and the
related compensation expense for the three and six months ended
June 30, 2006
was $90,278 and $94,861 respectively.
In
the
three and six months ended June 30, 2006 Series A Preferred shareholders
converted 6.00784 and 8.75980 shares into 300,391 and 437,989
shares of Common
Stock, respectively. Series B Preferred shareholders converted
5.35286 and
12.05966 shares into 438,757 and 988,494 shares of Common Stock,
respectively.
During
the three months ended June 30, 2006 the Company issued 140,691
shares of its
Common Stock upon the exercise of warrants and received cash
of $86,321.
In
the
six months ended June 30, 2006 the Company issued 399,121 shares
of its Common
Stock as payment of dividends on its Series A Preferred Stock
and 89,379 shares
of its Common Stock as payment of dividends on its Series B Preferred
Stock.
The
warrants to purchase 1,713,114 shares of Common Stock issued
in connection with
the March 2006 Series B offering were assigned a value of $481,470.
Warrants
to purchase 520,000 shares of Common Stock were issued in connection
with the
bridge loan and were assigned a value of $328,341.
During
the three and six months ended June 30, 2006, the Company issued
warrants to
purchase 84,695 and 158,599 shares, respectively of Common Stock
at exercise
prices from $0.55 to $0.883 per share to a distributor as payment
for
commissions (value $34,100) and commissions accrued at year end
2005 (value
$24,000) and to consultants as compensation for 2006 (value for
the three and
six months ended June 30, 2006 was $16,000 and $22,824, respectively).
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
|
(c)
|
Series
A 8% Convertible Preferred Stock:
|
Redemption:
The holders have the right, under certain conditions, to require
redemption of
all or a portion of such holder’s shares of Series A Preferred Stock. The Series
A Preferred Stock is not currently redeemable and there is no
likelihood 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 $370.65 per
share, an
aggregate for all such shares of $4,553,204. Accrued but unpaid
dividends of
$55,568 are included in the preferred stock carrying value as
at June 30,
2006.
Dividends:
The 8% per annum dividend is payable semi-annually, in cash or,
at the Company’s
option, in Common Stock. In June 2006, the Series A Preferred
Stock was amended
to provide, among other matters, that dividends in Preferred
or Common Stock
would be based on a 10 day volume weighted average market price
at the time of
the dividend. To date all dividends have been paid in Common
Stock.
|
(d)
|
Series
B 9% Convertible Preferred Stock:
|
On
March
30, 2006, the Company sold $1 million of additional Series B
Preferred Stock to
a Series B Preferred shareholder pursuant to provisions of the
January 2005
Series B 9% Preferred Stock financing agreements. Such provisions
were exclusive
to said shareholder. Approximately $140,000 of these proceeds
was used to pay
cash dividends which were accrued as of December 31, 2005.
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 likelihood
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 $2,110.77 per share,
an aggregate for
all such shares of $5,937,289. Accrued but unpaid dividends of
$240,493 are
included in the preferred stock carrying value as at June 30,
2006. The accrued
but unpaid dividend was paid on January 2, 2006 by the issuance
of 4.60249
shares Series B Preferred Stock. Subsequent to this issuance
a Series B
shareholder asserted its right, which is exclusive to such shareholder,
to
receive its dividend in cash; the certificate for 2.80452 shares
of Series B was
surrendered and the equivalent amount of $140,226 was paid in
April
2006.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments”, the
Company evaluated the Series B Preferred Stock transaction that
occurred in
January 2005 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. The Company also evaluated the Series
B Preferred Stock
transaction that occurred on March 30, 2006, see above, and found
that there was
an associated beneficial conversion feature totaling $463,434;
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.
Dividends:
The 9% Series B Preferred Stock accrues dividends at 9% per annum,
payable
semi-annually. Dividends are payable in Series B Preferred Stock,
Common Stock
or in cash. In June 2006, the Series B Preferred Stock was amended
to provide,
among other matters, that the dividend could be paid in Common
Stock (in
addition to Preferred Stock or cash) and that dividends in Preferred
or Common
Stock would be based on a 10 day volume weighted average market
price at the
time of the dividend. The majority investor in the Series B financing
has the
option as it pertains to its dividend payment to choose cash
or Preferred or
Common shares. The Company has the option to choose cash or Preferred
or Common
shares as to the balance of the dividends. To date all dividends
have been paid
in Preferred or Common Shares, except $140,226 which was paid
in cash at the
option of the majority investor.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(UNAUDITED)
NOTE
|
5
|
—
|
COMMITMENTS
AND CONTINGENCIES:
|
The
Company had sales to three
customers in excess of 10% of total sales in the three months
ended June 30,
2006. Sales to these customers approximated $477,000, $347,310
and $270,000,
respectively.
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 customers approximated
$352,500.
The
Company had sales to two customers in excess of 10% of total
sales in the six
months ended June 30, 2006. Sales to these customers approximated
$965,448 and
$685,670, 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 approximated
$352,500 and
$118,294, respectively.
The
Company had no purchases from any vendor in excess of 10% of
total purchases for
the three months ended June 30, 2006.
The
Company had purchases from one vendor in excess of 10% of total
purchases for
the six months ended June 30, 2006. Purchases from this vendor
approximated
$132,300.
The
Company had no purchases from any vendor in excess of 10% of
total purchases for
the three and six months ended June 30, 2005.
|
(b)
|
Governmental
Regulation:
|
All
of
the Company’s existing and proposed diagnostic products are regulated by
the
U.S. Food and Drug Administration (FDA), U.S. Department of Agriculture,
certain
state and local agencies, and/or comparable regulatory bodies
in other
countries. Most aspects of development, production, and marketing,
including
product testing, authorizations to market, labeling, promotion,
manufacturing,
and record keeping are subject to review. After marketing approval
has been
granted, Chembio must continue to comply with governmental regulations.
Failure
to comply with these regulations can result in significant
penalties.
The
Company is involved in a patent litigation with StatSure Diagnostics
Systems,
Inc., formerly Saliva Diagnostic Systems, Inc. (“SDS”), the assignee of a 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
SDS’s patent, that
such patent is invalid, and that it is unenforceable due to inequitable
procurement. SDS 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 SDS and took several other
actions based
upon SDS’s representations regarding its alleged patent.
In
response to the Company’s aforementioned request for relief, the Court has
decided that it is not yet prepared to rule on the significant
issues in the
case. The Company does not believe that the Court’s decision adversely affects
the strength of its position. Accordingly, we are not presently
appealing this
decision, although we believe we have a meritorious basis for
future appeal. The
discovery phase of the litigation is proceeding pursuant to a
scheduling order
and trial is presently expected to convene in late 2006.
PART
II
Information
Not Required in Prospectus
Item
24. Indemnification of Directors and Officers
The
articles of incorporation of Chembio Diagnostics, Inc. (the “Registrant”)
provide for the indemnification of the directors, officers, employees
and agents
of the Registrant to the fullest extent permitted by the laws
of the State of
Nevada. Section 78.7502 of the Nevada General Corporation Law permits a
corporation to indemnify any of its directors, officers, employees
or agents
against expenses actually and reasonably incurred by such person
in connection
with any threatened, pending or completed action, suit or proceeding,
whether
civil, criminal, administrative or investigative (except for
an action by or in
right of the corporation) by reason of the fact that such person
is or was a
director, officer, employee or agent of the corporation, provided
that it is
determined that such person acted in good faith and in a manner
which he
reasonably believed to be in, or not opposed to, the best interests
of the
corporation and, with respect to any criminal action or proceeding,
had no
reasonable cause to believe his conduct was unlawful.
Section 78.751
of the Nevada General Corporation Law requires that the determination
that
indemnification is proper in a specific case must be made by
(a) the
stockholders, (b) the board of directors by majority vote of
a quorum consisting
of directors who were not parties to the action, suit or proceeding
or (c)
independent legal counsel in a written opinion (i) if a majority
vote of a
quorum consisting of disinterested directors is not possible
or (ii) if such an
opinion is requested by a quorum consisting of disinterested
directors.
Insofar
as indemnification for liabilities arising under the Securities
Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons
of the
registrant pursuant to the foregoing provisions, or otherwise,
the registrant
has been advised that in the opinion of the Securities and Exchange
Commission
such indemnification is against public policy as expressed in
the Act and is,
therefore, unenforceable.
Item
25. Other Expenses of Issuance and Distribution
We
will
pay all expenses in connection with the registration and sale
of our common
stock. The estimated expenses of issuance and distribution are
set forth
below.
Type
of Expense
|
|
Amount
|
|
Registration
Fees
|
|
$
|
2,228
|
|
Transfer
Agent Fees
|
|
$
|
250
|
|
Costs
of Printing and Engraving
|
|
$
|
0
|
|
Legal
Fees
|
|
$
|
60,000
|
|
Accounting
Fees
|
|
$
|
5,000
|
|
Total
|
|
$
|
67,478
|
|
Item
26. Recent
Sales of Unregistered Securities
There
have been no sales of unregistered securities within the last
three years, which
would be required to be disclosed pursuant to Item 701 of Regulation
S-B, except
for the following:
On
May 5, 2004, pursuant to the Agreement and Plan of Merger (the “Merger
Agreement”), dated as of March 3, 2004, as amended as of May 3, by and
among privately held Chembio Diagnostic Systems Inc. (“Chembio Diagnostic
Systems”), a Delaware corporation, Chembio Diagnostics, Inc. (formerly,
Trading
Solutions.com, Inc.), a publicly traded Nevada corporation (“the Company”), and
New Trading Solutions, Inc., a wholly owned subsidiary of the
Company (“Merger
Sub”), the Merger Sub merged with and into Chembio Diagnostic Systems,
with
Chembio Diagnostic Systems remaining as the surviving corporation
(the
“Merger”). Pursuant to the Merger, the Company issued 4,000,000 shares
of its
restricted common stock, 704,000 options and warrants to purchase
690,000 shares
of its common stock to the stockholders of Chembio Diagnostic
Systems in
exchange for 100% of their issued and outstanding common stock,
options and
warrants to purchase Chembio Diagnostic Systems’ common stock. The Company
relied on Regulation D promulgated under Section 4(2) of the
Act and on Section
4(2) of the Act as the basis for its exemption from registration
of this
offering. 44 accredited and only 3 non-accredited investors received
securities
of the Company in the Merger. All of the stockholders of Chembio
Diagnostic
Systems, including the non-accredited investors, were provided
with an
information statement meeting the informational requirements
of Rule 502 (b)(2)
of the Securities Act.
On
May 5,
2004 the Company issued warrants to designees of H.C. Wainright
& Co., Inc.
to purchase 751,667 shares of our common stock and to designees
of Wellfleet
Partners, Inc. to purchase 183,333 shares of our common stock,
our placement
agents in the series A preferred stock private placement, at
exercise prices of
$0.72 and $1.08. In addition, designees of Wellfleet Partners
received 59,000
shares of common stock and an individual finder received 6,667
shares of common
stock..
At
or
about the time of the Merger, the Company consummated three private
placements
of its 8% Series A Convertible Preferred Stock as follows: (i) shares of
series A preferred and warrants were sold for cash (the “Cash Offering”); (ii)
shares of series A preferred and warrants were exchanged, as
described herein,
for conversion of the Bridge Notes (the “Bridge Conversion Offering”), and (iii)
shares of series A Preferred and warrants were exchanged, as
described herein,
for conversion of the existing debt of Chembio Diagnostic Systems
(the “Existing
Debt Exchange Offering”). These placements are described below:
(i) |
The
Cash Offering.
A
total of 73.33330 shares of series A preferred stock
and warrants to
acquire 4,400,000 shares of common stock at $.90 per
share were issued
pursuant to the Cash Offering in May 2005 for total consideration
of
$2,200,000. The Company relied on Regulation D promulgated
under Section
4(2) of the Act and on Section 4(2) of the Act as the
basis for its
exemption from registration of this offering. Nine accredited
and zero
non-accredited investors received securities of the Company
in the
offering. All of the investors, including the non-accredited
investors,
were provided with an information statement meeting the
informational
requirements of Rule 502 (b)(2) of the Securities
Act.
|
(ii) |
The
Bridge Conversion Offering.
On March 22, 2004, Chembio Diagnostic Systems completed
a private
placement (the “Bridge Financing”) of $1,000,000 in face amount of
Convertible Notes (the “Bridge Notes”). The Bridge Financing provided for
the Bridge Note holders to elect whether to convert the
Bridge Notes into
shares of the Company’s series A preferred stock (together with warrants
to acquire shares of the Company’s common stock) or into shares of the
Company’s common stock at the effective time of the Merger. As
a result,
$672,000 in principal amount of the Bridge Notes, together
with accrued
and unpaid interest, was converted into 33.83632 shares
of the Company’s
series A preferred stock (together with warrants to acquire
an additional
2,030,217 shares of the Company’s common stock at $.90 per share). The
balance of the Bridge Financing, or $328,000, was converted
into 826,741
shares of the Company’s common stock. The Company relied on Regulation D
promulgated under Section 4(2) of the Act and on Section
4(2) of the Act
as the basis for its exemption from registration of this
offering. 33
accredited and zero non-accredited investors received
securities of the
Company in the offering. All of the investors, including
the
non-accredited investors, were provided with an information
statement
meeting the informational requirements of Rule 502 (b)(2)
of the
Securities Act.
|
(iii) |
The
Existing Debt Exchange Offering.
Pursuant to the Existing Debt Exchange Offering, which
was consummated at
the effective time of the Merger, the Company issued
44.40972 shares of
series A preferred stock and warrants to acquire 2,664,584
shares of
common stock at $.90 per share in exchange for the conversion
of
$1,332,292 of Chembio Diagnostic Systems’ debt existing on its balance
sheet as of December 31, 2003. On
December 29, 2004 the Company converted $361,559 of additional
debt into
12.05199 shares of series A preferred stock and associated
warrants to
purchase 723,120 shares of common stock. The Company
relied on Section
4(2) of the Securities Act of 1933 as the basis for its
exemption from
registration. Eleven
accredited and zero non-accredited investors received
securities of the
Company in these offerings. All of the investors were
provided with an
information statement meeting the informational requirements
of Rule 502
(b)(2) of the Securities Act.
|
In
May
2004, the Company issued options to acquire 100,000 shares of
common stock to
Lawrence Siebert, of which 50,000 options vest in one year with
an exercise
price of $1.20 per share and of which 50,000 options vest in
two years with an
exercise price of $1.50 per share. In May 2004, the Company issued
options to
acquire 200,000 shares of common stock to Avi Pelossof, of which
100,000 options
are immediately exercisable with an exercise price of $0.60 per
share, of which
50,000 options vest in one year with an exercise price of $0.90
per share, and
of which 50,000 options vest in two years with an exercise price
of $1.35 per
share. The Company also issued options to acquire 75,000 shares
of common stock
to Javan Esfandiari, one-third of which vests in one year with
an exercise price
of $0.90 per share, one-third of which vests in two years with
an exercise price
of $1.20 per share, and one-third of which vests in three years
with an exercise
price of $1.50 per share.
Also
in
May, 2004, the Company issued 25,000 shares of common stock and
options to
acquire 150,000 shares of common stock with an exercise price
of $0.60 per share
to a consultant for services performed. One-quarter of these
options vested on
July 1, 2004, and an additional one-quarter vests every six months
until January
1, 2006. The Company also issued options to acquire 30,000 shares
to a second
consultant for services performed, of which 2,500 options vest
each month
beginning June 15, 2004 with an exercise price of $1.00 per share.
In
June
2004, the Company issued options to acquire 20,000 shares of
common stock with
an exercise price of $1.00 per share to a consultant for services
performed. The
Company issued to this same consultant options to acquire 20,000
shares of
common stock with an exercise price of $1.50 and options to acquire
5,000 shares
of common stock at $2.00 per share, all of which vest in one
year.
In
early
June 2004, the Company agreed with Patton Boggs LLP, a law firm
providing legal
services to the Company, that the Company would pay for $27,989
of its
outstanding bill for previously provided legal services with
37,319 shares of
the Company’s restricted common stock. The Company relied on Regulation D
promulgated under Section 4(2) of the Act and on Section 4(2)
of the Act as the
basis of its exemption from registration for this transaction.
The firm
receiving the shares is an accredited investor.
The
Company issued 303,145 shares of common stock on November 15,
2004 as payment of
dividends on the 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
December 9, 2004, the Company entered into a contract with an
investor relations
company, as part of the terms of this contract the Company issued
56,250 shares
of common stock. No cash was exchanged in this issuance. The
Company issued an
additional 20,000 shares of common stock to the investor relations
company on
March 9, 2005. 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 investor
in the issuance was an accredited investor of the Company.
On
December 13, 2004 the Company issued options to purchase 50,000
shares of common
stock (25,000 exercisable immediately and 25,000 exercisable
July 1, 2005 with
an exercise price of $1.00 and $1.50 per share respectively.
The options expire
on December 13, 2011) to an employee. 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 investor in the issuance was an accredited investor
of the
Company.
On
December 30, 2004 a major shareholder exercised warrants to purchase
66,869
shares of common stock. The exercise price was $0.45 per share
and the Company
received $30,091 in cash for this exercise. 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 investor in the issuance was an accredited
investor of the
Company.
On
January 28, 2005, the Company sold for $5,000,000, in a private
placement, 100
shares of our 9% Series B Convertible Preferred Stock together
with warrants to
purchase 7,786,960 of the Company’s common stock. For each $.61 invested in this
Private Placement, an investor received (a) $.61 of face amount
of series B
preferred stock, which is convertible into one share of the Company’s common
stock, and (b) a five-year warrant to acquire .95 of a share
of the Company’s
common stock. Each full share of the series B preferred stock
was purchased for
$50,000, with fractional shares of Series B Stock being purchased
by investments
of less than $50,000. In connection with the private placement,
the Company
issued to the placement agent, Midtown Partners & Co., LLC, or its
designees, shares
of
series B preferred stock in an aggregate amount equal to 5% of
the amount of
cash proceeds from the private placement, together with accompanying
warrants to
purchase common stock. The Company also issued to Midtown Partners
& Co.,
LLC, or its designees, warrants to purchase 737,712 shares of
the Company’s
common stock exercisable for a period of five years from their
issuance and have
an exercise price of $.80 per share.
The
Company relied on Section 4(2) of the Securities Act of 1933
and Rule 506
promulgated thereunder as the basis for its exemption from registration
of this
issuance. All of the investors in the offering are accredited
investors as
defined under Rule 501 promulgated under the Securities Act of
1933.
In
connection with the series B private placement, three of the
investors in the
series A preferred stock collectively purchased a .95 share of
series B
preferred stock, convertible into 77,868 shares of common stock,
together with
warrants to acquire 73,972 shares of common stock. In addition,
one investor in
our series A preferred stock converted all of his interests in
the series A
preferred stock for a .4 share of series B preferred stock, convertible
into
32,786 shares of common stock, together with warrants to acquire
38,933 shares
of common stock.
On
May 1,
2005, Chembio Diagnostics, Inc. 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. On October 26, 2005, the Company issued an option
to acquire
10,000 shares of common stock to Allen Moore, a member of the
Company’s Advisory
Committee. The exercise price of the option is $.48 per share,
one-half of the
option is exercisable immediately and one-half becomes exercisable
on the first
anniversary of the grant date. The option expires on October
26, 2010. The
Company relied on Section 4(2) of the Securities Act of 1933
as the basis for
its exemption from registration of this issuance.
On
November 17, 2005, the Company entered into a contract with Bio
Business Science
and Development, LTDA, a consulting company, and as part of the
terms of this
contract the Company issued a warrant to acquire 39,006 shares
of common stock
to the consulting company as a portion of the compensation for
services to be
performed. The conversion price for the warrant is $.55 per share,
and the
warrant expires on November 17, 2010. Also pursuant to this contract
Bio
Business Science and Development, LTDA received a warrant to
acquire 59,571
shares of common stock at an exercise price of $.55 per share
on February 9,
2006. The Company relied on Section 4(2) of the Securities Act
of 1933 as the
basis for its exemption from registration of this issuance.
On
December 1, 2005, the Company entered into a contract with The
Investor
Relations Group, a consulting company, and as part of the terms
of this contract
the Company issued 25,000 shares of common stock and a warrant
to acquire 25,000
shares of common stock to the consulting company as a portion
of the
compensation for services to be performed. The conversion price
for the warrant
is $.70 per share and the warrant expires on November 30, 2010.
Also pursuant to
this contract, each month since March 2006, The Investor Relations
Group has
received 8,333 shares of common stock and a warrant to acquire
8,333 shares of
common stock for an exercise price of $.70 per share. The Company
also issued
the Investor Relations Group 88,750 shares of common stock on
June 13, 2006
as payment for services rendered. The Company relied on Section
4(2) of the
Securities Act of 1933 as the basis for its exemption from registration
of these
issuances.
On
December 16, 2005, the Company issued an option to acquire 15,000
shares of
common stock to each of the Company’s non-employee directors: Alan Carus, Gary
Meller, and Gerald Eppner. The exercise price of each option
is $.35 per share,
and each option is exercisable immediately. Each option expires
on December 16,
2010. The Company relied on Section 4(2) of the Securities Act
of 1933 as the
basis for its exemption from registration of this issuance.
On
March
18, 2006, the Company issued an option to acquire 36,000 shares
of common stock
to two of the Company’s non-employee directors: Gary Meller, and Gerald Eppner.
The exercise price of each option is $.55 per share, and each
option vests in
three equal annual installments beginning on March 18, 2006.
Each option expires
on March 18, 2011. The Company relied on Section 4(2) of the
Securities Act of
1933 as the basis for its exemption from registration of this
issuance.
On
March
24, 2006, the Company granted options to purchase 50,000 shares
of common stock
under the Company’s 1999 Equity Incentive Plan to Avi Pelossof, a Vice President
of the Company, at an exercise price of $.62 per share until
March 24, 2011.
One-half of these options are currently exercisable, and the
other one-half vest
on January 1, 2007. On March 24, 2006, the Board also granted
options to
purchase 37,500 shares of common stock under the Plan to Richard
Larkin, the
Chief Financial Officer of the Company, at an exercise price
of $.62 per share
until March 24, 2011. One-half of these options are currently
exercisable, and
the other one-half vest on January 1, 2007. On March 24, 2006,
the Company
granted options to purchase 6,000 to an independent consultant,
Joseph Nnorom,
at an exercise price of $.62 per share until March 24, 2011.
Also on March 24,
2006, in accordance with the terms of the Company’s 1999 Equity Incentive Plan,
the Company granted to additional employees of the Company options
to purchase
156,500 shares of the Company’s common stock. The
exercise price for these options is equal to $.62. 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 vesting date. All options with the
exception of two
that vest on January 1, 2007 immediately vested on March 24,
2006. The Company
relied on Section 4(2) of the Securities Act of 1933 and Rule
506 promulgated
thereunder as the basis for its exemption from registration of
this issuance.
Executive officers of the Company are considered to be “accredited investors”
when purchasing securities issued by the Company.
On
March
30, 2006, the Company issued to Crestview Capital Master, LLC
(“Crestview”) 20
shares (face amount $1,000,000) of the Company’s series B preferred stock
together with warrants to purchase a total of 1,557,377 shares
of Common Stock
at an exercise price of $0.61 per share for a period of five
years. The Company
agreed to issue, and Crestview agreed to purchase for $1,000,000,
the securities
described above pursuant to the terms of a Securities Purchase
Agreement dated
January 26, 2005 (the “Agreement”) by and among the Company, Crestview, and
various purchasers. This transaction represents the second closing
under the
Agreement, and was triggered upon the Company’s achieving, as of the fourth
fiscal quarter of 2005, certain financial milestones. The
proceeds from the sale of the securities at the second closing
will be 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. Midtown
Partners &
Co., LLC acted as the placement agent for this offering. As compensation
for
services rendered to the Company by Midtown for the second closing,
the Company
agreed to issued to Midtown two shares (face amount $100,000)
of its Series B
Preferred and warrants to purchase a total of 155,738 shares
of its Common Stock
at an exercise price of $.061 per share for a period of five
years. The Company
relied on Section 4(2) of the Securities Act of 1933 and Rule
506 promulgated
thereunder as the basis for its exemption from registration of
this issuance. It
is the Company’s understanding that each of Crestview and Midtown is an
accredited investor as defined under Rule 501 promulgated under
the Securities
Act of 1933. The Company did not engage in any public advertising
or general
solicitation in connection with the issuances of these securities.
On
April
15, 2006, the Company issued an option to acquire 36,000 shares
of common stock
to one of the Company’s non-employee directors: Alan Carus. The exercise price
of the option is $.75 per share, and the option vests in three
equal annual
installments beginning on April 15, 2006. Each option expires
on April 15, 2011.
The Company relied on Section 4(2) of the Securities Act of 1933
as the basis
for its exemption from registration of this issuance.
On
April
17, 2006, the Compensation Committee of the Company approved
the cancellation of
each employee stock option award issued under the 1999 Equity
Incentive Plan
where the exercise price was greater than $0.75 per share of
the Company’s
common stock, and the issuance of a new stock option award under
the 1999 Equity
Incentive Plan, for the same number of shares of the Company’s common stock,
with an exercise price of $0.75 per share of the Company’s common stock for each
cancelled stock option award. The market price of the common
stock of the
Company on April 17, 2006 was $0.72 per share. In total, stock
option awards to
acquire 795,000 shares of Company common stock were cancelled,
and stock option
awards to acquire 795,000 shares of Company common stock were
issued. Other than
the change in the exercise price, all of the terms and conditions
in each newly
issued stock option award are identical to the cancelled stock
option award it
replaces, with the following exceptions: (i) Lawrence A. Siebert’s stock option
award for 50,000 shares of the Company’s common stock, exercisable on May 28,
2006 and terminating on May 28, 2011 was replaced with a stock
option award for
50,000 shares of the Company’s common stock, exercisable on January 1, 2007 and
terminating on May 28, 2011; (ii) Avi Pelossof’s stock option awards for 72,500
shares of the Company’s common stock, exercisable on May 28, 2005 and on May 28,
2006 and both terminating on May 28, 2011 was replaced with a
stock option award
for 72,500 shares of the Company’s common stock, exercisable on January 1, 2007
and terminating on May 28, 2011. The Company relied on Section
4(2) of the
Securities Act of 1933 and Rule 506 promulgated thereunder as
the basis for its
exemption from registration of this issuance. Executive officers
of the Company
are considered to be “accredited investors” when purchasing securities issued by
the Company. The following table lists the named executive officers
of the
Company, the number of shares of Company common stock each executive
officer may
acquire under the new stock option awards, and the exercise price
of each stock
option award cancelled.
Name
of Executive Officer
|
|
Number
of Shares of Common Stock
|
|
Exercise
Price of Stock Option Cancelled
|
|
Lawrence
Siebert
|
|
|
10,000
|
|
|
1.000
|
|
Lawrence
Siebert
|
|
|
50,000
|
|
|
1.200
|
|
Lawrence
Siebert
|
|
|
50,000
|
|
|
1.500
|
|
Lawrence
Siebert
|
|
|
50,000
|
|
|
3.000
|
|
Lawrence
Siebert
|
|
|
10,000
|
|
|
4.000
|
|
Avi
Pelossof
|
|
|
25,000
|
|
|
0.800
|
|
Avi
Pelossof
|
|
|
25,000
|
|
|
0.800
|
|
Avi
Pelossof
|
|
|
50,000
|
|
|
0.900
|
|
Avi
Pelossof
|
|
|
10,000
|
|
|
1.000
|
|
Avi
Pelossof
|
|
|
50,000
|
|
|
1.350
|
|
Avi
Pelossof
|
|
|
40,000
|
|
|
3.000
|
|
Avi
Pelossof
|
|
|
10,000
|
|
|
4.000
|
|
Javan
Esfandiari
|
|
|
25,000
|
|
|
0.800
|
|
Javan
Esfandiari
|
|
|
25,000
|
|
|
0.800
|
|
Javan
Esfandiari
|
|
|
25,000
|
|
|
0.900
|
|
Javan
Esfandiari
|
|
|
5,000
|
|
|
1.000
|
|
Javan
Esfandiari
|
|
|
25,000
|
|
|
1.200
|
|
Javan
Esfandiari
|
|
|
25,000
|
|
|
1.500
|
|
Javan
Esfandiari
|
|
|
30,000
|
|
|
3.000
|
|
Javan
Esfandiari
|
|
|
5,000
|
|
|
4.000
|
|
Richard
Bruce
|
|
|
5,000
|
|
|
1.000
|
|
Richard
Bruce
|
|
|
20,000
|
|
|
2.350
|
|
Richard
Bruce
|
|
|
10,000
|
|
|
3.000
|
|
Richard
Bruce
|
|
|
5,000
|
|
|
4.000
|
|
Richard
Bruce
|
|
|
12,500
|
|
|
0.800
|
|
Richard
Bruce
|
|
|
12,500
|
|
|
0.800
|
|
Richard
Larkin
|
|
|
25,000
|
|
|
0.800
|
|
Richard
Larkin
|
|
|
25,000
|
|
|
0.800
|
|
On
May
10, 2006, Bio Business Science and Development, LTDA, exercised
warrants to
purchase 29,858 shares of common stock. The exercise price was
$0.88 per share
and the Company received $26,275 in cash for this exercise. 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 investor in the issuance
was an
accredited investor of the Company.
On
May
15, 2006, as payment of dividends on the series A preferred stock,
the Company
issued 315,364 shares of common stock to holders of the 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
June
14, 2006, as payment of dividends on the series A preferred stock
and the series
B preferred stock, the Company issued 83,757 shares of common
stock to the
holders of the series A preferred stock, and 89,379 shares of
common stock to
the holders of the series B 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.
In
connection with its private placement of up to $1,800,000 of
secured debentures,
of which $1,300,000 was then borrowed, on June 29, 2005, the
Company issued
520,000 warrants to holders of the secured debentures. These
warrants have an
exercise price of $0.75 per share, with a term of exercise of
five years. 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
was an accredited investor of the Company.
On
July
5, 2006, as payment of dividends on the series B preferred stock,
the Company
issued 322,577 shares of common stock to holders of the series
B 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
July
10, 2006, Bio Business Science and Development, LTDA, exercised
warrants to
purchase 29,838 shares of common stock. The exercise price was
$0.75 per share
and the Company received $22,378 in cash for this exercise. 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 investor in the issuance
was an
accredited investor of the Company.
On
July
18, 2006, the Company issued 15,000 shares of common stock to
one of the
Company’s non-employee directors: Alan Carus. 5,000 of these shares vest
immediately, 5000 vest on July 1, 2007, and 5,000 vest on July
1, 2008. 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 investor
in the issuance
was an accredited investors of the Company.
On
August
18, 2006, due to a calculation error related to the payment of
dividends on the
series B preferred stock on July 5, 2006, the Company issued
4,484 shares of
common stock to holders of the series B 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
September 29, 2006, the Company sold 80 shares of its 7% series
C convertible
preferred stock, together with warrants to purchase 1,250,000
shares of common
stock, exercisable at $1.00 per share. This issuance was made
in connection with
the Company’s private placement for $8,150,000, consisting of 165 shares
of 7%
series C convertible preferred stock, together with warrants
to purchase
2,578,125 shares of its common stock. For each $0.80 of consideration
received,
an investor received (a) $0.80 of face amount of series C stock,
which shall pay
cumulative dividends in cash or shares at the rate of 7% per
annum payable
semiannually beginning in the year 2007, and which is convertible
into one share
of the common stock, and (b) a five-year warrant to acquire shares
of the
Company’s common stock, equal to 25% of the investor’s subscription amount
divided by $0.85, with an exercise price of $1.00 share. Each
full share of the
Series C Stock was purchased for $50,000, with fractional shares
of series C
preferred stock being purchased by investments of less than $50,000.
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
October 5, 2006, the Company sold 85 shares of its 7% series
C convertible
preferred stock, together with warrants to purchase 1,328,125
shares of common
stock, exercisable at $1.00 per share, pursuant to the series
C convertible
preferred stock private placement. 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
October 5, 2006, in consideration for placement agent services
provided in
connection with the series C convertible preferred stock private
placement, the
Company issued Midtown Partners & Co., LLC, warrants to purchase 62,500
shares of its common stock. The warrants issued to Midtown are
exercisable for a
period of five years from their issuance and have an exercise
price of $1.00 per
share. 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.
EXHIBITS
2.1(1) Agreement
and Plan of Merger dated as March 3, 2004 (the “Merger Agreement”), by and among
the Registrant, New Trading Solutions, Inc. (“Merger Sub”) and Chembio
Diagnostic Systems Inc.
2.2(1) Amendment
No. 1 to the Merger Agreement dated as May 1, 2004, by and
among the Registrant,
Merger Sub and Chembio Diagnostic Systems Inc.
3.1(7) Articles
of Incorporation, as amended.
3.2(2) Bylaws.
3.3(1) Amendment
No. 1 to Bylaws dated May 3, 2004.
4.2(1) Certificate
of Designation of the Relative Rights and Preferences of
the Series A
Convertible Preferred Stock of the Registrant.
4.3(1) Registration
Rights Agreement, dated as of May 5, 2004, by and among the
Registrant and the
Purchasers listed therein.
4.4(1) Lock-Up
Agreement, dated as of May 5, 2004, by and among the Registrant
and the
shareholders of the Registrant listed therein.
4.5(1) Form
of
Common Stock Warrant issued pursuant to the Stock and Warrant
Purchase
Agreement.
4.6(1) Form
of
$.90 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated
as of May 5, 2004 between the Registrant and Mark L. Baum.
4.7(1) Form
of
$.60 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated
as of May 5, 2004 between the Registrant and Mark L. Baum.
4.8(4) Form
of
Warrant issued to Placement Agents pursuant to the Series A Convertible
Stock Private Placement
4.9(6) Certificate
of Designation of Preferences, Rights, and Limitations of
Series B 9%
Convertible Preferred Stock of the Registrant.
4.10(6) Form
of
Common Stock Warrant issued to Midtown Partners & Co., LLC
4.11(6) Form
of
Common Stock Warrant issued pursuant to the Securities Purchase
Agreement.
4.12(6) Registration
Rights Agreement, dated as of January 26, 2005, by and among
the Registrant and
the purchasers listed therein.
4.13(10) Amended
and Restated Certificate of Designation of the Relative Rights
and Preferences
of the Series A Convertible Preferred Stock of Chembio Diagnostics,
Inc.
4.14(10) Amended
and Restated Certificate of Designation of Preferences, Rights
and Limitations
of Series B 9% Convertible Preferred Stock of Chembio Diagnostics,
Inc.
4.15(12)
Form
of
Warrant, dated June 29, 2006, issued pursuant to Company
and purchasers of the
Company’s Secured Debentures
4.16(12) Registration
Rights Agreement, dated June 29, 2006.
4.17(13) Certificate
of Designation of Preferences, Rights and Limitations of
Series C 7% Convertible
Preferred Stock of the Registrant.
4.18(13)
Amended
Certificate of Designation of Preferences, Rights and Limitations
of Series C 7%
Convertible Preferred Stock of the Registrant
4.19(13) Form
of
Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated
September 29, 2006 and October 5, 2006.
4.20(13) Registration
Rights Agreement, dated as of September 29, 2006, by and
among the Registrant
and the Purchasers listed therein.
4.21(13) Registration
Rights Agreement, dated as of October 5, 2006, by and among
the Registrant and
the Purchasers listed therein.
5.1* Opinion
and Consent of Patton Boggs LLP.
10.2(3) Employment
Agreement between the Registrant and Lawrence A. Siebert
dated as of May 5,
2004.
10.3(3) Employment
Agreement between the Registrant and with Avi Pelossof dated
as of May 5,
2004.
10.4(3) Employment
Agreement between the Registrant and with Javan Esfandiari
dated as of May 5,
2004.
10.5(1) Series A
Convertible Preferred Stock and Warrant Purchase Agreement
(the “Stock and
Warrant Purchase Agreement”), dated as of May 5, 2004, by and among the
Registrant and the purchasers listed therein.
10.6(3) License
and Supply Agreement dated as of August 30, 2002 by and between
Chembio
Diagnostic Systems Inc. and Adaltis Inc.
10.8(4) Contract
for Transfer of Technology and Materials with Bio-Manguinhos.
10.9(5) Agreement
with Abbott Laboratories.
10.10(6) Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of January
26, 2005, by and among the Registrant and the purchasers
listed
therein.
10.11(8) Amendment
No. 1 to Securities Purchase Agreement, dated as of January
28, 2005, by and
among the Registrant and the purchasers listed therein.
10.12(8) Equity
Exchange Agreement, dated as of January 28, 2005, by and
between the Registrant
and Kurzman Partners, LP.
10.13(7) 1999
Equity Option Plan.
10.14(13)
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of September
29, 2006, by and among the Registrant and the Purchasers
listed
therein.
10.15(13)
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of October 5,
2006, by and among the Registrant and the Purchasers listed
therein.
10.16(13) Letter
of
Amendment to Securities Purchase Agreements dated as of September
29, 2006 by
and among the Registrant and the Purchasers listed therein.
10.17(11) Employment
Agreement between Registrant and Lawrence A. Siebert dated
as of June 16, 2006,
and to be effective May 10, 2006.
10.18(12) Securities
Purchase Agreement, dated June 29, 2006, among the Company
and purchasers of the
Company’s Secured Debentures
10.19(12) Form
of
Secured Debenture, dated June 29, 2006
10.20(12) Security
Agreement, dated June 29, 2006, among the Company, Chembio
Diagnostic Systems,
Inc., and purchasers of the Company’s Secured Debentures
10.21(12) Subsidiary
Guarantee, dated June 29, 2006, made by Chembio Diagnostic
Systems, Inc., in
favor of Purchasers of the Company’s Secured Debentures.
10.22
(13) HIV
Barrel License, Marketing and Distribution Agreement, dated
as of September 29,
2006, by and among the Registrant, Inverness and StatSure.
10.23
(13) HIV
Cassette License, Marketing and Distribution Agreement, dated
as of September
29, 2006, between the Registrant and Inverness.
10.24(13) Non-Exclusive
License, Marketing and Distribution Agreement, dated as of
September 29, 2006,
between theRegistrant and Inverness.
10.25(13) Joint
HIV
Barrel Product Commercialization Agreement, dated as of September
29, 2006,
between the Registrant and StatSure.
10.26(13) Settlement
Agreement, dated September 29, 2006, between the Registrant
and
StatSure.
21(9) List
of
Subsidiaries.
23.1 Consent
of Lazar, Levine & Felix LLP, Independent Accountants.
23.2 Consent
of Patton Boggs LLP (Included in Exhibit 5.1).
|
(1)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on May 14, 2004.
|
|
(2)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on August 23,
1999.
|
|
(3)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on June 7,
2004.
|
(4)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2/A
filed with the Commission on August 4,
2004.
|
|
(5)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2/A
filed with the Commission on October 27,
2004.
|
|
(6)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on January 31, 2005.
|
|
(7)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 31, 2005.
|
(8)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on March 28, 2005.
|
(9)
|
Incorporated
by reference to the Registrant’s registration statement on Form 10KSB
filed with the Commission on March 30,
2006.
|
(10)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on June 14, 2006.
|
(11)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on June 21, 2006.
|
(12)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on July 3, 2006.
|
(13)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on October 5, 2006.
|
* Previously
filed.
UNDERTAKINGS
The
undersigned registrant hereby undertakes:
2. |
To
file, during any period in which offers or sales are
being made, a
post-effective amendment to this registration statement
to:
|
(a) |
Include
any prospectus required by section 10(a)(3) of the
Act;
|
(b) |
Reflect
in the prospectus any facts or events which, individually
or together,
represent a fundamental change in the information in
the registration
statement;
|
(c) |
Include
any additional or changed material information on the
plan of
distribution.
|
3. |
For
determining liability under the Act, treat each post-effective
amendment
as a new registration statement relating to the securities
offered
therein, and the offering of such securities at that
time shall be deemed
to be the initial bona fide offering
thereof.
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4. |
File
a post-effective amendment to remove from registration
any of the
securities that remain unsold at the end of
offering.
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5. |
Insofar
as indemnification for liabilities arising under the
Act may be permitted
to directors, officers and controlling persons of the
registrant pursuant
to the foregoing provisions, or otherwise, the registrant
has been advised
that in the opinion of the Securities and Exchange Commission
such
indemnification is against public policy as expressed
in the Act and is,
therefore, unenforceable.
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6. |
In
the event that a claim for indemnification against such
liabilities (other
than the payment by the registrant of expenses incurred
or paid by a
director, officer or controlling person of the registrant
in the
successful defense of any action, suit or proceeding)
is asserted by such
director, officer or controlling person in connection
with the securities
being registered, the registrant will, unless in the
opinion of its
counsel the matter has been settled by controlling precedent,
submit to a
court of appropriate jurisdiction the question whether
such
indemnification by it is against public policy as expressed
in the Act and
will be governed by the final adjudication of such
issue.
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SIGNATURES
In
accordance with the requirements of the Securities Act of 1933,
as amended, the
registrant certifies that it has reasonable grounds to believe
that it meets all
of the requirements for filing on Form SB-2 and authorized this
Registration
Statement to be signed on its behalf by the undersigned, in the
City of Medford,
State of New York, on October 27, 2006
Chembio
Diagnostics, Inc.,
Nevada
corporation
By:
/s/
Lawrence A. Siebert
Lawrence
A. Siebert
Its: President,
Chief Executive Officer
and
Chairman of the Board
In
accordance with the requirements of the Securities Act of 1933,
this Post
Effective Amendment No. 1 to the Registration Statement on Form
SB-2 has been
signed by the following persons in the capacities and on the
dates
indicated.
By: /s/
Lawrence A. Siebert
Lawrence A.
Siebert
President,
Chief Executive Officer
and
Chairman of the Board
(Principal
Executive Officer)
|
October
27,
2006
|
By: /s/
Richard J. Larkin
Richard J.
Larkin
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
October
27,
2006
|
By:
/s/ Alan Carus
Alan
Carus
Director
|
October
27,
2006
|
By:
/s/ Dr. Gary Meller
Dr.
Gary Meller
Director
|
October
27,
2006
|
By:
Gerald A.
Eppner
Director
|
October
27,
2006
|