form424b3.htm
Filed
Pursuant to Rule 424(b)(3)
Registration
Statement on Form S-1 No. 333-125942
PROSPECTUS
CHEMBIO
DIAGNOSTICS, INC.
18,610,710
SHARES OF COMMON STOCK
This
Prospectus relates to 18,610,710 shares of our common stock which may be offered
for sale from time to time by the Selling Stockholders identified in this
Prospectus, consisting of up to an aggregate of 433,090 shares of our common
stock now owned by them, up to an aggregate of 13,098,674 shares of common
stock
issuable pursuant to the exercise of warrants and options, and additional shares
of common stock which Selling Stockholders may receive at a later date pursuant
to the anti-dilution provisions of certain warrants. We anticipate that the
Selling Stockholders will offer the Shares for sale at prevailing market prices
on the OTC Bulletin Board on the date of such sale. We will not receive any
proceeds from these sales. We are paying the expenses incurred in registering
the Shares, but all selling and other expenses incurred by each of the Selling
Stockholders will be borne by each Selling Stockholder.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “CEMI.” On
March 27, 2008 the closing bid and ask prices for one share of our common stock
were $0.14 and $0.16, 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.
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These
securities are speculative and involve a high degree of risk. You
should consider carefully the “Risk Factors” beginning on Page 2 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 April 2, 2008
TABLE
OF CONTENTS
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Page
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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2
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USE
OF PROCEEDS
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8
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DETERMINATION
OF OFFERING PRICE
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8
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DILUTION
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8
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SELLING
SECURITY HOLDERS
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8
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PLAN
OF DISTRIBUTION
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11
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LEGAL
PROCEEDINGS
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12
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
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12
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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14
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DESCRIPTION
OF SECURITIES
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16
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INTEREST
OF NAMED EXPERTS AND COUNSEL
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16
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DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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17
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ORGANIZATION
WITHIN LAST FIVE YEARS
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17
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DESCRIPTION
OF BUSINESS
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20
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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33
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DESCRIPTION
OF PROPERTY
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43
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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43
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LEGAL
MATTERS
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43
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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44
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EXECUTIVE
COMPENSATION
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45
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FINANCIAL
STATEMENTS
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48
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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48
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ADDITIONAL
INFORMATION
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48
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PROSPECTUS
SUMMARY
The
following summary is qualified in its entirety by the more detailed information
and the financial statements and notes thereto appearing elsewhere in, or
incorporated by reference into, this Prospectus. Consequently, this
summary does not contain all of the information that you should consider before
investing in our Common Stock. You should carefully read the entire
Prospectus, including the “Risk Factors” section, and the documents and
information incorporated by reference into this Prospectus before making an
investment decision.
This
Prospectus relates to 18,610,710 shares of our common stock which may be offered
for sale from time to time by the Selling Stockholders identified in this
Prospectus, consisting of up to an aggregate of 433,090 shares of our
common stock now owned by them, up to an aggregate of 13,098,674 shares of
common stock issuable pursuant to the exercise of warrants and options,
and additional
shares of common stock which Selling Stockholders may receive at a
later date pursuant to the anti-dilution provisions of certain
warrants. We anticipate that the Selling Stockholders will offer the
Shares for sale at prevailing market prices on the OTC Bulletin Board on the
date of such sale. We will not receive any proceeds from these
sales. We are paying the expenses incurred in registering the Shares,
but all selling and other expenses incurred by each of the Selling Stockholders
will be borne by each Selling Stockholder.
Our
Corporate Information
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 that detect a number of infectious
diseases. 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 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.
Our
Business
We
are a
developer, manufacturer and marketer of rapid diagnostic tests that detect
infectious diseases. Our main products presently commercially
available are three rapid tests for the detection of HIV antibodies in whole
blood, serum and plasma samples, two of which were approved by the FDA last
year. These products employ single path lateral flow technology which
we have licensed from Inverness Medical Innovations, Inc. (“Inverness”), who is
also our exclusive marketing partner for those two products in the United States
under its Clearview® brand. Inverness launched its marketing of these
products in the United States in February, 2007. Chembio’s two HIV
STAT-PAK® rapid HIV tests are marketed outside the United States through
different partners and channels under a license from Inverness. We
also have a rapid test for Chagas disease (a parasitic disease endemic in Latin
America) as well as a line of rapid tests for tuberculosis, including tests
for
tuberculosis in animals for which USDA approval for certain tests has been
received.
On
March 13, 2007, we were issued United States patent # 7,189,522 for
our Dual Path Platform (“DPP™”) rapid test system. We believe that as
a result of the patent protection we now have with DPP™, we have a significant
opportunity to develop and license many new rapid tests in a number of fields
including but not limited to infectious diseases. We have already
completed initial development on some products in this new
platform. We believe the DPP™ provides significant advantages over
standard single path lateral flow assays, and we are developing most of our
new
products using this platform.
Our
products are sold to medical laboratories and hospitals, governmental and public
health entities, non-governmental organizations, medical professionals and
retail establishments. Our products are sold either under our
STAT-PAK® or SURE CHECK® registered trademarks and/or the private labels of our
marketing partners, such as the Inverness Clearview® label.
We
have a
history of losses, and we continue to incur operating and net
losses. 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
main
products are as follows:
·
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HIV
Rapid Tests: HIV 1/2 STAT-PAK® Cassette, HIV 1/2 SURE CHECK® and HIV 1/2
STAT-PAK® Dipstick;
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·
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Chagas
Rapid Test: Chagas STAT-PAK; and
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·
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Tuberculosis
(TB): Prima TB STAT-PAK and Veterinary
products.
|
We
also
are in the process of developing rapid tests employing our patented DPP™
technology including, but not limited to, an oral fluid rapid HIV
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.
Summary
Financial Data
The
following table presents summary historical financial information for the fiscal
years ended December 31, 2007 and 2006. The financial statements
are set forth beginning on page F-1 of this prospectus, and you should read
this
information for a more complete understanding of the presentation of this
information.
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Year
Ended December 31, 2007
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Year
Ended December 31, 2006
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Revenue
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$ |
9,230,948
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|
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$ |
6,502,480
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Operating
Expenses
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6,738,467
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6,596,761
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Net
Loss
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(2,626,892 |
) |
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(4,995,020 |
) |
Current
Assets
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5,471,307
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6,953,668
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Total
Assets
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6,584,997
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7,906,577
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Current
Liabilities
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2,242,583
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1,840,435
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Total
Liabilities
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2,322,171
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2,297,193
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Convertible
Redeemable Preferred
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n/a
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6,549,191
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Stockholders’
Equity (Deficit)
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4,262,826
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(939,807 |
) |
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. While
we have recently received ISO 13.485 certification, there are no assurances
that
we will be able to maintain this certification, in addition we are in the
process of implementing quality and documentary procedures in order to obtain
CE
registration, and we are not aware of any material reason why such approval
will
not be granted. However, if for any reason a CE 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 our 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 single path 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.
On
March 13, 2007, our Dual Path Platform Immunassay Device patent application
issued as United States patent no. 7,189,522. Additional
protection for this intellectually property is pending
worldwide. 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. We believe 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. However there can be no
assurance that our patents or our 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, in addition to the market success of our
products, 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
our revenues and gross margins increased significantly in recent periods, we
sustained significant operating losses in 2007, 2006 and 2005. At
December 31, 2007, we had a stockholders’ equity of $4.2 million and a working
capital surplus of $3.2 million. Our liquidity and cash requirements
will depend on several factors. These factors include: (1)
the level of revenue growth; (2) the extent to which, if any, that revenue
growth improves operating cash flows; (3) our investments in research and
development, facilities, marketing, regulatory approvals and other investments
we may determine to make; and (4) our investment in capital equipment and the
extent to which this investment improves cash flow through operating
efficiencies. If our resources are not sufficient to fund our needs
through 2008, there are no assurances that we will be successful in raising
sufficient capital.
On
December 19, 2007, we received $1.1 million pursuant to the exercise of certain
warrants. In spite of this capital raise, there is no guarantee that
the Company will be successful in raising additional capital if
needed.
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;
|
·
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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 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.
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, and
our
Senior Vice President of Research and Development, Javan
Esfandiari. Due to the specific knowledge and experience of these
executives regarding the industry, technology and market, the loss of the
services of either 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 contract with Mr. Esfandiari has a term of three
years ending March 2010. We have obtained a key man insurance
policy for Mr. Esfandiari.
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 interests 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, 2007, we have incurred net losses. As of
December 31, 2007, we have an accumulated deficit of $35
million. We incurred net losses of $2.6 million and $5 million in
2007 and 2006, 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
Until
recently, our Common Stock was classified as penny stock, and it continues
to be
extremely illiquid, so investors may not be able to sell as much stock as they
want at prevailing market prices.
Until
recently, our Common Stock was 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 securities that are classified as penny stocks. 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 penny stock
issuers to regulations that 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.
At
the
present time, transactions in our Common Stock are not subject to the “penny
stock” rules because our average revenue for 2005, 2006 and 2007 exceeded $6
million per year. However, there can be no assurance that
transactions in our Common Stock will not be subject to the “penny stock” rules
in the future.
The
average daily trading volume of our Common Stock on the over-the-counter market
was less than 100,000 shares per day over the three months ended April 2,
2008. 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.
Sales
of a substantial number of shares of our Common Stock into the public market
by
the selling stockholders, as well as the exercise of our outstanding warrants
on
a cash or a cashless basis, 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 that this post-effective amendment to the registration statement is
declared effective by the SEC, a significant number of shares of our Common
Stock will be eligible to be immediately sold in the market. In
addition, pursuant to the December 2007 plan (the “Plan”) to simplify our
capital structure, certain holders of warrants and options (collectively, the
“Non-Employee Warrants”) not including options or warrants issued to employees
or directors in their capacity as such may exercise their warrants on a cashless
basis. Certain Non-Employee Warrant holders are now permitted to
exercise 9,323,855 warrants on a cashless basis at an exercise price of $0.45
per share at any time on or before June 30, 2008.
The
Plan’s cashless exercise provision permits Non-Employee Warrant holders to use
any excess of the market price of the Company’s Common Stock over the exercise
price of a Non-Employee Warrant as part of the exercise price for another
warrant by submitting both warrants at the time of exercise. Pursuant
to the Plan, certain Non-Employee Warrant holders are permitted on or before
June 30, 2008 to use the greater of (i) $0.53 or (ii) the VWAP for the
ten-trading day period that ends on the second trading day before the exercise
date as the value of the Common Stock, so that each Non-Employee Warrant used
as
part of the exercise price payment will represent the difference between the
greater of these two values and the applicable exercise price.
As
of
March 27, 2008, our Common Stock was trading at $0.16 cents per
share. If a large number of Non-Employee Warrant holders exercise
their warrants on a cashless basis on or before June 30, 2008, our stock price
could drop. Even a perception by the market that selling stockholders
may sell in large amounts after the post-effective amendment to the registration
statement is declared effective could place significant downward pressure on
our
stock price.
You
will experience substantial dilution upon the exercise of options and warrants
underlying common stock that we are currently
registering.
There
are
13,098,674 shares of common stock underlying warrants and options registered
in
this registration statement, and 4,124,940 shares of common stock underlying
warrants registered in another registration statement. These
securities were issued by the Company in connection with the Company’s
previously completed private placements, and as adjusted in connection with
the
Company’s December 2007 plan to simplify its capital structure. As of
April 2, 2008, we have approximately 22 million warrants and options
outstanding. As a result, the exercise of the outstanding warrants
and options will result in substantial dilution to the holders of our Common
Stock.
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
April 2, 2008, our named executive officers, directors and 5% stockholders
beneficially owned approximately 65% 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.
DETERMINATION
OF OFFERING PRICE
We
are
not selling any common stock in this offering. We anticipate that the
Selling Stockholders will offer the Shares for sale at prevailing market prices
on the OTC Bulletin Board on the date of such sale. We will not
receive any proceeds from these sales.
DILUTION
We
currently file reports with the SEC, and we are not selling any common stock
in
this offering. The selling security holders are the current
stockholders of the Company.
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, 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 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
terms of these agreements, and the specific 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 433,090 shares of our common stock now owned
by
them, up to an aggregate of 13,098,674 shares of our common stock issuable
pursuant to the exercise of warrants and options, and additional
shares of common stock which Selling Stockholders may receive at a
later date pursuant to the anti-dilution provisions of certain
warrants. 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
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 April 2,
2008
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 the Company's total outstanding 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
|
|
Alpha
Capital AG 2,3
|
|
|
1,894,024
|
|
|
|
660,000
|
|
|
|
1,234,024
|
|
|
|
2.02 |
% |
Bassett,
Truman 1
|
|
|
42,526
|
|
|
|
3,866
|
|
|
|
38,660
|
|
|
|
0.06 |
% |
Baum,
Mark L. 2
|
|
|
911,849
|
|
|
|
850,000
|
|
|
|
61,849
|
|
|
|
0.10 |
% |
Bell,
Lon E. 2
|
|
|
378,602
|
|
|
|
151,178
|
|
|
|
227,424
|
|
|
|
0.37 |
% |
BioEquity
Partners, Inc. 1,4
|
|
|
109,375
|
|
|
|
84,375
|
|
|
|
25,000
|
|
|
|
0.04 |
% |
Breitbart,
Ted 1,5
|
|
|
14,208
|
|
|
|
14,208
|
|
|
|
-
|
|
|
|
0.00 |
% |
Chrust,
Steve 1
|
|
|
11,605
|
|
|
|
11,605
|
|
|
|
-
|
|
|
|
0.00 |
% |
Crestview
Capital Master, LLC 7
|
|
|
24,145,310
|
|
|
|
4,672,130
|
|
|
|
19,473,180
|
|
|
|
29.89 |
% |
Daedalus
Consulting, Inc.8
|
|
|
71,926
|
|
|
|
71,926
|
|
|
|
-
|
|
|
|
0.00 |
% |
Diamond
Deecembra 8
|
|
|
287,706
|
|
|
|
287,706
|
|
|
|
-
|
|
|
|
0.00 |
% |
DKR
Soundshore Oasis Holding Fund, Ltd.9
|
|
|
835,499
|
|
|
|
730,499
|
|
|
|
105,000
|
|
|
|
1.17 |
% |
Eckert,
Christopher & Lynn 2,10
|
|
|
229,554
|
|
|
|
100,000
|
|
|
|
129,554
|
|
|
|
0.21 |
% |
Engel,
Sam 1
|
|
|
4,118
|
|
|
|
374
|
|
|
|
3,744
|
|
|
|
0.01 |
% |
Esfandiari,
Javan 1
|
|
|
814,580
|
|
|
|
2,007
|
|
|
|
812,573
|
|
|
|
1.34 |
% |
Famalom,
LLC 8
|
|
|
359,634
|
|
|
|
359,634
|
|
|
|
-
|
|
|
|
0.00 |
% |
Feldman,
Stephen 1
|
|
|
1,868
|
|
|
|
187
|
|
|
|
1,681
|
|
|
|
0.00 |
% |
Fort
Mason Master LP
|
|
|
501,830
|
|
|
|
501,830
|
|
|
|
-
|
|
|
|
0.00 |
% |
Fort
Mason Master LP
|
|
|
32,544
|
|
|
|
32,544
|
|
|
|
-
|
|
|
|
0.00 |
% |
Ginsberg,
Mike 1
|
|
|
2,375
|
|
|
|
216
|
|
|
|
2,159
|
|
|
|
0.00 |
% |
Glass,
Marc 1
|
|
|
1,883
|
|
|
|
1,883
|
|
|
|
-
|
|
|
|
0.00 |
% |
Goldberg,
Jeffrey 1,11
|
|
|
27,875
|
|
|
|
27,875
|
|
|
|
-
|
|
|
|
0.00 |
% |
Greenblatt,
Phil 1
|
|
|
10,347
|
|
|
|
941
|
|
|
|
9,406
|
|
|
|
0.02 |
% |
Gregoretti,
Gordon
|
|
|
59,458
|
|
|
|
59,373
|
|
|
|
85
|
|
|
|
0.00 |
% |
Guzikowski,
Frank J.1
|
|
|
178,114
|
|
|
|
16,192
|
|
|
|
161,922
|
|
|
|
0.27 |
% |
Haendler,
Kurt 1
|
|
|
91,621
|
|
|
|
30,904
|
|
|
|
60,717
|
|
|
|
0.10 |
% |
Haendler,
Renata 1
|
|
|
131,863
|
|
|
|
59,133
|
|
|
|
72,730
|
|
|
|
0.12 |
% |
Haendler,
Tomas 2,12
|
|
|
143,726
|
|
|
|
86,257
|
|
|
|
57,469
|
|
|
|
0.09 |
% |
Haim,
Eduardo 1
|
|
|
7,115
|
|
|
|
647
|
|
|
|
6,468
|
|
|
|
0.01 |
% |
Hamblett,
Michael 13
|
|
|
404,831
|
|
|
|
382,109
|
|
|
|
22,722
|
|
|
|
0.04 |
% |
Hanson,
Andrew Merz 2,14
|
|
|
158,105
|
|
|
|
60,471
|
|
|
|
97,634
|
|
|
|
0.16 |
% |
Ide,
Bruce J.2,15
|
|
|
567,305
|
|
|
|
160,961
|
|
|
|
406,344
|
|
|
|
0.67 |
% |
Jacob,
Sam 1
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
0.00 |
% |
Jacoby,
Richard A.2
|
|
|
473,955
|
|
|
|
213,811
|
|
|
|
260,144
|
|
|
|
0.43 |
% |
JP
Turner 1,5
|
|
|
41,250
|
|
|
|
41,250
|
|
|
|
-
|
|
|
|
0.00 |
% |
Keskinen,
Karen 1
|
|
|
4,579
|
|
|
|
144
|
|
|
|
4,435
|
|
|
|
0.01 |
% |
Klaus,
Elaine 1
|
|
|
2,242
|
|
|
|
204
|
|
|
|
2,038
|
|
|
|
0.00 |
% |
Knasin,
Paul and Ellen 2
|
|
|
177,696
|
|
|
|
76,608
|
|
|
|
101,088
|
|
|
|
0.17 |
% |
Koch,
Scott F.1,6
|
|
|
158,400
|
|
|
|
158,400
|
|
|
|
-
|
|
|
|
0.00 |
% |
Kreger,
Richard 16
|
|
|
1,090,404
|
|
|
|
540,315
|
|
|
|
550,089
|
|
|
|
0.90 |
% |
Lankenau,
Robert 1
|
|
|
20,045
|
|
|
|
6,675
|
|
|
|
13,370
|
|
|
|
0.02 |
% |
Lanouette,
Kevin P.
|
|
|
54,768
|
|
|
|
23,749
|
|
|
|
31,019
|
|
|
|
0.05 |
% |
Larkin,
Richard 2
|
|
|
290,967
|
|
|
|
30,486
|
|
|
|
260,481
|
|
|
|
0.43 |
% |
Lawrence,
Colin 1
|
|
|
7,115
|
|
|
|
647
|
|
|
|
6,468
|
|
|
|
0.01 |
% |
Ledowitz,
Bill 1
|
|
|
6,471
|
|
|
|
647
|
|
|
|
5,824
|
|
|
|
0.01 |
% |
Little
Gem Life Sciences Fund LLC 17
|
|
|
111,025
|
|
|
|
109,373
|
|
|
|
1,652
|
|
|
|
0.00 |
% |
Mayer-Wolf,
Mike 1
|
|
|
18,379
|
|
|
|
1,671
|
|
|
|
16,708
|
|
|
|
0.03 |
% |
McCarthy,
Michael 1
|
|
|
4,145
|
|
|
|
377
|
|
|
|
3,768
|
|
|
|
0.01 |
% |
Metasequoia,
LLC 2
|
|
|
50,082
|
|
|
|
20,000
|
|
|
|
30,082
|
|
|
|
0.05 |
% |
Midtown
Partners & Co., LLC 18
|
|
|
261,122
|
|
|
|
56,824
|
|
|
|
204,298
|
|
|
|
0.34 |
% |
Millennium
3 Opportunity Fund, LLC 19
|
|
|
4,006,610
|
|
|
|
1,557,376
|
|
|
|
2,449,234
|
|
|
|
3.94 |
% |
Moran,
Sean
|
|
|
37,000
|
|
|
|
35,624
|
|
|
|
1,376
|
|
|
|
0.00 |
% |
Nnorom,
Joseph
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
0.00 |
% |
Pelossof,
Avi 2
|
|
|
201,238
|
|
|
|
34,650
|
|
|
|
166,588
|
|
|
|
0.28 |
% |
Pelossof,
Elior 2
|
|
|
113,577
|
|
|
|
45,354
|
|
|
|
68,233
|
|
|
|
0.11 |
% |
Phillips,
Chris 8
|
|
|
79,173
|
|
|
|
34,192
|
|
|
|
44,981
|
|
|
|
0.07 |
% |
Poole,
Colin 2
|
|
|
78,135
|
|
|
|
75,589
|
|
|
|
2,546
|
|
|
|
0.00 |
% |
Poole,
John G.1
|
|
|
68,365
|
|
|
|
6,215
|
|
|
|
62,150
|
|
|
|
0.10 |
% |
Raker,
Gilbert 2
|
|
|
45,354
|
|
|
|
45,354
|
|
|
|
-
|
|
|
|
0.00 |
% |
Rohan,
J. Rory 18
|
|
|
360,212
|
|
|
|
142,061
|
|
|
|
218,151
|
|
|
|
0.36 |
% |
Rojas,
Zilma 1
|
|
|
22,000
|
|
|
|
500
|
|
|
|
21,500
|
|
|
|
0.04 |
% |
Sandler,
J & S 1
|
|
|
8,287
|
|
|
|
753
|
|
|
|
7,534
|
|
|
|
0.01 |
% |
Schwartz,
Eric 1
|
|
|
5,496
|
|
|
|
500
|
|
|
|
4,996
|
|
|
|
0.01 |
% |
Seren,
Stanley 1
|
|
|
753
|
|
|
|
753
|
|
|
|
-
|
|
|
|
0.00 |
% |
Shapiro,
Alex 1
|
|
|
10,219
|
|
|
|
10,219
|
|
|
|
-
|
|
|
|
0.00 |
% |
Siderowf,
Richard 2,20
|
|
|
53,221
|
|
|
|
28,377
|
|
|
|
24,844
|
|
|
|
0.04 |
% |
Sive
Paget & Reisel 1
|
|
|
2,055
|
|
|
|
187
|
|
|
|
1,868
|
|
|
|
0.00 |
% |
Smith,
Robin 1,21
|
|
|
34,000
|
|
|
|
29,455
|
|
|
|
4,545
|
|
|
|
0.01 |
% |
Spatacco,
Jr., Anthony J. 22
|
|
|
73,836
|
|
|
|
72,304
|
|
|
|
1,532
|
|
|
|
0.00 |
% |
Spilka,
R. Edward 2,23
|
|
|
369,277
|
|
|
|
100,000
|
|
|
|
269,277
|
|
|
|
0.44 |
% |
Starboard
Capital Markets, LLC 24
|
|
|
17,588
|
|
|
|
12,931
|
|
|
|
4,657
|
|
|
|
0.01 |
% |
Starobin
Partners 1,5
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
0.00 |
% |
Talesnick,
Alan L. 2,25
|
|
|
295,349
|
|
|
|
94,930
|
|
|
|
200,419
|
|
|
|
0.33 |
% |
Total
M.I.S., Inc. 2
|
|
|
694,222
|
|
|
|
300,000
|
|
|
|
394,222
|
|
|
|
0.65 |
% |
Tyson,
John 2,26
|
|
|
16,250
|
|
|
|
16,250
|
|
|
|
-
|
|
|
|
0.00 |
% |
Weiss,
Gunther 1
|
|
|
28,334
|
|
|
|
2,576
|
|
|
|
25,758
|
|
|
|
0.04 |
% |
Westbury
Diagnostics, Inc. 2
|
|
|
186,832
|
|
|
|
77,403
|
|
|
|
109,429
|
|
|
|
0.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
|
57,069,452
|
|
|
|
13,531,764
|
|
|
|
43,537,688
|
|
|
|
|
|
(A)
|
Includes
shares of Common Stock 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
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.
|
[2]
|
The
sale of all of these shares, except for less than 235,000 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.
|
[7]
|
Affiliated
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 Morgan
Stanley.
|
[11]
|
Affiliated
with Wellfleet Partners and Starobin Partners, investment banking
services.
|
[12]
|
Former
President of CDS and Director.
|
[13]
|
Employee
of Starboard Capital Markets, LLC, investment banking
services.
|
[14]
|
Assisted
the Company in fundraising.
|
[15]
|
Former
Director of CDS.
|
[16]
|
Employee
of Midtown Partners & Co., LLC, investment banking
services.
|
[17]
|
Except
for 81,582 shares, the sale of these shares 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.
|
[18]
|
NASD
member, assisted the Company in
fundraising.
|
[19]
|
Fred
Fraenkel and Udi Toledano have ultimate control over Millennium 3
Opportunity Fund and the shares held by Millennium 3 Opportunity
Fund.
|
[20]
|
Registered
sales representative with RBC Dain
Rauscher.
|
[21]
|
Provided
marketing consulting services; affiliated with Wellfleet Partners
and
Starobin Partners.
|
[22]
|
Assisted
the Company in fundraising; employee of Starboard Capital Markets
LLC.
|
[23]
|
Stockholder
of Lehman Brothers.
|
[25]
|
Partner
at Patton Boggs LLP, our legal
counsel.
|
[26]
|
Provides
marketing consulting services.
|
PLAN
OF DISTRIBUTION
The
Shares covered by this Prospectus are being registered by us for the account
of
the Selling Stockholders.
The
Shares offered by this Prospectus may be sold from time to time directly by
or
on behalf of the Selling Stockholders in one or more transactions on the OTC
Bulletin Board or on any stock exchange on which the Common Stock may be listed
at the time of sale, in privately negotiated transactions, or through a
combination of these methods. The Selling Stockholders may sell
Shares through one or more agents, brokers or dealers or directly to
purchasers. These brokers or dealers may receive compensation in the
form of commissions, discounts or concessions from the Selling Stockholders
and/or purchasers of the Shares, or both. Compensation as to a
particular broker or dealer may be in excess of customary
commissions. The Selling Stockholders will act independently of us in
making decisions with respect to the timing, manner and size of each sale or
non-sale related transfer. If a Selling Stockholder is an employee,
officer or director of the Company, he or she will be subject to our policies
concerning trading and other transactions in the Company’s
securities.
Each
Selling Stockholder of the Shares and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their Shares
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 the 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. There is no
assurance that the Selling Stockholders will sell all or a portion of the stock
being offered hereby.
In
connection with the sale of Shares, 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 Shares in the course of hedging the
positions they assume. The Selling Stockholders may also sell the
Shares short and deliver these Shares to close out short positions, or loan
or
pledge the Shares to broker-dealers or other financial institutions that in
turn
may sell these Shares. The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial institutions
that require the delivery to the broker-dealer or other financial institution
of
the Shares, which the broker-dealer or other financial institution may resell
pursuant to this Prospectus, or enter into transactions in which a broker-dealer
makes purchases as a principal for resale for its own account or through other
types of transactions.
In
connection with the sales, a Selling Stockholder and any participating broker
or
dealer may be deemed to be “underwriters” within the meaning of the Securities
Act, and any commissions they receive and the proceeds of any sale of Shares
may
be deemed to be underwriting discounts or commissions under the Securities
Act. A Selling Stockholder who is deemed to be an “underwriter”
within the meaning of Section 2(11) of the Securities Act will be subject
to the prospectus delivery requirements of the Securities Act. The
Selling Stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules
and
regulations thereunder, including, without limitation, Regulation
M. Regulation M may limit the timing of purchases and sales of shares
of our Common Stock by the Selling Stockholders and any other
person. Furthermore, Regulation M may restrict, for a period of up to
five business days prior to the commencement of the distribution, the ability
of
any person engaged in a distribution of shares of our Common Stock to engage
in
market-making activities with respect to these shares. All of the
foregoing may affect the marketability of shares of our Common Stock and the
ability of any person or entity to engage in market-making activities with
respect to shares of our Common Stock.
To
the
extent required, the Shares to be sold, the names of the persons selling the
Shares, the respective purchase prices and public offering prices, the names
of
any agent, dealer or underwriter and any applicable commissions or discounts
with respect to a particular offer will be set forth in an accompanying
prospectus supplement or, if appropriate, a post-effective amendment to the
registration statement of which this Prospectus is a part.
We
are
bearing all of the fees and expenses relating to the registration of the
Shares. Any underwriting discounts, commissions or other fees payable
to broker-dealers or agents in connection with any sale of the Shares will
be
borne by the Selling Stockholders. In order to comply with certain
states’ securities laws, if applicable, the Shares may be sold in such
jurisdictions only through registered or licensed brokers or
dealers. In certain states, the Shares may not be sold unless the
Shares have been registered or qualified for sale in such state, or unless
an
exemption from registration or qualification is available and is obtained and
complied with. Sales of the Shares must also be made by the Selling
Stockholders in compliance with all other applicable state securities laws
and
regulations.
The
Selling Stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the Shares against certain
liabilities in connection with the offering of the Shares arising under the
Securities Act.
We
have
notified the Selling Stockholders of the need to deliver a copy of this
Prospectus in connection with any sale of the Shares.
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 that is adverse to our interest.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
Directors
and Executive Officers
Lawrence
A. Siebert (51), President, Chief Executive Officer and
Director. Mr. Siebert was appointed Chief Executive
Officer of Chembio Diagnostics, Inc. and Chairman of our board of directors
upon consummation of the merger of the Company and Chembio Diagnostic Systems,
Inc. in 2004. Mr. Siebert has been Chairman of Chembio Diagnostic
Systems Inc. for approximately 16 years and its President since May
2002. Prior to his involvement with Chembio Diagnostic Systems, Inc.,
in 1992 Mr. Siebert was involved 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 (51), 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.
Javan
Esfandiari (41), Executive VP 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 (53), 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, Inc. (formerly Oganon Teknika
Corp.). 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 (56), VP of Sales & Marketing – Vet TB. 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 (45), 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 to
2005, Director level positions in Quality Assurance, Quality Control, Process
Development and Regulatory Affairs at United Biomedical, Inc. from 1987 to
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.
Cathy
Dudnanski (48), VP of Marketing, Ms. Dudnanski joined Chembio in 2005
as Marketing Director for human diagnostic products including HIV 1/ 2 and
Chagas disease. She was promoted to Vice President in 2007. Ms.
Dudnanski brings over 20 years of domestic and international marketing and
sales
experience in medical devices and diagnostics to the Company. Between 2003
to 2005, Ms. Dudnanski was the Global Marketing Manager for Suction and Oxygen
Care for GE Healthcare. From 2000 to 2003, Ms. Dudnanski was the
Director of Sales & Marketing for ZeptoMetrix Corporation (former Division
of Hemagen Diagnostics, Inc.) where her responsibilities included sales and
marketing of research products to biotechnology firms and academia. From
1992 to 1999, Ms. Dudnanski was the Director of Sales & Marketing for
Hemagen Diagnostics, Inc. where she was responsible for the infectious disease
and autoimmune disease product lines. She received a B.S. in Medical
Technology from Roanoke College and an MBA from Loyola. Ms. Dudnanski
is MT (ASCP) certified and a member of the American Society of
Microbiology.
Robert
L. Aromando, Jr. (52), Executive VP of Commercial
Operations. Mr. Aromando joined the Company in May
2007. Prior to this position, between 2001 and 2007, Mr. Aromando was
Vice President of Marketing for Bracco Diagnostics Inc., a Princeton, New
Jersey-based pharmaceutical company and part of the Bracco
Group. Most of his focus at Bracco was on managing the efforts of a
marketing department, launching new products, business development and life
cycle management. Prior to joining Bracco Mr. Aromando completed a
one-year contract as interim President and Chief Executive Officer for American
Bio Medica Corporation, a publicly-traded diagnostic healthcare
company. Prior to American Bio Medica Corporation, Mr. Aromando was
Director of Global Marketing for Covance, a leading pharmaceutical development
organization headquartered in Princeton, New Jersey where is had responsibility
for managing the strategic direction of the clinical development marketing
department. He also spent eight years at Roche Diagnostic Systems
(member of the Roche Group) as Director of Global Marketing responsible for
the
drugs of abuse business unit. His focus at Roche was allocated to
government affairs as well as providing solutions for substance abuse programs
in the workplace, criminal justice, drug treatment and school
sectors. Mr. Aromando’s career in healthcare also included stints at
American Home Products and Litton Bionetics Laboratory Products.
Alan
Carus, CPA (69), Director, Audit Committee chair. Mr. Carus
was elected to Chembio’s Board of Directors on April 15, 2005, and currently
serves on the Company’s Audit, Compensation, and Nominating and Corporate
Governance Committees, including as Chairman of the Audit
Committee. 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 Shipholding 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 (57), Director. Dr. Meller was elected to our
Board of Directors on March 15, 2005, and currently serves on the Company’s
Audit, Compensation and Nominating and Corporate Governance Committees,
including as Chairman of the Compensation Committee. 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 is our largest
stockholder. Dr. Meller is a graduate of the University of New Mexico
School of Medicine and has an MBA from the
Harvard Business School.
Kathy
Davis (51), Director. Ms. Davis was elected to the Company’s
Board of Directors in May 2007, and currently serves on the Company’s Audit,
Compensation and Nominating and Corporate Governance Committees, including
as
Chairman of the Nominating and Corporate Governance Committee. Ms.
Davis is presently the owner of Davis Design Group LLC, a company that provides
analytical and visual tools for public policy design. Previously she
served as the Chief Executive Officer of Global Access Point, a start up company
with products for data transport, data processing, and data storage network
and
hub facilities. From October 2003 to January 2005 Ms. Davis was
Lieutenant Governor of the State of Indiana, and from January 2000 to October
2003 was Controller of the City of Indianapolis. From 1989 to 2003
Ms. Davis held leadership positions with agencies and programs in the State
of
Indiana including State Budget Director, Secretary of Family & Social
Services Administration, and Deputy Commissioner of
Transportation. From 1982 to 1989 Ms. Davis held increasingly senior
positions with Cummins Engine, where she managed purchasing, product cost,
manufacturing, engineering, and assembly of certain engine product
lines. Ms. Davis also led the startup of and initial investments by a
$50 million Indiana state technology fund, serves on the not-for-profit boards
of Noble of Indiana, Indiana Museum of African American History, University
of
Evansville Institute of Global Enterprise, and Purdue College of Science Dean’s
Leadership Council. She has a Masters of Business Administration from
Harvard Business School and a Bachelor of Science in Mechanical Engineering
from
the Massachusetts Institute of Technology.
James
Merselis(54),
Director. Mr. Merselis was elected to the Company’s Board of Directors in
March 2008. From 2002 to 2007, Mr. Merselis served as the President,
Chief Executive Officer, and Director of Hemosense, Inc. (AMEX: HEM), a company
that develops, manufactures, and sells handheld blood coagulation monitoring
systems. From 1998 to 2002, Mr. Merselis served as President,
Chief Executive Officer, and Director of Micronics, Inc., a Redmond, WA, based
company that develops in vitro diagnostic products for disease diagnosis,
prognosis, and treatment monitoring. From 1976 to 1998, Mr. Merselis
held multiple positions at Boehringer Mannheim, including serving as Managing
Director of the British affiliate of Boehringer Mannheim. Mr.
Merselis holds an Advanced Management Program Certificate from the Harvard
Business School, and a Bachelor of Science degree in Biology (Pre-Med) from
Nebraska Wesleyan University.
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,
and
by each of our directors, each of our “named executive officers”, and all of our
directors and executive officers as a group as of April 2, 2008.
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of Beneficial Owner
|
|
|
Percent
of Class
|
|
Siebert,
Lawrence (1)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
7,465,605
|
|
|
|
11.85 |
% |
Esfandiari,
Javan (2)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
714,580
|
|
|
|
1.17 |
% |
Larkin,
Richard (3)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
290,967
|
|
|
|
0.48 |
% |
Ippolito,
Tom (4)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
65,000
|
|
|
|
0.11 |
% |
Bruce,
Richard (5)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
140,000
|
|
|
|
0.23 |
% |
Carus,
Al (6)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
138,000
|
|
|
|
0.23 |
% |
Meller,
Gary (7)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
223,000
|
|
|
|
0.37 |
% |
Davis,
Katherine L. (8)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
36,000
|
|
|
|
0.06 |
% |
James
D. Merselis (9)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
9,000
|
|
|
|
0.01 |
% |
Officers
and Directors as a group (10)
|
|
|
9,082,227
|
|
|
|
14.14 |
% |
Vicis
Capital Master Fund
126
East 56th Street, Tower 56, Suite 700
New
York, NY 10022
|
|
|
4,608,707
|
|
|
|
7.61 |
% |
Millenium
3 Opportunity Fund, LLC (11)
4
Becker Farm Road
Roseland,
NJ 07068
|
|
|
4,006,610
|
|
|
|
6.45 |
% |
Inverness
Medical Innovations, Inc.
51
Sawyer Road, Suite 200
Waltham,
MA 02453
|
|
|
5,367,840
|
|
|
|
8.87 |
% |
Crestview
Capital Master, LLC (12)
95
Revere Drive, Suite A
Northbrook,
IL 60062
|
|
|
24,145,310
|
|
|
|
36.20 |
% |
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 (60,537,534) of the Company's common stock as
of
April 2, 2008, and 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.
The
term
“named executive officer” refers to our principal executive officer, our two
most highly compensated executive officers other than the principal executive
officer who were serving as executive officers at the end of 2007, and two
additional individuals for whom disclosure would have been provided but for
the
fact that the individuals were not serving as executive officers of the Company
at the end of 2007.
(1)
|
Includes
245,000 shares issuable upon exercise of options exercisable within
60
days and 2,205,731 warrants.
|
(2)
|
Includes
492,500 shares issuable upon exercise of options exercisable within
60
days and 2,007 shares issuable upon exercise of warrants. Does
not include 100,000 shares issuable upon exercise of options that
are not
exercisable within the next 60 days
|
(3)
|
Includes
212,500 shares issuable upon exercise of options exercisable within
60
days and 27,436 shares issuable upon exercise of
warrants.
|
(4)
|
Includes
65,000 shares issuable upon exercise of options exercisable within
60
days.
|
(5)
|
Includes
140,000 shares issuable upon exercise of options exercisable within
60
days.
|
(6)
|
Includes
123,000 shares issuable upon exercise of options exercisable within
60
days. Does not include 144,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
(7)
|
Includes
123,000 shares issuable upon exercise of options exercisable within
60
days. Does not include 144,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
(8)
|
Includes
36,000 shares issuable upon exercise of options exercisable within
60
days. Does not include 144,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
(9)
|
Includes
9,000 shares issuable upon exercise of options exercisable within
60
days.
|
(10)
|
Includes
footnotes (1)-(9)
|
(11)
|
Includes
1,557,376 shares issuable upon exercise of
warrants.
|
(12)
|
Includes
6,169,056 shares issuable upon exercise of
warrants.
|
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.
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.
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.
INTEREST
OF NAMED EXPERTS AND COUNSEL
The
validity of the common stock covered by this Registration Statement has been
passed upon for the Company by Patton Boggs LLP. A partner of Patton
Boggs LLP owns 225,419 shares of common stock and warrants to purchase 69,930
shares of our 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.
ORGANIZATION
WITHIN LAST FIVE YEARS
Lawrence
A. Siebert, the president, chief executive officer and chairman of the
board of directors of Chembio Diagnostics, Inc. (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. On May 5, 2004, 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 $0.90 per share,
pursuant to the Company’s private placement of its Series A Preferred Stock on
May 5, 2004. Pursuant to the terms of the original Series A
Preferred Stock, the shares of Series A Preferred Stock held by Mr. Siebert
were
convertible into 1,547,100 shares of the Company’s common stock at $0.60 per
share. The remaining debt of $234,062 held by Mr. Siebert was
exchanged on May 5, 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 $0.90 per share, pursuant to the terms of the Company’s private
placement of its Series A Preferred Stock on May 5, 2004. As of
December 31, 2006, $65,287.39 of accrued interest on the debt was also due
to
Mr. Siebert, but was not accruing interest. As of December 31, 2007,
the accrued interest had been repaid. Mr. Siebert also invested
$50,000 in the Company’s Series B Preferred Stock private placement pursuant to
which he received 1 share of Series B Preferred Stock, which was originally
convertible into 81,967 shares of common stock at $0.61 per share, together
with
a warrant to purchase 77,868 shares of common stock at an exercise price of
$0.61 per share.
Mr.
Siebert 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 $0.90 per share, pursuant to the Company’s private placement of its
Series A Preferred Stock on May 5, 2004.
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 for a total of $182,181. This amount was
repaid in the fourth quarter of 2006. In addition as of December 31,
2007, all of the accrued interest on the debt due to Mr. Siebert had been
paid.
On
February 15, 2008, the Compensation Committee approved the reduction of the
exercise price to $0.48 per share of each employee stock option award issued
under the 1999 Equity Incentive Plan for which the exercise price was greater
than $0.48 per share. As a result of this price reduction, the
following number of employee stock options awarded to the Company’s officers and
directors under the 1999 Equity Incentive Plan qualified for this price
reduction: (i) Mr. Siebert: 170,000 options; (ii) Mr. Larkin: 87,500 options;
(iii) Mr. Esfandiari: 532,500 options; (iv) Mr. Aromando: 100,000 options;
(v)
Mr. Ippolito: 15,000 options; (vi) Mr. Bruce: 90,000 options; (vii) Mr. Carus:
252,000 options; (viii) Dr. Meller: 252,000 options; and (ix) Ms. Davis: 180,000
options.
In
addition, on February 15, 2008 the Compensation Committee granted to certain
of
the Company’s employees options to purchase the Company’s common stock under the
1999 Equity Incentive Plan. Included in these employee option grants
were the following option grants to officers: (i) Mr. Siebert received 75,000
options; (ii) Mr. Larkin received 75,000 options; (iii) Mr. Esfandiari received
60,000 options; (iv) Mr. Bruce received 50,000 options; (v) Mr. Ippolito
received 50,000 options; and (vi) Mr. Aromando received 25,000
options. The exercise price for each of these options is $0.22 per
share, which was the closing market price for the Company’s common stock on
February 15, 2008, which was the date of the grant. The options vest
on the date of the grant, and 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.
Avi
Pelossof, the Company’s Vice President of Sales and Marketing from May 5, 2004
to January 31, 2007, exercised 100,000 options in December 2006 at $0.60 per
share, and another 50,000 options in January 2007 at $0.75 per
share.
Robert
Aromando, the Company’s Executive Vice President of Commercial Operations was
hired in May of 2007. In June 2007 in connection with his joining the
Company, he was granted options to purchase 100,000 shares of common stock
at an
exercise price of $0.62 per share. These options will become
exercisable one year from the date of grant. As discussed above, on
February 15, 2008, the exercise price for these options was reduced to
$0.48.
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
Stock private placement in March 2006. Crestview also invested $2
million in our Series C Preferred Stock private placement in September
2006. Details of these transactions are set forth
below. Crestview currently is the largest stockholder of the
Company.
As
referred to above, in January 2005, for a purchase price of $3 million,
Crestview acquired 60 shares of our Series B Preferred Stock, together
with warrants to purchase 4,672,130 shares of our common stock at a warrant
exercise price of $0.61 per share.
In
March
2006, for a purchase price of $1 million, Crestview acquired 20 shares of Series
B Preferred Stock together with warrants to purchase 1,557,377 shares of common
stock at a warrant exercise price of $0.61 per share. These shares
were issued in connection with the Company’s January 2005 private placement as
described herein. In September 2006, for a purchase price of $2
million, we issued 40 shares of Series C Preferred Stock to Crestview together
with warrants to purchase 625,000 shares of common stock at an exercise price
of
$1.00 per share.
In
January 2007, because of comments from the staff of the SEC concerning the
Company’s registration statement No. 333-138266 (the “Prospectus”), Crestview
agreed to reduce the number of its shares of common stock covered by the
Prospectus to 2,000,000. Crestview also agreed to waive any penalties
that the Company would otherwise owe Crestview because of the failure to
register all of Crestview’s shares in the Prospectus. In
consideration for this waiver, the Company agreed that, upon request by
Crestview, the Company will file one or more registration statements with the
SEC in order to register the resale of other shares beneficially owned by
Crestview. The cost of any such registration statements shall be
borne by the Company.
In
addition to Crestview’s $2,000,000 investment in the Company’s September 2006
private placement of Series C Preferred Stock, the Company also received an
investment of $2,000,000 on that date from Inverness Medical Innovations, Inc.
(“Inverness”). At that time, a Certificate of Designation for the
Series C Preferred Stock was filed with the Secretary of State of Nevada
reflecting the agreed upon conversion price of $0.85 per share of common
stock. This private placement of Series C Preferred Stock was
completed on October 5, 2006, and it raised an aggregate of $8,150,000
(including the $2,000,000 invested by each of Crestview and
Inverness). During the period between September 29, 2006 and October
5, 2006, we requested the assistance of Crestview and others in identifying
prospective investors for us. On October 3, 2006, a Crestview
representative informed Mr. Siebert of a conversation he had earlier that day
with a fund manager who indicated that his fund would be interested in investing
a substantial amount in the offering, but only at a conversion price of no
more
than $0.80.
At
a
board of directors meeting on October 4, 2006, Mr. Siebert expressed his
recommendation that the board approve lowering the conversion price to $0.80
in
order to be able to obtain the additional funds. The board discussed
the $1,300,000 promissory note bridge financing which had been completed in
June
2006, the noteholders who expected to convert their notes into Series C
Preferred Stock, and the restrictions on future equity sales by the Company
in
the bridge financing purchase agreement that necessitated finalizing promptly
the Series C Preferred Stock offering. After discussion to approve
the funding, the motion was approved unanimously, with the exception of Gerald
Eppner who abstained. Mr. Eppner stated that he understood the
benefits of the economics of the transaction and the Company’s need to proceed
so quickly, but that he did not wish to vote in favor.
At
a
board meeting held on October 11, 2006, the board members discussed the Series
C
Preferred Stock private placement. Mr. Eppner indicated that in his
view it would be desirable to review the sequence of events in this transaction
to assure proper guidelines for corporate governance and to determine if
disclosure or other issues needed to be considered. At a board
meeting held on October 26, 2006, it was discussed that a subcommittee of the
audit committee, whose members would be Mr. Eppner and Alan Carus, would review
certain issues related to the Series C Preferred Stock private
placement.
The
first
meeting of the audit committee to review the Series C Preferred Stock offering
was held on October 27, 2006. The audit committee decided it would
review the role of Crestview in the Series C Preferred Stock offering,
Crestview’s status as a possible control person, the role of Dr. Gary Meller in
the offering and his relationship with Crestview, and whether the audit
committee should recommend new corporate governance procedures to be implemented
or any action to be taken by the Board. The audit committee utilized
legal counsel to assist in its review. The audit committee held seven
meetings during the period from October 27, 2006 to January 10,
2007. Messrs. Carus and Eppner attended all of the
meetings. Mr. Carus concluded that: (i) he was satisfied
with the review, and (ii) although with fewer time constraints, there could
have
been more deliberation regarding the change in the conversion price, he believed
there was no inappropriate conduct, that the Company had not suffered any damage
and that the matter should be closed. Mr. Eppner stated his concerns
that: (i) Crestview is an affiliate of the Company, (ii)
there was no participation by the Company in the reduction in the conversion
price from $0.85 to $0.80, (iii) although he agreed with Mr. Carus that the
$0.80 price may have been acceptable to the Company, it was not as good as
a
higher price, (iv) Mr. Siebert should not have allowed this to happen, and
that
because he did, it was evidence of control by Crestview, and (v) disclosure
of
the review of the audit committee should be made in a registration statement
that was to be filed shortly thereafter.
On
January 30, 2007, Gerald Eppner resigned from his position as a director of
the
Company, effective immediately. At the time of his resignation, as
additional consideration of his time and efforts as a member of the board of
directors, the Company granted Mr. Eppner $20,000, and caused his outstanding
unvested stock options to become vested immediately. In his
resignation letter, Mr. Eppner stated that he did not resign due to any
disagreement with the Company, or because of any matter relating to the
Company's operations, policies or practices.
On
December 19, 2007 (the “Closing Date”), amendments to the governing documents
for the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”), not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”), were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants (See - Note 1 to the condensed consolidated financial
statements). Subsequent to these amendments, all shares of Preferred
Stock were converted to common stock and certain of the Non-Employee Warrants
were exercised, including the following: (i) Mr. Siebert’s 38.74442 shares of
Series A Preferred Stock were converted into 2,421,526 shares of common stock
at
$0.48 per share, his 1.08545 shares of Series B Preferred Stock were converted
into 113,067 shares of common stock at $0.48 per share, and Mr. Siebert
purchased 337,500 shares of common stock through the exercise of warrants at
an
exercise price of $0.40 per share, for a total of $135,000 in cash; and
(ii) Crestview’s 82.32274 shares of Series B Preferred Stock were
converted into 10,290,342 shares of the Company’s common stock at $0.40 per
share, Crestview’s 40 shares of Series C Preferred Stock were converted into
4,166,666 shares of common stock at $0.48 per share, Crestview exercised a
portion of its Series B Warrants to purchase a total of 60,451 shares of common
stock for an aggregate purchase price of $24,180.40, and Crestview exercised
all
of its Series C Warrants to purchase a total of 625,000 shares of common stock
for an aggregate purchase price of $250,000.
Director
Independence
Our
common stock trades on the OTC Bulletin Board. As a result, we are
not currently subject to corporate governance standards of listed companies,
which require, among other things, that the majority of the board of directors
be independent.
We
also are not currently subject to
corporate governance standards defining the independence of our directors.
We have chosen to define an “independent” director in accordance with the NASDAQ
Global Market's requirements for independent directors (NASDAQ Marketplace
Rule
4200). Under this definition, we have determined that Katherine L.
Davis and Al Carus currently qualify as independent directors. We do
not list the “independent” definition we use on our Internet
website.
DESCRIPTION
OF BUSINESS
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934, and Section 27A of the Securities Act
of
1933. Any statements contained in this report that are not statements
of historical fact may be forward-looking statements. When we use the
words “intends,” “estimates,” “predicts,” “potential,” “continues,”
“anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,”
“will” or the negative of these terms or other comparable terminology,
we are identifying forward-looking statements. Forward-looking
statements involve risks and uncertainties, which may cause our actual results,
performance or achievements to be materially different from those expressed
or
implied by forward-looking statements. These factors include our; research
and development activities, distributor channel; compliance with regulatory
impositions; and our capital needs. 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.
Except
as may be required by applicable law, we do not undertake or intend to update
or
revise our forward-looking statements, and we assume no obligation to update
any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not
assume that our silence over time means that actual events are bearing out
as
expressed or implied in such forward-looking statements. You should
carefully review and consider the various disclosures we make in this report
and
our other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks, uncertainties and other factors
that
may affect our business.
For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in the “Risk Factors” section beginning on
page 2.
General
Chembio
Diagnostics, Inc. (the “Company”) and its subsidiaries develop, manufacture and
market rapid diagnostic tests that detect infectious diseases. The
Company’s main products presently commercially available are three rapid tests
for the detection of HIV antibodies in whole blood, serum and plasma samples,
two of which were approved by the FDA in 2006. These products employ
single path lateral flow technology which we have licensed from Inverness
Medical Innovations, Inc. (“Inverness”), which is also our exclusive marketing
partner for those two products in the United States under its Clearview®
brand. Inverness launched its marketing of these products in the
United States in February 2007. Chembio’s two HIV STAT-PAK® rapid HIV
tests are marketed outside the United States through different partners and
channels under license from Inverness. We also have a rapid test for
Chagas disease (a parasitic disease endemic in Latin America) and two rapid
tests for detecting tuberculosis antibodies in animals for which we have
received USDA approval.
On
March
13, 2007, we were issued United States patent #7,189,522 for our Dual Path
Platform (DPP™) rapid test system. Additional patent protection for
DPP™ is pending worldwide. DPP™ enables Chembio to participate in the
growing point of care diagnostics market with a patent-protected point-of-care
platform technology. The independent sample strip on our DPP™ devices
enables the development of products whose performance we believe exceeds that
of
comparable tests developed on a single path lateral flow platform. We
therefore believe that as a result of the patent protection we now have with
DPP™, we have a significant opportunity to develop and/or license many new rapid
tests in a number of fields including but not limited to infectious
diseases. During both 2007 and 2008 year to date we have made
significant progress in establishing commercial opportunities for this new
platform that are now in development (see Research and
Development”). We have completed initial development of an
oral fluid HIV test on this new platform and are currently conducting
pre-clinical studies on this product We believe the DPP™ provides
significant advantages over standard single path lateral flow assays
particularly where challenging sample matrices, such as oral fluid, are
involved, or where multiplexing is desired. We are developing all of
our new products using this platform. Our strategy for the
development of this platform technology is also dual; we are entering into
exclusive collaborations with large marketing partners for whom we will develop
and manufacture products on the DPP™ and we are developing our own products that
we may choose to market through selected distribution partners either under
a
Chembio or other brand.
Our
products are sold to medical laboratories and hospitals, governmental and public
health entities, non-governmental organizations, and medical
professionals. Our products are sold either under our STAT-PAK® or
SURE CHECK® registered trademarks and/or the private labels of our marketing
partners, such as is the case with the Inverness Clearview® label for our rapid
HIV tests in the United States.
Rapid
HIV Tests
The
major
component of our revenue growth in 2007 was increased sales of our rapid HIV
tests, and most of that increase was a result of our entry into the US rapid
HIV
test market as a result of the launch of our tests by Inverness. 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 that 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 testing, as the stigma
associated with the disease is lessened and the ability to resume normal
activities is substantially improved. All three of our rapid HIV
tests are qualitative “yes/no” tests for the detection of antibodies to HIV 1
& 2 with results available within approximately 15 minutes. The
tests differ principally only in the method of sample collection and test
procedure, flexibility with different sample types, and cost of
manufacture. Our rapid HIV tests have been marketed under our SURE
CHECK® and STAT-PAK® trademarks. Pursuant to our agreement with
Inverness Medical Innovations, Inc., the SURE CHECK® product is now being
marketed globally (with limited exceptions) by Inverness as Clearview® Complete
HIV 1/2 and the cassette format of our STAT-PAK (we also have a third product
known as HIV 1/2 STAT-PAK dipstick) is now being marketed by Inverness in the
United States as Clearview® HIV 1/2 STAT-PAK®. We continue to market
our STAT-PAK® cassette and dipstick outside the United States through other
marketing channels.
Regulatory
Status:
Rapid
HIV Tests
The
FDA
approved our Pre-Market Applications for our SURE CHECK HIV 1/2 (now Inverness’
Clearview® Complete HIV 1-2 worldwide) and HIV 1/2 STAT-PAK (now Inverness’
Clearview® HIV 1/2 STAT-PAK in the United States only) products on May 25,
2006. A Clinical Laboratory Improvement Act (“CLIA”) waiver was
granted by the FDA for the HIV 1/2 STAT-PAK on November 20,
2006. Labeling changes to the Inverness Clearview® brands for both
products were approved during the first quarter of 2007. CLIA
waiver for the Clearview® Complete HIV 1-2 was granted on October 22,
2007. CLIA waiver is required in order to market the products in
public health clinics and physicians’ offices where the level of training is
traditionally less than the training at clinical laboratories and
hospitals. Public health clinics and physicians’ offices now
constitute the largest portion of the available market for our
products. Our third rapid HIV test, HIV 1/2 STAT-PAK
Dipstick, though not FDA approved, qualifies under FDA
export regulations to sell, subject to any required approval by the importing
country, to customers outside the United States. The dipstick product
is our most competitively priced version of our three rapid HIV tests, and
was
designed primarily for resource-constrained, donor-funded markets that have
large test volume needs. In 2006 we made certain improvements
to this product so that it could be run flat on an adhesive backing card as
an
alternative to being dipped in a vial containing the sample and buffer
solution. This change made the product procedure similar to a
cassette format with less cost than those associated with producing the cassette
format.
Although
we have received approval from a number of potential importing countries for
all
three of our HIV tests, Brazil, Mexico, Nigeria, Ethiopia and Uganda are the
only countries in which we have realized significant sales. As a
result of favorable evaluations of our HIV 1/2 STAT-PAK and HIV 1/2 STAT-PAK
Dipstick products by the World Health Organization (the “WHO”), these products
are qualified 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
(“PEPFAR”).
Partners
Involved in the Products:
On
September 29, 2006 we executed marketing and license agreements with
Inverness. These agreements provide for the marketing of our
rapid HIV tests in the United States; the agreements also grant us a license
to
Inverness’ single path lateral flow patents that may be applicable to our other
products, including those that we had under development at the time of the
grant. As part of these agreements we settled litigation that had
been ongoing with another company, StatSure Diagnostics, Inc., relating to
the
barrel device that is incorporated into our Sure Check® (now Inverness Clearview
Complete) HIV 1/2 product.
In
September 2005 we were designated as the confirmatory test in Uganda’s national
rapid testing protocol. 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. In
February 2008, Nigeria changed from a parallel algorithm to a serial algorithm,
and this designation was changed to that of a confirmatory test. In
October, 2007 our HIV 1/2 STAT-PAK® was designated by the Ethiopian Ministry of
Health as the confirmatory test in that country’s national rapid testing
algorithm. We have identified and/or appointed distributors in these
and other countries in Africa so that we are positioned to service those new
markets if we are selected in their national testing protocols. Our
focus is on those African countries that are receiving funding from PEPFAR
and
other large relief programs.
In
November 2006, we received an order for 990,000 units of our Sure Check product
from our distributor in Mexico, a division of Bio-Rad Laboratories,
Inc. This distribution agreement is the one exception to our
otherwise global exclusive agreement with Inverness as it relates to this
product. Approximately one-half of this order was shipped during the
fourth quarter of 2006 and the balance was shipped during the first quarter
of
2007. Additional orders were received and shipped during the first
and second quarters of 2007 in the amount of approximately
$600,000. Absent other arrangements, which are under discussion this
exception to Inverness’ global exclusivity will be eliminated on September 29,
2008.
We
have
established or are establishing distributors in a number of other markets where
we believe there is or will be a significant market opportunity for our
products.
CHAGAS
RAPID TEST
We
have 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. In January 2006, the Company received
a $1.2 million order from the Pan American Health Organization to supply its
Chagas disease rapid tests for a screening program in Bolivia. These
tests were delivered in the first three quarters of 2006. The Pan
American Health Organization (the “PAHO”), headquartered in Washington D.C., is
affiliated with the WHO, and this procurement was used to implement a nationwide
Chagas screening program for all children under the age of 10 in endemic regions
of Bolivia. Although 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, these opportunities must be funded
by
donors such as the PAHO. The private commercial market for this
disease is very limited. We do anticipate completing the
requirements for obtaining a CE mark (Community European) for this product,
and
registration in Mexico, which may provide additional sales
opportunities. This certification is necessary to obtain CE Markings
for our products which are required in order to sell in most European countries,
as well as many other countries in the world.
Other
Products
In
2007
our facility was licensed by the USDA to manufacture and market two products
for
veterinary tuberculosis. Revenues from these products have not been
material and the market opportunity for the products approved thus far is
limited due to certain restrictions placed on sales by the USDA pending further
discussions. The USDA manufacturing facility approval is however very
material to our being able to pursue collaborations to develop and manufacture
other veterinary products on our DPP™ platform that would be
marketed by companies that are engaged in these markets, and we are
actively pursuing such collaborations. We also are involved in the
development of several new products, for our own account and for others pursuant
to existing and pending agreements as described below under “Research and
Development”.
Lateral
Flow Technology
All
of
our commercially available current products employ single path 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, whether single or dual path, allows the development
of
accurate, 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 micro liters 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. 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. The sensitivity and
specificity of our rapid HIV tests during our clinical trials undertaken in
connection with our FDA Pre-Marketing Applications were 99.7% and 99.9%,
respectively.
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 above] 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 rapid HIV test which 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.
On
March
13, 2007, we were issued United States patent number #7,189,522
describing a Dual Path Immunoassay system which we believe provides several
advantages over standard single path lateral flow test systems (See
“Intellectual Property”). We believe that this system, which we refer
to as DPP™ (for Dual Path Platform), provides the Company with significant new
product development and licensing opportunities.
During
2007 we entered a collaborative agreement with Alverix, which was formerly
a
business unit of Avago Technologies. Alverix has developed
cost-effective reflectance and fluorescent readers that can objectively measure,
quantify, record and report test results. The readers have been
customized and private labeled for us to use with our DPP™
cassette. We believe that combining DPP™ with this reader feature
will help to broaden the potential market applications of DPP™.
Target
Market
Rapid
HIV Tests
We
believe that the September 2006 recommendations by the United States Centers
for
Disease Control (“CDC”) that called for testing for HIV as part of routine
medical care in the United States and that reversed a long standing policy
of
informed consent will drive the demand for testing in the United
States. Similarly, because HIV medicines have become much less
expensive and more widely available, unprecedented multi-billion dollar
financial commitments have been made for prevention, treatment and
care. For example, the largest commitment ever to funding the fight
against the epidemic in Africa and other countries was authorized by President
Bush in 2003. This was a five-year, fifteen billion dollar program
known as the President’s Emergency Plan for AIDS Relief, or
PEPFAR. PEPFAR is now expected to be re-authorized for another five
years beginning in fiscal 2009. In January 2008, President Bush
stated in his State of the Union Address that PEPFAR “II” should be doubled to
$30 billion. On February 27, 2008, the Foreign Affairs
Committee of the United States House of Representatives approved the
reauthorization of PEPFAR in the amount of $50 billion. Approval by
the U.S. House of Representatives, the Senate, and President is
pending. The other large funding source for HIV testing, care and
treatment is the Global Fund for AIDS, Tuberculosis and Malaria. This
fund is primarily supported by the United States (21.9% of which is appropriated
from PEPFAR), the European community, Japan and certain other
countries.
According
to UNAIDS, as of the end of 2007, there were an estimated 33.2 million people
living with HIV/AIDS worldwide. There were nearly 2.5 million new
infections in 2007 and 2.1 million AIDS-related deaths in 2007. In
order for more infected individuals to gain access to life-saving treatments,
treatments that are made increasingly available by PEPFAR and other large
bilateral and multilateral donor funded programs, testing and early detection
will need to increase. Therefore, based upon the treatment goals of
PEPFAR and other large programs, we believe that there will be a funded
increasing global demand for several hundred million rapid HIV tests for the
foreseeable future.
The
marketing of our FDA-approved rapid HIV tests in the United States was launched
by Inverness during the first quarter of 2007. In the United States
the need for rapid HIV tests has been developing first in the public health
and
hospital emergency room segments, and also in the physicians’ office
laboratories. There are approximately 20-25 million HIV tests
performed in clinical settings in the United States. Rapid HIV
tests account for approximately 20-25% of this market, or approximately 5-6
million tests. We believe that the total number of HIV tests will
continue to grow, and that the share available to rapid HIV tests will also
grow.
Chagas
Rapid Test
Chagas
disease is endemic only in regions of Latin
America where there are an estimated 16-18 million
existing Chagas disease cases, resulting in approximately 20,000 deaths
annually, and an estimated 300,000 new cases each year. Chagas
disease is transmitted by a parasitic bug which lives in cracks and crevices
of
poor-quality houses usually in rural areas, through blood transfusions or
congenitally from infected mother to fetus. There is an effective
therapy available to treat the early chronic phase, but this therapy only
eliminates the infection if it is administered to children that are diagnosed
with the disease.
Other
Products
Veterinary
Tuberculosis Tests
Tuberculosis
in animal species can become a significant problem either because of potential
transmission to humans, costs in lost agricultural productivity or because
of
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. In 2007 we received approval from the USDA to manufacture
and market our single path lateral-flow test for the detection of TB in
Non-Human Primates (PrimaTB STAT-PAK™). The test can use serum,
plasma, or whole blood, is simple and easy to use, has up to a 12-month shelf
life at room temperature (RT) storage, and provides results within 20
minutes. This compares to the only currently available technology,
the eye-lid tuberculin test, which is inconvenient, subjective, and
unreliable.
Marketing
Strategy
Our
marketing strategy is to:
·
|
Support,
review and assess the marketing and distribution efforts of our rapid
HIV
tests by Inverness Medical Innovations, Inc. Inverness, which
is a leading marketer of point of care diagnostic products, has
significantly expanded its distribution footprint since we signed
our
agreement with them, and we believe that this will enhance opportunities
for them to market our rapid HIV tests. In particular,
Inverness has been very active in acquiring point of care product
lines
serving hospital emergency rooms and physicians’
offices.
|
·
|
Leverage
our DPP™ intellectual property and regulated product development and
manufacturing experience to create new collaborations where Chembio
can be
the exclusive development and manufacturing partner with world class
marketing partners. Beginning with our Cooperative Research
Development Agreement entered into in November 2006 with the United
States
Centers for Disease Control, we have entered several new collaborations
related to DPP™ that are described below (see “Research &
Development”).
|
·
|
Develop
a small number of Chembio brand DPP™ products that capitalize on the
advantages of this newly patented point of care technology and select
distribution partners for such
products.
|
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);
|
·
|
The
ability to manufacture products
cost-effectively;
|
·
|
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 tests for detection
of antibodies to infectious diseases such as HIV and Chagas disease, 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 has been instrumental in our
obtaining the collaborations we have and that we continue to
pursue. The patent protection that we now have with our Dual Path
Platform™ should enhance our ability to develop more profitable collaborative
relationships and to license out the technology.
We
believe our regulatory achievements are a strong asset for developing new
products collaborations. There are only three companies that have
approved PMA’s for lateral flow rapid tests, all HIV tests: Trinity Biotech
(Ireland), Orasure Technologies, Inc. (PA) and Chembio. We believe
that this is a significant competitive advantage when considering new products
and collaborations. During 2006 and 2007 we obtained
two CLIA waivers for each of our FDA PMA approved HIV
tests. These products therefore represent two of the four CLIA waived
rapid HIV tests. Also, during 2007 we received facility and product
licenses from the USDA, and became certified under ISO 13.485.This combination
of regulatory credentials is unique.
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 if we continue our trend of improved sales and operating
results. Establishment of collaborations for our DPP™ with large
companies should provide us with additional credibility in the investment
community and may also facilitate our access to strategic
capital. The simplification of our capital structure that was
completed in December 2007 should also improve our access to capital (See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Overview).
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 compete effectively for the
same
individuals to the extent that a competitor uses its substantial resources
to
attract any such individuals.
We
have
been able to obtain patent protection by entering into licensing arrangements
for reagents and lateral flow technologies. The March 2007 issuance
by the United States Patent & Trademark Office of our Dual Path Platform™
patent gives us our first patent protection on a rapid test platform, which
we
believe enhances our competitive position. Additional
protection of this intellectual property is pending worldwide.
Competitive
factors specifically related to our HIV tests are product quality, delivery,
sensitivity, specificity, ease-of-use, shelf life and price. Other
factors can be sample size required, the presence of a true IgG control, and
time to result. During the last few years, the competitive features
of certain products produced by some international competitors have
improved. In addition, these companies typically have
substantially lower costs of labor, regulatory approval and compliance,
and intellectual property (if any) as compared with
Chembio. Price has therefore become an increasingly important factor,
especially for products based upon the conventional single path lateral flow
platform which are currently marketed HIV and other tests are based
upon.
The
leading competitors in the international rapid HIV test market are Trinity
Biotech (Ireland), Inverness (U.S.) and Standard Diagnostics
(Korea). Uni-Gold HIV®, marketed by Trinity Biotech of Ireland and
Determine®, formerly a Japanese division of Abbott Diagnostics that is now owned
by Inverness, are the market leaders in the developing world , particularly
sub-Saharan Africa which is where most of the funding for rapid HIV tests is
being allocated from donor funded programs such as PEPFAR. Neither of
these products is FDA-approved although Trinity does manufacture in Ireland
an
FDA-approved rapid HIV test, Uni-Gold Recombigen, for marketing in the United
States. Inverness’ Orgenics subsidiary in Israel also has a rapid HIV
test, Double Check Gold as does its subsidiary in China, ABON; neither of these
products is FDA-approved. As such, while Inverness is our exclusive
marketing partner in the United States, it is also the principal competitor
to
our rapid HIV tests outside the United States. Furthermore, in 2007
Trinity Biotech settled litigation with Inverness, and as part of that
settlement it has contracted with ABON, an Inverness subsidiary, to manufacture
the Uni-Gold® HIV products for marketing outside the United
States. Standard Diagnostics of Korea also has a low-cost
product that has been increasingly competitive against each of the other
competitors in the developing world. There are a number of additional
competitors, including several based in China and India, that produce
competitive rapid HIV tests, though they are not FDA
approved. Nevertheless, all of these products are eligible for
procurement under the current PEPFAR USAID waiver program due to the fact that
there were no FDA-approved products when PEPFAR was originally authorized
several years ago. In order to realize sales in the markets where the
donor funds are allocated, the product must additionally be selected by a
country’s ministry of health or their designees to be part of a national testing
protocol or “algorithm”. The algorithms typically use multiple rapid
tests in sequence or in parallel to screen and confirm patients at the point
of
care and are increasingly allowing for multiple tests to be qualified in these
algorithms. Chembio’s sales in Africa and certain other markets are
therefore based on the fact that its test has been one of those
selected. The selection process in each of these countries is
very challenging based upon a number of factors, including but not limited
to
product performance and price.
In
the
developed world, particularly the United States and Europe, the competitive
landscape is quite different. There are only two companies that have
products that are FDA PMA approved and are CLIA-waived: Orasure Technologies
(Bethlehem, PA) with OraQuick®, and Trinity Biotech Ltd. with its UniGold®
Recombigen product (manufactured by Trinity at its facility in
Ireland). The requirements for the PMA and CLIA waiver are difficult,
costly, time-consuming, and represent a competitive advantage. We do
not anticipate that Inverness has any plan to submit any of its
products produced outside the U.S. to the FDA. Further, our
agreements with Inverness provide that in the event one of those submissions
is
made (or if Inverness markets a competitive product in the United States),
we
have the right to terminate our agreement with Inverness or make Inverness’
marketing rights non-exclusive. In either case, we would retain a
license under the Inverness lateral flow patents to market the products under
a
Chembio brand and/or through third party distribution partners.
The
comparative competitive features of Chembio’s products (marketed under
Inverness’ Clearview® brand in the U.S.) in comparison to the other FDA PMA
approved and CLIA-waived products are shown below.
|
|
Chembio
|
|
Orasure
|
|
Trinity
|
No.
of Rapid Test Formats FDA PMA approved and CLIA
waived
|
|
2
|
|
1
|
|
1
|
Sensitivity
|
|
99.7%
|
|
99.6%*
|
|
100.0%
|
Specificity
|
|
99.9%
|
|
99.9%
|
|
99.7%
|
Analyte(s)
|
|
HIV
1&2
|
|
HIV
1&2
|
|
HIV1
|
Format(s)
|
|
Standard
SPLF Cassette & Proprietary Unitized Barrel
Format
|
|
Oral
fluid Swab connected to Standard SPLF Cassette
|
|
Standard
SPLF Cassette
|
Sample
Types
|
|
Plasma,
Serum, Venous Whole Blood, Fingerstick Whole
Blood
|
|
Plasma,
Oral Fluid, Serum, Venous Whole Blood, Fingerstick Whole
Blood
|
|
Plasma,
Serum, Venous Whole Blood, Fingerstick Whole
Blood
|
Sample
Size
|
|
~5
microliters
|
|
~5
microliters
|
|
~50
microliters
|
U.S.
Pricing
|
|
$7-$13
|
|
$11.50-$20
|
|
$7.50-$20
|
Estimated
US Market Share
|
|
<5%
|
|
75%
|
|
15%
|
US
Marketing Partner
|
|
Inverness
|
|
Abbott
& Direct
|
|
Direct
|
True
IgG Control
|
|
Yes
|
|
Yes
|
|
No
|
Shelf
Life
|
|
24
mos.
|
|
6
mos.
|
|
12
mos.
|
*
Orasure sensitivity on oral fluid are lower
|
|
|
|
|
Orasure
has a dominant market share in the United States market. Orasure’s
main advantage is that its test was first to market and that, for certain market
segments (primarily public health), the fact that it can be performed with
oral
fluid samples is an attractive feature. Orasure’s Oraquick product’s
main disadvantages are its price, limited shelf life, that it is more difficult
to use with whole blood samples, and that it is not approved for use with serum
samples. Also, Orasure’s claimed sensitivity with oral fluid samples
is lower, and there have been some reports of performance problems on oral
fluid
samples. Orasure markets its products directly through its own sales
organization to the public health market, has made a significant investment
in
that market, and has nearly 100% of this market with its oral fluid
test. Orasure has an exclusive marketing arrangement with Abbott
Diagnostics for its sales effort to the hospital market.
The
Uni-Gold product that is marketed by Trinity accounts for an estimated 15%
of
the market. This product does not detect HIV-2. Though
HIV-2 is a rare strain of HIV, there have been more cases identified of
late. Trinity’s product also requires a much larger sample size, and
does not have a true IgG control. This means that a control line,
which is intended to confirm that the test procedure has been performed
correctly, will appear on their product so long as any liquid material is
applied to its sampling area; Chembio’s (and Orasure’s) control line will appear
only if a biological sample is applied. Trinity also relies on its
own sales force to market is product, and does not have any other rapid tests
to
sell to distributors.
We
believe Chembio, through its marketing agreement with Inverness, is well
positioned to compete for market share against these two US market competitors,
at least in the hospital and physicians’ office market. Inverness has
made a significant investment in its launch of our products and we believe
this
is a very important product for Inverness in the United States
market. The shelf life of our HIV products’ is 24 months, which is
double that of Uni-Gold 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 products are
extremely convenient and easier to use than OraQuick on finger-stick whole
blood
samples.
Chembio’s
HIV Tests
One
of
our two product formats, the “barrel” format now marketed by Inverness as
Clearview® Complete HIV 1-2, is a unique product format and is a unitized
product (meaning that all components necessary to perform a single test are
contained in a single pouch). The “barrel” has a proprietary method
of collecting finger-stick whole blood samples that eliminates the need for
a
transfer loop or other device to transfer the sample from the fingertip to
the
sample well. Also, the buffer solution is in a unitized vial that is
pierced by the barrel tip to initiate the sample migration up the test strip
contained inside the “barrel”, and thereby creates a closed system that helps to
minimize possible exposure to potentially infectious samples. The
“barrel” product did not receive the CLIA waiver until October 22, 2007 so sales
of this product were nominal in 2007. We anticipate that sales of
this format will increase in 2008.
Our
other
FDA PMA approved rapid HIV test, marketed by Inverness as Clearview® HIV 1-2
STAT PAK®, is a standard lateral flow plastic cassette format wherein the sample
is transferred to the sample port in the cassette by means of a transfer
loop. Though this step is not required in the barrel format, the
cassette is less costly to manufacture, is more familiar to customers that
have
performed other lateral flow tests, and is a more flexible format that utilizes
the same procedure for all approved sample matrices (venous whole blood,
finger-stick whole blood, serum and plasma). To date this format has
accounted for almost all of the sales we have had through
Inverness.
We
are
currently pursuing certain improvements and amendments to the cassette and
barrel formats which, if successfully completed, could enhance their
marketability. These items include lowering of the lower age limits
(currently the lower age limit is 18) of individuals that the tests are approved
for. We anticipate completing the testing requirements for this
amendment during the first quarter, and approval of the amendment by the FDA
before the end of the second quarter.
Research
and Development
During
2007 and 2006, $1.9 million and $1.4 million, respectively, was spent on
research and development activities. Substantially all of our new
product development activities involve employment of our Dual Path Platform
(DPP™) technology for which we were awarded a U.S patent in 2007. We
believe that this platform enables us to pursue many new product development
and
licensing opportunities, and we have developed a dual path strategy for doing
this. The DPP™ can provide improved features on certain tests
developed with it that include higher sensitivity, earlier detection, use of
multiple sample types including oral fluid, and improved ability to detect
multiple analytes (multi-plexing) in one test device. We have
completed several studies that confirm this and we are currently conducting
a
pre-clinical trial on our DPP™ HIV test for use with oral fluid. We
also believe tests developed on our DPP™ platform, such as our oral fluid HIV
test, will be simple for untrained users to perform, thereby enabling
CLIA waiver for such a product.
We
currently have the following products in development on the
DPP:
Technology
Transfer and Supply Agreements with Bio-Manguinhos
On
January 29, 2008 we signed three new technology transfer, supply and license
agreements with the Bio-Manguinhos unit of the Oswaldo Cruz Foundation of Brazil
for products being developed by Chembio with its patented DPP™
technology. Previously, in 2004, Bio Manguinhos and Chembio entered
into a similar agreement concerning one of Chembio’s HIV rapid
tests.
Two
of
the products being developed will be used in screening programs funded by
Brazil’s Ministry of Health for the control and eradication of Leishmaniasis and
Leptospirosis, respectively, which are both blood-borne infectious diseases
that
are endemic to Brazil. A third test being developed is for the
confirmation of HIV-1 in patients who have tested positive with a screening
test. Bio-Manguinhos, also known as the Immunobiological Technology
Institute, is the largest producer of vaccines and kits for diagnosis of
infectious and parasitic diseases in Latin America. Chembio’s DPP™
test platform was selected for the screening programs because of its high
sensitivity and specificity of prototypes evaluated by Bio-Manguinhos and
because of the unique multiplexing capabilities of DPP™ for the confirmatory
assay. The DPP™ point-of-care screening tests will complement
the current Bio-Manguinhos national program, which currently only uses
laboratory-based technologies. The HIV confirmatory test will allow
for the simultaneous binding and uniform delivery of samples to multiple HIV
antigens printed in the detection zone, providing results equivalent to Western
blot in a simple point-of-care format that provides results within 20
minutes. Under the new agreements, once the products meet mutually
agreed-upon performance specifications and are approved for sale in Brazil,
Chembio will receive a minimum purchase order for at least one million tests
within a one-year period. Thereafter, the agreement allows for
production of the products to be transferred to Brazil, subject to certain
royalty payments.
Based
upon the initial prototypes we have developed for each of these products, we
anticipate that these products will be successfully developed in accordance
with
the agreed-upon specifications. Also, based upon our experience with
Bio-Manguinhos through the earlier agreement, we anticipate that the other
aspects of our agreement will be successful, though there can be no assurance
that this will in fact occur.
Cooperative
Research & Development Agreement with the CDC for Syphilis
Test
In
November 2006 we signed a Cooperative Research and Development Agreement (CRADA)
with the United States Centers for Disease Control and Prevention to develop
a
rapid combination test for syphilis, capable of detecting treponemal and
non-treponemal antibodies in the same device, utilizing Chembio’s Dual Path
Platform (DPP™) technology and the CDC’s patented Syphilis
antigens. This test could serve both as a screening and
confirmatory test in a point-of-care setting.
Syphilis
is a sexually transmitted disease (STD) caused by the bacterium Treponema
pallidum. Infection rates have been on the increase lately;
worldwide, 12 million individuals are diagnosed with syphilis each year and
are
at increased risk of becoming infected with and transmitting HIV. In
addition, syphilis can be transmitted from an infected woman to her unborn
child
during pregnancy. Early and appropriate diagnosis and treatment
prevents infection of the child and development of severe
complications.
The
difficulty in following up with patients who have undergone syphilis testing
in
a variety of settings and testing for syphilis in many prenatal settings are
major obstacles to effective syphilis control. The development of a
rapid, point-of-care test, that combines the sensitivity of a screening test
with the specificity of a confirmatory test is important in aiding clinicians
to
provide appropriate treatment at an initial clinic
visit.
While
development work continues with good progress, there can be no assurance that
a
product will be successfully developed and/or successfully
commercialized.
We
have
several other DPP™ research and development projects in various stages,
including products that we are or may be developing under contract for third
party marketing partners. There can be no assurance that any of these
projects will result in completed products or that such products, if
successfully completed, will be successfully commercialized.
Employees
At
December 31, 2007, we employed 109 people, including 97 full-time
employees. Effective May 2006, we entered into an employment
agreement with Lawrence Siebert, President and Chairman. Effective
March 2007, we entered into an employment agreement with Javan Esfandiari,
Executive Vice-President of Research and Development.
Governmental
Regulation
The
manufacturing and marketing of the Company’s existing and proposed diagnostic
products are regulated by the United States Food and Drug Administration
(“FDA”), United States Department of Agriculture (“USDA”), certain state and
local agencies, and/or comparable regulatory bodies in other
countries. These regulations govern 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 United States, 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). Failure to comply with the FDA’s requirements can lead to
significant penalties, both before and after approval or clearance.
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 much more expensive,
detailed and time-consuming process as compared with a 510(K) pre-market
notification. 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 be, and often is, much longer,
often requiring one year or more, and may include requests for additional
data. The Company has approved PMAs for the two rapid HIV tests now
marketed by Inverness Medical as Clearview® Complete HIV 1-2 and Clearview® HIV
1-2 STAT PAK®.
Every
company that manufactures medical devices distributed in the United States
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 United States 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. The Company has received a
CLIA waiver for each of the two rapid HIV tests now marketed by Inverness
Medical as Clearview® Complete HIV 1-2 and Clearview® HIV 1-2 STAT
PAK®. The CLIA waiver was granted by the FDA for HIV 1-2 STAT-PAK on
November 20, 2006 and for the Clearview® Complete HIV 1-2 on October 22,
2007.
In
addition, the FDA regulates the export of medical devices that have not been
approved for marketing in the United States. The Federal Food, Drug
and Cosmetic Act contains general requirements for any medical device that
may
not be sold in the United States 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 United States. 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 United States 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.
One
or
more of the Company’s rapid HIV tests are also approved for marketing in several
foreign jurisdictions, including but not limited to Brazil, Mexico, India and
a
number of other nations in the developing world.
In
2007
Chembio received certification under ISO 13.485:2003. ISO
(International Organization for Standardization) is the world's largest
developer and publisher of International Standards. It is comprised
of a network of the national standards institutes of 155 countries, one member
per country, with a Central Secretariat in Geneva, Switzerland, that coordinates
the system. ISO 13485:2003, in particular, specifies requirements for
a quality management system where an organization needs to demonstrate its
ability to provide medical devices and related services that consistently meet
customer requirements and regulatory requirements applicable to medical devices
and related services. The primary objective of ISO 13485:2003 is to
facilitate harmonized medical device regulatory requirements for quality
management systems. ISO 13.485:2003 is the quality system that is
most recognized globally, including throughout the European Community for
products seeking a CE mark. Chembio has engaged a European
Notified Body and Authorized Representative in connection with its plans to
obtain a CE mark for its products.
Environmental
Laws
To
date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Our
intellectual property strategy is to: (1) build our owned
intellectual property portfolio around our Dual Path Platform technology; (2)
pursue licenses, trade secrets and know-how within the area of lateral flow
technology and DPP™; and (3) 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 proprietary know-how to
develop tests for multiple conditions using colored latex. Our buffer
formulations enable extremely long shelf lives of our rapid HIV tests and we
believe that this provides us with an important competitive
advantage.
Lateral
Flow Technology and Reagent Licenses
Prior
to
the issuance of our United States patent covering our Dual Path Platform (DPP™),
we owned no issued patents covering lateral flow
technology. Therefore we obtained non-exclusive licenses from
Inverness Medical Innovations, Inc. and Abbott Laboratories with respect to
their portfolios of single path lateral flow patents. Although we
believe our DPP™ is outside of the scope of single path lateral flow patents, we
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 patent litigation, we often 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
the applicable product such that a license would not be
necessary. However, this alternative could delay or limit our ability
to sell these products in the United States and/or other markets, and/or
increase penalties all of which would adversely affect our results of
operations, cash flows and business.
The
DPP™
technology provides improved sensitivity as compared with conventional platforms
in a number of preliminary studies using well characterized HIV, Tuberculosis
and other samples. 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. We have also
filed two patents relating to our veterinary tuberculosis rapid tests and
improvements to the sample collection method in our “barrel” (SURE CHECK) device
which is one of the formats which Inverness is marketing.
The
peptides used in our rapid HIV 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 to reduce the royalty rate. We also
have licensed the antigens used in our tuberculosis and Chagas disease
tests. In prior years we concluded license agreements related to
intellectual property rights associated with HIV- 1, and during the first
quarter of 2008 we entered into a license agreement for HIV-2.
Corporate
History
On
May 5,
2004, we completed a merger with Chembio Diagnostic Systems Inc. through which
Chembio Diagnostics Systems Inc. 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. In 2003, we had sold our prior
business, and as a result, we had no specific business immediately prior to
the
merger.
Since
the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved
in
developing, manufacturing, selling and distributing in-vitro diagnostic tests,
including rapid tests beginning in 1995, for a number of conditions in humans
and animals.
On
March
12, 2004, we implemented a 1-for-17 reverse split of our common
stock. All references to shares of our common stock in this Post
Effective Amendment No. 5 to the Registration Statement have been adjusted
to
reflect this reverse split.
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human
Immunodeficiency Virus, HIV.
|
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.
|
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
|
United
States 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
|
United
States 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.
|
UNAIDS
|
Joint
United Nations Program on HIV/AIDS
|
USAID
|
United
States Agency for International Development
|
USDA
|
U.S
Department of Agriculture
|
WHO
|
World
Health Organization
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
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 United
States. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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,” “could”,
“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.
Except
as
may be required by applicable law, we do not undertake or intend to update
or
revise our forward-looking statements, and we assume no obligation to update
any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not
assume that our silence over time means that actual events are bearing out
as
expressed or implied in such forward-looking statements. You should
carefully review and consider the various disclosures we make in this report
and
our other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks, uncertainties and other factors
that
may affect our business.
The
following management discussion and analysis relates to the business of the
Company and its subsidiaries, which develop, manufacture, and market rapid
diagnostic tests that detect infectious diseases. The Company’s main
products presently commercially available are three rapid tests for the
detection of HIV antibodies in whole blood, serum and plasma samples, two of
which were approved by the FDA in 2006; the third is sold for export
only. These products all employ single path lateral flow
technology. The Company also has a rapid test for Chagas
disease (a parasitic disease endemic in Latin America) as well as a line of
rapid tests for tuberculosis, including tests for tuberculosis in animals which
is USDA approved. The Company’s products are sold to medical
laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail
establishments. Chembio’s products are sold either under the
Company’s STAT-PAK® or SURE CHECK® registered trademarks or under the private
labels of its marketing partners, such as is the case with the Clearview® label
owned by Inverness Medical Innovations, Inc., which is the Company’s exclusive
marketing partner for its rapid HIV test products in the United
States.
Recent
Events
On
December 19, 2007 (the “Closing Date”) amendments to the governing documents for
the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”) not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”) were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants. Subsequent to these amendments, among other matters, all the
Preferred Stock and certain of the Non-Employee Warrants were converted to
shares of the Company’s common stock. A description of the terms of
the Plan is included in Note 1 to the consolidated financial
statements.
On
February 1, 2008, we entered into a sublicense agreement with Bio-Rad
Laboratories, Inc. and Bio-Rad Pasteur (collectively,
“Bio-Rad”). Bio-Rad is the exclusive licensee of Institute Pasteur of
Paris, France, under the HIV-2 patents. Pursuant to the terms of the
Agreement, Bio-Rad sublicensed to the Company patents related to the use of
HIV2. The Company will also pay Bio-Rad a royalty on net sales in the
United States and Canada of rapid test immunoassay tests sold under the
Company’s name (a) for simultaneously detecting “HIV type 1 + HIV type 2”
antibodies and/or antigens; (b) being operated with the Company’s Point of Care
Rapid Test Platform; and (c) allowing visual and automated signal reading and
interpretation through a single test unit format. The Company will be
manufacturing products under the sublicense agreement immediately, but it does
not currently have any sales that are subject to the royalty. The
Agreement will continue until the expiration of the last-to-expire of the
sublicensed patents, unless otherwise terminated at an earlier date by the
Company or Bio-Rad.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AS COMPARED WITH THE YEAR
ENDED DECEMBER 31, 2006
Revenues
Selected
Product Categories:
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
HIV
|
|
$ |
7,927,676
|
|
|
$ |
4,434,432
|
|
|
$ |
3,493,244
|
|
|
|
78.78 |
% |
Chagas
|
|
|
67,888
|
|
|
|
1,216,794
|
|
|
|
(1,148,906 |
) |
|
|
-94.42 |
% |
Other
|
|
|
769,313
|
|
|
|
642,786
|
|
|
|
126,527
|
|
|
|
19.68 |
% |
Net
Sales
|
|
|
8,764,877
|
|
|
|
6,294,012
|
|
|
|
2,470,865
|
|
|
|
39.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
grant income
|
|
|
466,071
|
|
|
|
208,468
|
|
|
|
257,603
|
|
|
|
123.57 |
% |
Total
Revenues
|
|
$ |
9,230,948
|
|
|
$ |
6,502,480
|
|
|
$ |
2,728,468
|
|
|
|
41.96 |
% |
Revenues
for our HIV tests during the year ended December 31, 2007 increased by $3.5
million over the same period in 2006. This was primarily attributable
to increased sales in Africa and sales to our distributor in the United States,
offset by the reduction of sales to Brazil in 2006 that were not repeated
in
2007. Sales of our Chagas product declined because a $1.2 million
order received in 2006 was not repeated. The increase in grant and
development income was due to revenue generated from grant and feasibility
studies for our DPP™ platform of which $509,000 was received and $466,000 was
earned in 2007. The $43,000 balance is reflected in deferred
revenues. Sales to Africa (see Note 3 of the financial statements)
were primarily from Nigeria of approximately $2.7 million. We have
been advised recently that our designation in Nigeria as one of the screening
tests has changed to that of the confirmatory test as this country moves
from a
parallel to a serial testing algorithm, which we expect to significantly
reduce
our sales to Nigeria in 2008.
Gross
Margin:
Gross
Margin related to
|
|
For
the years ended
|
|
|
|
|
|
|
|
Net
Product Sales:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Gross
Margin per Statement of Operations
|
|
$ |
3,862,303
|
|
|
$ |
2,016,568
|
|
|
$ |
1,845,735
|
|
|
|
91.53 |
% |
Less:
Research grant income
|
|
|
466,071
|
|
|
|
208,468
|
|
|
|
257,603
|
|
|
|
123.57 |
% |
Gross
Margin from Net Product Sales
|
|
$ |
3,396,232
|
|
|
$ |
1,808,100
|
|
|
$ |
1,588,132
|
|
|
|
87.83 |
% |
Gross
Margin %
|
|
|
38.75 |
% |
|
|
28.73 |
% |
|
|
|
|
|
|
|
|
The
increase in our gross margin resulted primarily from increased quantities
of our
product sales and increased average unit prices on product sales to our U.S.
distributor.
Research
and Development:
This
category includes costs incurred for regulatory approvals, product evaluations
and registrations.
Selected
expense lines:
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Clinical
& Regulatory Affairs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
186,428
|
|
|
$ |
174,489
|
|
|
$ |
11,939
|
|
|
|
6.84 |
% |
Consulting
|
|
|
40,813
|
|
|
|
78,249
|
|
|
|
(37,436 |
) |
|
|
-47.84 |
% |
Clinical
Trials
|
|
|
29,664
|
|
|
|
61,427
|
|
|
|
(31,763 |
) |
|
|
-51.71 |
% |
Other
|
|
|
12,657
|
|
|
|
8,942
|
|
|
|
3,715
|
|
|
|
41.55 |
% |
Total
Regulatory
|
|
$ |
269,562
|
|
|
$ |
323,107
|
|
|
$ |
(53,545 |
) |
|
|
-16.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
Other than Regulatory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
952,557
|
|
|
$ |
756,902
|
|
|
|
195,655
|
|
|
|
25.85 |
% |
Consulting
|
|
|
70,237
|
|
|
|
12,605
|
|
|
|
57,632
|
|
|
|
457.22 |
% |
Share-based
compensation
|
|
|
189,843
|
|
|
|
60,547
|
|
|
|
129,296
|
|
|
|
213.55 |
% |
Materials
and supplies
|
|
|
300,604
|
|
|
|
135,576
|
|
|
|
165,028
|
|
|
|
121.72 |
% |
Other
|
|
|
123,850
|
|
|
|
112,735
|
|
|
|
11,115
|
|
|
|
9.86 |
% |
Total
other than Regulatory
|
|
$ |
1,637,091
|
|
|
$ |
1,078,365
|
|
|
$ |
558,726
|
|
|
|
51.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Research and Development
|
|
$ |
1,906,653
|
|
|
$ |
1,401,472
|
|
|
$ |
505,181
|
|
|
|
36.05 |
% |
Expenses
for Clinical & Regulatory Affairs for the year ended December 31, 2007
decreased by $53,500 as compared to the same period in 2006. This was primarily
due to a reduction in consulting and clinical trail expenses related to CLIA
waiver for our HIV products, which were performed on both FDA approved HIV
products in 2006 and repeated for only one of these products in
2007.
Expenses
other than Clinical & Regulatory Affairs increased by $558,700 in the
year ended December 31, 2007 as compared with the same period in 2006 and
were
primarily related to an increase in the work related to feasibility studies
of
our DPP™ platform and grant income resulting in an increase in our personnel and
material costs. In addition the cost of share-based compensation
related to the value of common stock and employee stock options issued to
an
employee pursuant to a contract also contributed to the
increase.
Subject
to cash availability, the Company currently plans to continue to increase
its
spending on research and development in 2008 because it believes such spending
will result in the deployment of new and innovative products that are based
on
the newly patented DPP™ technology.
The
Company entered into five externally funded research agreements during 2007
that
accounted for total financial commitments of $600,000, of which $439,000
was
received by the Company during 2007 (approximately $396,000 of which was
earned
in 2007 on a percentage of completion basis) with clinical diagnostics, life
science, companion animal, academic, and government-affiliated public health
entities. These agreements all related to potential applications for
point of care tests that would employ our DPP™ technology. The Company has
several Research & Development and Regulatory projects
underway. Some highlights include:
Research
& Development - Dual Path Platform (DPP™)
During
2007 we made significant progress in implementing our strategy for the
deployment of our Dual Path Platform technology. We have further
confirmed that this platform technology has potential application to a broad
range of point-of-care/point-of-use products and markets. We believe
that our DPP™ intellectual property, product development and regulated
manufacturing know-how and experience are core strengths, but that significant
additional resources would be required for the associated product development
and marketing needed to adequately address such a wide range of opportunities.
A
key aspect of our strategy is therefore to leverage our strengths in developing
collaborations with premier organizations that have significant sales, marketing
and distribution capabilities. We have received a substantial amount
of interest in these kinds of collaborations. If successful, in each
case we would be an exclusive development and long-term manufacturing partner
to
these companies, and the companies would also acquire an exclusive license
to
our DPP™ intellectual property with respect to marketing the product
in the field of interest. We have several projects in discussion and in
negotiation, and we anticipate that we will consummate agreements during
2008
relative to these activities. There can be no assurance however that
these discussions will be successfully concluded or, even if they are, that
products will be developed and successfully commercialized as a result of
such
agreements.
On
January 29th
2008 we signed three new technology transfer, supply and license agreements
with
the Bio-Manguinhos (B-M) unit of the Oswaldo Cruz Foundation of Brazil for
products being developed by Chembio with its patented Dual Path Platform
(DPP™)
technology. Previously, in 2004, B-M and Chembio entered into a
similar agreement concerning one of Chembio’s HIV rapid tests.
Two
of
the products being developed will be used in screening programs funded by
Brazil’s Ministry of Health for the control and eradication of Leishmaniasis and
Leptospirosis, respectively, which are both blood-borne infectious diseases
that
are endemic in Brazil. A third test being developed is for the
confirmation of HIV-1 in patients who have tested positive with a screening
test. Bio-Manguinhos, also known as the Immunobiological Technology Institute,
is the largest producer of vaccines and kits for diagnosis of infectious
and
parasitic diseases in Latin America. Chembio’s DPP™ test platform was selected
for the screening programs because of its high sensitivity and specificity
of
prototypes evaluated by Bio-Manguinhos and because of the unique multiplexing
capabilities of DPP™ for the confirmatory assay. The DPP™ point-of-care
screening tests will complement the current Bio-Manguinhos national program,
which currently only uses laboratory-based technologies. The HIV confirmatory
test will allow for the simultaneous binding and uniform delivery of samples
to
multiple HIV antigens printed in the detection zone, providing results
equivalent to Western blot in a simple point-of-care format that provides
results within 20 minutes. Under the new agreements, once the products meet
mutually agreed-upon performance specifications and are approved for sale
in
Brazil, Chembio will receive a minimum purchase order for at least one million
tests within a one-year period. Thereafter, the agreement allows for production
of the products to be transferred to Brazil, subject to certain royalty
payments. This is similar to Chembio’s 2004 agreement with B-M for one of the
Company’s rapid HIV tests.
Based
upon the initial prototypes we have developed for each of these products,
we
anticipate that these products will be successfully developed in accordance
with
the agreed-upon specifications. Also, based upon our experience with
Bio-Manguinhos through the earlier agreement, we anticipate that the other
aspects of our agreement will be successful, though there can be no assurance
that this will in fact occur.
We
have
several other DPP™ research and development projects in various stages,
including products that we are or may be developing under contract for
third-party marketing partners. There can be no assurance that any of
these projects will result in completed products or that such products, if
successfully completed, will be successfully commercialized.
We
are
also pursuing under Chembio brands the development of products on the DPP™
platform that we believe will address market opportunities in point-of-care
testing. We anticipate that we will select such products during the
first quarter of 2008. We are attempting to identify
products that could generate attractive revenues and margins, address
significant market opportunities and that would feature the unique advantages
of
DPP™, such as its improved sensitivity, sample management and/or multiplexing
features. There can be no assurance that these efforts
will be successful in developing a Chembio-branded product or products, and
that
if developed such product or products will be successfully
commercialized.
Regulatory
Activities
In
July
2007, we submitted to the FDA the results of our untrained user studies in
connection with our pending CLIA waiver application for the HIV barrel product
marketed by Inverness under the name Clearview® Complete™ HIV 1/2. In October
2007, we announced that the FDA granted a CLIA waiver for this product. We
believe that CLIA waiver for this product will create additional sales
opportunities for Inverness with this product that were not available previously
without the CLIA waiver.
In
August
2007, we received ISO 13.485 certification. ISO 13.485 is a directive
of the International Standards Organization (ISO) that is specifically related
to manufacturers of in-vitro diagnostic products. This certification is
necessary to obtain CE (Community European) Markings for our products which
are
required in order to sell in most European countries, as well as many other
countries in the world. We have made progress in pursuing CE Markings
for all of our rapid HIV tests, which we anticipate receiving
during 2008. We have also made progress in pursuing CE
Marking for our Chagas rapid test, which we anticipate receiving
during 2008.
During
the fourth quarter we were granted an Investigational Device Exemption (IDE)
by
the FDA in connection with a study for which we have agreed upon a protocol
with
FDA. If this program is successfully completed, it would enable us and therefore
Inverness to expand the age range of our two FDA-approved rapid HIV tests
beyond
the current 18-64 year old range down to individuals 13 years of age and
above. We believe that this study and associated
submission, which will be a supplement to our Pre-Marketing Approval (PMA),
will
be completed during the first quarter of 2008. However there is no
assurance that this study will be completed successfully or that the FDA
will
approve these additional claims based upon our submission.
The
Company received its first USDA approval during the second quarter of 2007
for
manufacturing and marketing its Prima-TB STAT PAK™ test, a rapid test for the
detection of active pulmonary tuberculosis in non-human primate whole blood
samples. There is no assurance that commercialization of these
products will be successful.
Selling,
General and Administrative Expense:
Selected
expense lines:
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Wages
and related costs
|
|
$ |
1,517,728
|
|
|
$ |
1,502,747
|
|
|
$ |
14,981
|
|
|
|
1.00 |
% |
Consulting
|
|
|
229,322
|
|
|
|
318,536
|
|
|
|
(89,214 |
) |
|
|
-28.01 |
% |
Commissons,
License and Royalties
|
|
|
1,098,356
|
|
|
|
900,431
|
|
|
|
197,925
|
|
|
|
21.98 |
% |
Options
(per SFAS 123R)
|
|
|
152,319
|
|
|
|
182,674
|
|
|
|
(30,355 |
) |
|
|
-16.62 |
% |
Marketing
Materials
|
|
|
75,570
|
|
|
|
55,734
|
|
|
|
19,836
|
|
|
|
35.59 |
% |
Investor
Relations
|
|
|
224,843
|
|
|
|
574,557
|
|
|
|
(349,714 |
) |
|
|
-60.87 |
% |
Legal,
Accounting and 404
|
|
|
613,603
|
|
|
|
792,460
|
|
|
|
(178,857 |
) |
|
|
-22.57 |
% |
Travel,
Entertainment and shows
|
|
|
121,433
|
|
|
|
186,551
|
|
|
|
(65,118 |
) |
|
|
-34.91 |
% |
Bad
Debt Allowance
|
|
|
(11,210 |
) |
|
|
22,479
|
|
|
|
(33,689 |
) |
|
|
-149.87 |
% |
Other
|
|
|
809,850
|
|
|
|
659,120
|
|
|
|
150,730
|
|
|
|
22.87 |
% |
Total
S, G &A
|
|
$ |
4,831,814
|
|
|
$ |
5,195,289
|
|
|
$ |
(363,475 |
) |
|
|
-7.00 |
% |
Selling,
general and administrative expense for the year ended December 31, 2007
decreased by 7 percent as compared with the same period in
2006. Reduction in spending on investor relations and decreased
professional fees were partially offset by increases in commission, license
and
royalty expenses. The decreased cost of professional fees (legal,
accounting and section 404 of Sarbanes-Oxley) were related to the reduction
of
legal fees related a patent lawsuit that was settled in late 2006, which
was
partially offset by the added cost of section 404 related
expenses. The increase in commission, license and royalty expenses
were due to added royalty burden due to our agreements with Inverness Medical
Systems, Inc. as well as the settlement with Bio-Rad Laboratories for past
royalties on HIV-2 offset by reduced commissions on sales to Brazil which
occurred in 2006 but were not repeated in 2007. Our periodic review
of our allowance for doubtful accounts resulted in a reduction of the allowance
in the year ended December 31, 2007.
As
the
Company’s sales of its rapid test products increase, it will incur increased
costs for commissions and royalties on intellectual property
licenses.
Other
Income and Expense:
Other
Income and Expense
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Other
income (expense)
|
|
$ |
120,862
|
|
|
$ |
30,000
|
|
|
$ |
90,862
|
|
|
|
302.87 |
% |
Interest
income
|
|
|
145,289
|
|
|
|
29,532
|
|
|
|
115,757
|
|
|
|
391.97 |
% |
Interest
expense
|
|
|
(16,879 |
) |
|
|
(87,464 |
) |
|
|
70,585
|
|
|
|
-80.70 |
% |
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
(386,895 |
) |
|
|
-
|
|
|
|
0.00 |
% |
Total
Other Income and Expense
|
|
$ |
249,272
|
|
|
$ |
(414,827 |
) |
|
$ |
664,099
|
|
|
|
-160.09 |
% |
Interest
income for the year ended December 31, 2007 increased due to the additional
availability of funds to invest. In addition the Company received
$133,000 in 2007, net of expenses, from New York State related to a program
for
qualified emerging technology companies, which was partially offset by the
retirement of a fixed asset in 2007 of $12,000, resulting in the increase
in
other income. The conversion of a bridge loan in 2006 related to the
loss on extinguishment of debt. The lack of interest expense related
to the bridge loan in 2006 and the effect of several of our operating leases
approaching the end of their terms, resulted in the decrease in interest
expense
in 2007 over 2006.
SELECTED
FOURTH QUARTER INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND
2006.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
SELECTED
OPERATION INFORMATION
|
FOR
THE THREE MONTHS ENDED
|
UNAUDITED
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
REVENUES:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,160,901
|
|
|
$ |
2,610,413
|
|
Research
grant income
|
|
|
215,416
|
|
|
|
(1,026 |
) |
TOTAL
REVENUES
|
|
|
2,376,317
|
|
|
|
2,609,387
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,150,742
|
|
|
|
1,780,163
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,225,575
|
|
|
|
829,224
|
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
521,580
|
|
|
|
339,153
|
|
Selling,
general and administrative expenses
|
|
|
1,341,715
|
|
|
|
1,454,524
|
|
|
|
|
1,863,295
|
|
|
|
1,793,677
|
|
LOSS
FROM OPERATIONS
|
|
|
(637,720 |
) |
|
|
(964,453 |
) |
Revenues:
Selected
Product Categories:
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
HIV
|
|
$ |
2,001,279
|
|
|
$ |
2,464,192
|
|
|
$ |
(462,913 |
) |
|
|
-18.79 |
% |
Chagas
|
|
|
6,808
|
|
|
|
15,887
|
|
|
|
(9,079 |
) |
|
|
-57.15 |
% |
Other
|
|
|
152,814
|
|
|
|
130,334
|
|
|
|
22,480
|
|
|
|
17.25 |
% |
Net
Sales
|
|
|
2,160,901
|
|
|
|
2,610,413
|
|
|
|
(449,512 |
) |
|
|
-17.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
grant income
|
|
|
215,416
|
|
|
|
(1,026 |
) |
|
|
216,442
|
|
|
|
21095.71 |
% |
Total
Revenues
|
|
$ |
2,376,317
|
|
|
$ |
2,609,387
|
|
|
$ |
(233,070 |
) |
|
|
-8.93 |
% |
Revenues
for our HIV tests during the three months ended December 31, 2007 decreased
by
$463,000 over the same period in 2006. This was primarily due to $1.1
million of revenues realized during the three months ended December 31, 2006
received from a division of Bio-Rad Laboratories in Mexico that did not recur
in
2007 as well as sales to Brazil of $845,000 in 2006 that did not recur in
2007
offset by increased rapid HIV test sales to Africa of $740,000 and to
our distributor in the United States of $875,000, including an adjustment
of
$94,000 for sales prior to the fourth quarter of 2007.
Gross
Margin:
Gross
Margin related to
|
|
For
the three months ended
|
|
|
|
|
|
|
|
Net
Product Sales:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Gross
Margin per Statement of Operations
|
|
$ |
1,225,575
|
|
|
$ |
829,224
|
|
|
$ |
396,351
|
|
|
|
47.80 |
% |
Less:
Research grant income
|
|
|
215,416
|
|
|
|
(1,026 |
) |
|
|
216,442
|
|
|
|
21095.71 |
% |
Gross
Margin from Net Product Sales
|
|
$ |
1,010,159
|
|
|
$ |
830,250
|
|
|
$ |
179,909
|
|
|
|
21.67 |
% |
Gross
Margin %
|
|
|
46.75 |
% |
|
|
31.81 |
% |
|
|
|
|
|
|
|
|
Our
gross
margins increased for the three months ended December 31, 2007 as compared
to
the same period in 2006. This increase was due to several factors
some of which included: a) improved average selling prices due to sales in
the
United States, and b) the timing of certain additional payments under our
U.S.
rapid HIV test marketing agreements, and c) a change in the overhead allocated
to inventories based on actual results for the year.
Research
and Development:
This
category includes costs incurred for regulatory approvals, product evaluations
and registrations. Clinical & Regulatory Affairs totaled $14,000
for the three months ended December 31, 2007 as compared to $73,600 for the
same
period in 2006. Research & Development costs other than
Regulatory totaled $507,600 for the three months ended December 31, 2007
as
compared to$ 265,600 for the same period in 2006.
Expenses
for Clinical & Regulatory Affairs for the three months ended December 31,
2007 decreased by $59,600 as compared to the same period in 2006. This was
primarily due to credit for certain regulatory expenses we incurred during
2007
that we billed to our U.S. marketing partner in the fourth quarter of
2007 under our agreements.
Expenses
other than Clinical & Regulatory Affairs increased in the three months ended
December 31, 2007 as compared with the same period in 2006 and were primarily
related to an increase in the work related to feasibility studies of our
DPP™
platform and to research grants that resulted in an increase in personnel,
consulting and material costs. In addition the cost of share-based
compensation related to the value of common stock and employee stock options
issued to an employee pursuant to a contract also contributed to the
increase.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense for the three months ended December 31,
2007
decreased by 7.8 percent as compared with the same period in
2006. Reduction in spending on investor relations and decreased
professional fees were offset partially by increases in commission, license
and
royalty expenses. The decreased cost of professional fees (legal,
accounting and section 404 -Sarbanes-Oxley) were related to the reduction
of
legal fees related to the Plan (see Note 1) of $250,000 which were charged
to
paid in capital (some of this amount was charged to legal expenses in the
third
quarter of 2007) offset by the added cost of section 404 related
expenses. The increase in commission, license and royalty expenses
were due to added royalty burden due to the settlement with Bio-Rad Laboratories
for past royalties on HIV-2.
Operating
Loss
The
operating loss shown was impacted by the number of adjustments described
above
that were made during the fourth quarter of 2007, please see our analysis
of the
full year results for a more complete understanding of our financial results
for
2007.
LIQUIDITY
AND CAPITAL RESOURCES
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
cash used in operating activities
|
|
$ |
(1,345,796 |
) |
|
$ |
(4,202,923 |
) |
|
$ |
2,857,127
|
|
|
|
-67.98 |
% |
Net
cash used in investing activities
|
|
|
(410,425 |
) |
|
|
(374,513 |
) |
|
|
(35,912 |
) |
|
|
9.59 |
% |
Net
cash provided by financing activities
|
|
|
293,204
|
|
|
|
8,635,674
|
|
|
|
(8,342,470 |
) |
|
|
-96.60 |
% |
NET
(DECREASE) INCREASE IN CASH
|
|
$ |
(1,463,017 |
) |
|
$ |
4,058,238
|
|
|
$ |
(5,521,255 |
) |
|
|
-136.05 |
% |
The
Company had a decrease in cash for the year ended December 31, 2007 as compared
to an increase in cash for the same period in 2006. The decrease during the
2007
period is primarily attributable to the cash used in operations. The
increase during the 2006 year was primarily due to cash from the sale of
additional Series B Preferred of $1,000,000, proceeds from a bridge loan
of
$1,300,000 and net proceeds from the sales of Series C Preferred of $7,440,000,
all received in 2006.
The
Company had a working capital surplus of $3,229,000 at December 31, 2007
and a
working capital surplus of $5,113,000 at December 31, 2006. Its
liquidity and cash requirements will depend on several factors. These factors
include (1) the level of revenue growth; (2) the extent, if any, to which
that
revenue growth improves operating cash flows; (3) the Company’s expenditures for
research and development, facilities, marketing, regulatory approvals, and
other
expenditures it may determine to make; and (4) the Company’s investment in
capital equipment and the extent to which this investment improves cash flow
through operating efficiencies. If our resources are not sufficient to
fund our needs through 2008, there are no assurances that we will be successful
in raising sufficient capital.
The
following table lists the future payments required on the Company’s debt and
certain other contractual obligations as of December 31, 2007:
OBLIGATIONS
|
|
Total
|
|
|
Less
than
|
|
|
1-3
Years
|
|
|
4-5
Years
|
|
|
Greater
than
|
|
|
|
|
|
|
1
Year
|
|
|
|
|
|
|
|
|
5
Years
|
|
Capital
Leases (1)
|
|
$ |
136,752
|
|
|
$ |
35,832
|
|
|
$ |
85,716
|
|
|
$ |
15,204
|
|
|
$ |
-
|
|
Operating
Leases
|
|
|
170,880
|
|
|
|
128,160
|
|
|
|
42,720
|
|
|
|
-
|
|
|
|
-
|
|
Other
Long Term Obligations(2)
|
|
|
1,775,666
|
|
|
|
897,666
|
|
|
|
810,500
|
|
|
|
27,000
|
|
|
|
40,500
|
|
Total
Obligations
|
|
$ |
2,083,298
|
|
|
$ |
1,061,658
|
|
|
$ |
938,936
|
|
|
$ |
42,204
|
|
|
$ |
40,500
|
|
|
(1)
|
This
represents capital leases used to purchase capital equipment. (Obligations
inclusive of interest).
|
|
(2)
|
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 Recent Events above.
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,
Inverness markets the Company’s FDA-approved rapid HIV tests under Inverness’
Clearview® brand, Chembio received a nonexclusive license to Inverness’ lateral
flow patents, and the Company and StatSure settled their patent litigation
related to the HIV barrel format product, marketed exclusively now by Inverness
(except in Mexico) as Clearview Complete HIV 1/2HIV ½. Inverness
markets Chembio’s cassette format rapid HIV test under the Clearview and
Chembio’s HIV 1/2 STAT-PAK® brand, i.e., as Clearview HIV 1/2
STAT-PAK. This enables Chembio to have brand identity for its
cassette product which Chembio markets directly, not through Inverness, outside
the United States. The distribution agreements with Inverness contain
gross margin sharing formulae among Inverness, the Company and, in the case
of
the HIV barrel product, StatSure. The specific terms of these
agreements are available for review in the Company’s Current Report on Form 8-K
filed with the Commission on October 5, 2006 (SEC Accession No. 000085), which
is incorporated by reference herein.
Inverness
launched marketing of our two FDA approved rapid HIV tests in the United States
during the first quarter of 2007. Though both products are now CLIA
waived, we only received the CLIA waiver for the HIV barrel product in October
of 2007. We believe that Inverness’ distribution network in the point
of care markets for HIV tests, namely hospital emergency departments, public
health clinics, and physicians’ offices, is outstanding and superior to the
networks of the two other CLIA-waived competitive products. However,
Inverness, in the development of the market for our products, is competing
against a well established product manufactured by the principal competitor
in
the US market, Orasure Technologies. Furthermore Orasure’s product
has certain product features and specifications not currently available in
our
products being marketed by Inverness. These features and
specifications include the inability to currently use our product with oral
fluid samples and the current limitation of the regulatory approval of our
product that is only approved for use in testing individuals that are over
18
years of age. We are currently completing steps to address these
issues. There can be no assurance that we will successfully complete
these steps or that, assuming we do, that Inverness will take all steps
reasonably necessary to exploit the improved market opportunity in that
case. We do believe however that there are other features and
specifications, such as test performance (sensitivity and specificity), shelf
life, ease of use, and price that we believe should help to offset those
disadvantages in the interim. We therefore believe that Inverness
will be successful in increasing its share of the growing Unites States rapid
HIV test market, although there are risks and uncertainties associated with
this.
During
2007 we signed a contract with the Partnership for Supply Chain Management
(“PSCM”) based in Washington D.C. PSCM is the organization now
charged with centralizing procurement, distribution, logistics and forecasting
under the United States President’s Emergency Plan for AIDS Relief (“PEPFAR”)
and other donor-funded relief programs in the developing world. Our
sales to the PEPFAR program are increasingly through this
organization. However, sales into PEPFAR countries still largely
depend upon being selected in national testing protocols. Currently
our STAT-PAK test is designated as the confirmatory test in all of the national
rapid HIV testing protocols in the Republic of Uganda, and in four of the eight
parallel testing algorithms (two tests are used on each patient) adopted by
the
Nigerian Ministry of Health. We have been advised recently that our
designation in Nigeria as one of the screening tests has changed to that of
the
confirmatory test as this country moves from a parallel to a serial testing
algorithm. Sales to Nigeria for 2007 approximated $2.7 million and a
substantial amount is not expected to recur in 2008. In October 2007,
we were also selected as the confirmatory test to be used in Ethiopia, and
initial orders have been shipped to this market. Progress in being
selected in additional countries is unpredictable and very price
competitive.
Numerous
other distribution opportunities are being pursued directly by Chembio for
its
HIV 1/2 STAT-PAK cassette and dipstick tests outside the United States, and
progress is being made. However there can be no assurance that these
efforts will result in successful distribution arrangements.
During
2007 we sold our HIV barrel product under our SURE CHECK® brand to our
distributor in Mexico, a division of Bio-Rad Laboratories, Inc. We
shipped approximately $1.4 million of this product to this customer during
2007. Our agreement with Inverness provides that this distribution
arrangement, which is currently the only exception to our otherwise global
exclusive agreement with Inverness for this product, was to terminate on
September 29, 2007. However, during 2007 Inverness agreed to extend
this carve-out to at least September 2008. We believe that additional
sales may be realized to Mexico although there can be no assurance that this
will occur.
With
the
additional revenues at higher margins as a result of the introduction of our
FDA-approved rapid HIV tests in the United States, and continued growth in
our
export revenues from our rapid HIV tests, we increased our sales and gross
margins significantly as compared with 2006. We believe that we will
experience continued revenue growth from our HIV tests in 2008 as we believe
that the market demand for rapid HIV tests will continue to increase in 2008,
and we believe we will participate in this continued growth. We
believe that growth in the United States market will occur as rapid tests
continue to replace laboratory based technologies, as routine HIV testing
recommendations by the CDC are increasingly implemented, and as our US marketing
partner participates in this growth with our tests with our
support. We also believe that the demand for rapid HIV tests will
increase in the donor funded markets as large amounts of funding for testing
is
appropriated for PEPFAR in 2008 and beyond. However, in order to
compete against manufacturers in Asia that currently dominate the supply of
rapid HIV tests to PEPFAR-funded markets, we will need to underscore the quality
of our fully-licensed, FDA-approved products and the justification for providing
US-based manufacturers with a fair opportunity to participate in US
taxpayer-funded programs. If we can continue to grow our revenues, we
will also continue to realize economies of scale as we did in 2007, thereby
improving margins. We have also implemented a series of process and
efficiency projects that if successfully implemented will also improve margins
and lower costs.
In
2007
we exclusively focused our business development efforts on Dual Path Platform
(DPP™), a rapid, point-of-care testing technology platform for which we were
granted a U.S. patent in March, 2007. This will continue in
2008. We have made significant progress in implementing our
strategies for the deployment of our DPP technology. We have
confirmed, through our own studies and those that we are performing for
prospective marketing partners, that this technology has potential application
to a broad range of point-of-care/point-of-use products and
markets. We believe that our DPP intellectual property, product
development and regulated manufacturing know-how and experience are core
strengths. Because significant additional resources would be required
for the associated product development and marketing needed to adequately
address such a wide range of opportunities, a major aspect of our DPP business
development strategy is to develop collaborations with premier organizations
that have significant sales, marketing and distribution
capabilities. We have received a substantial amount of interest in
these kinds of collaborations. In each case we would be an exclusive
development and long term manufacturing partner with these companies, and the
companies would also acquire an exclusive license to our DPP intellectual
property to market the product in the field of interest. Our focus is
on opportunities with partners that can address large markets where the proposed
product fills an unmet need. We believe that during 2008 we
will complete additional commercial opportunities for the license, development
and manufacture of new products based upon our DPP™ technology based upon this
business development strategy.
On
January 29, 2008 we signed three agreements with the Bio-Manguinhos division
of
the Oswald Cruz Foundation, part of Brazil’s Ministry of Health, for three
products (two neglected diseases, Leishmaniasis and Leptospirosis, and a
confirmatory test for HIV-1) based on our DPP technology. Pursuant to
these agreements, we have contracted to develop, supply and license these
products, and transfer the production of these products to the Bio-Manguinhos
facility. We believe that this agreement will enable us to scale up
the development, validation, and production of DPP products, and this will
facilitate additional development projects for DPP.
Provided
we successfully develop these products and that they are granted regulatory
approval in Brazil, these agreements provide us with the opportunity to realize
a total of approximately $3.4 million of product and license
revenues. We anticipate that approximately $1.7 million of these
revenues will be realized during the 2nd half of
2008, and
the balance in 2009. However there can be no assurance of the amount
or timing of these revenues.
We
are
also pursuing under Chembio brands the development of products on the DPP
platform that we believe will address market opportunities in point-of-care
testing. We anticipate that we will select such products during the
first quarter of 2008. We are attempting to identify products that
could generate attractive revenues and margins, address significant market
opportunities and that would feature the unique advantages of DPP™, such as its
improved sensitivity, sample management and/or multiplexing
features. There can be no assurance that these efforts will be
successful in developing a Chembio-branded product or products, and that if
developed such product or products will be successfully
commercialized.
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.
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting
policies relate to revenue recognition, research and development costs,
valuation of inventory, valuation of long-lived assets and income
taxes. These policies, and the related procedures, are described in
detail below.
Revenue
Recognition –
We
sell
our products directly through our sales force and through
distributors. Revenue from direct sales of our product is recognized
upon shipment to the customer. Income from research grants are
recognized when earned. Sales are recorded net of discounts, rebates
and returns.
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. Our 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. For
example, each additional 1% of obsolete inventory would reduce such inventory
by
approximately $14,000.
Allowance
for doubtful accounts –
Our
policy is to review our accounts receivable on a periodic basis, no less than
monthly. On a quarterly basis an analysis is made of the adequacy of
our allowance for doubtful accounts and adjustments are made
accordingly. The current allowance is approximately 1.05% of accounts
receivable. For example each additional 1% of accounts receivable
that becomes uncollectible would reduce such balance of accounts receivable
by
approximately $10,000.
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 we do not become profitable, we may be
unable to utilize our deferred tax asset, which approximates $7,988,000 at
December 31, 2007.
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, we determined that it was appropriate to
establish a valuation allowance for the full amount of our deferred tax
assets.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the consolidated financial statements tax positions taken or
expected to be taken on a tax return, including a decision whether to file
or
not to file in a particular jurisdiction.
The
calculation of our tax liabilities involves the inherent uncertainty associated
with the application of complex tax laws. We are subject to
examination by various taxing authorities. We believe that as a
result of our losses sustained to date, any examination would result in a
reduction of our net operating losses rather than a tax liability. As
such, we have not provided for additional taxes estimated under FIN 48,
Accounting for Uncertainty in Income Taxes.
The
above
listing is not intended to be a comprehensive list of all of our 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 our 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 16,640 square feet of industrial space
for $10,680 per month. The space is utilized for research and
development activities (approximately 2,600 square feet), offices (approximately
4,040 square feet) and production (approximately 10,000 square
feet). The lease term expires on April 30, 2009, and the Company has
an option 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
Please
refer to the “Organization Within Last Five Years” section beginning on page 17
for a discussion of the Company’s relationships and related
transactions.
LEGAL
MATTERS
The
validity of the shares of our common stock offered by the Selling
Stockholders has been passed upon by the law firm of Patton Boggs,
LLP.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.” The table below sets forth the high and low bid prices per
share of our common stock for each quarter of our two most recently completed
fiscal years. These prices represent inter-dealer quotations without
retail markup, markdown, or commission and may not necessarily represent actual
transactions.
Fiscal
Year 2007
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$0.93
|
$0.61
|
Second
Quarter
|
$0.65
|
$0.47
|
Third
Quarter
|
$0.65
|
$0.37
|
Fourth
Quarter
|
$0.57
|
$0.26
|
|
|
|
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
|
Fourth
Quarter
|
$0.92
|
$0.63
|
Rule
15g-9 of the Securities and Exchange Commission, known as the Penny Stock 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 penny stock issues. As a result of these rules,
investors sometimes find it difficult to sell shares of penny stock
issuers. At the present time, transactions in our common stock are
not subject to the Penny Stock Rule because our average revenue for 2005, 2006
and 2007 exceeded $6 million per year. However, there can be no
assurance that transactions in our common stock will not be subject to the Penny
Stock Rule in the future.
Holders
As
of
April 2, 2008, there were approximately 905 record owners of our common
stock.
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.
|
Equity
Compensation Plan Information
Equity
Compensation Plan Information as of December 31,
2007
|
|
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
|
2,201,500
|
$0.64
|
433,500
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
Total
|
2,201,500
|
$0.64
|
433,500
|
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by the Company in each
of
the last two completed fiscal years for our principal executive officer, our
two
most highly compensated executive officers other than our principal executive
officer whose annual compensation exceeded $100,000, and two additional
individuals for whom disclosure would have been made in this table but for
the
fact that the individual was not serving as an executive officer of our company
at December 31, 2007.
Name
/
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards
($)
|
|
Stock
Awards
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
Lawrence
A. Siebert
|
|
2007
|
|
$ |
249,135
|
|
$ |
26,000
|
|
$ |
-
|
|
$ |
-
|
|
$ |
9,314
|
|
$ |
284,449
|
CEO
|
|
2006
|
|
|
207,115
|
|
|
20,000
|
|
|
21,017
|
|
|
-
|
|
|
7,200
|
|
|
255,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
J. Larkin
|
|
2007
|
|
$ |
153,654
|
|
$ |
15,000
|
|
$ |
-
|
|
$ |
-
|
|
$ |
1,304
|
|
$ |
169,958
|
CFO
|
|
2006
|
|
|
140,385
|
|
|
15,000
|
|
|
27,300
|
|
|
-
|
|
|
-
|
|
|
182,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Javan
Esfandiari
|
|
2007
|
|
$ |
180,192
|
|
$ |
21,000
|
|
$ |
99,993
|
|
$ |
89,850
|
|
$ |
5,510
|
|
$ |
396,545
|
SVP-R&D
|
|
2006
|
|
|
150,385
|
|
|
12,000
|
|
|
41,390
|
|
|
-
|
|
|
4,800
|
|
|
208,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom
Ippolito
|
|
2007
|
|
$ |
155,481
|
|
$ |
12,000
|
|
$ |
-
|
|
$ |
-
|
|
$ |
381
|
|
$ |
167,862
|
VP-Regulatory
|
|
2006
|
|
|
140,385
|
|
|
9,000
|
|
|
7,754
|
|
|
-
|
|
|
-
|
|
|
157,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bruce
|
|
2007
|
|
$ |
143,654
|
|
$ |
12,000
|
|
$ |
-
|
|
$ |
-
|
|
$ |
990
|
|
$ |
156,644
|
VP-Operations
|
|
2006
|
|
|
127,981
|
|
|
9,000
|
|
|
24,516
|
|
|
-
|
|
|
-
|
|
|
161,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Salary
is total base salary.
|
2
|
Any
bonus earned was paid on a discretionary
basis.
|
3
|
The
estimated fair value of any option or common stock granted was determined
at the date of grant by using the Black-Scholes option pricing
model.
|
4
|
Mr.
Siebert also serves as a director on the Company’s board of
directors. Mr. Siebert does not receive any compensation for
this director role.
|
5
|
Other
compensation includes an employer match to 401(K) contributions and
a car
allowances where applicable.
|
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.
Esfandiari. On April 23, 2007, Mr. Esfandiari and
the Company entered into an employment agreement (the "Employment
Agreement"), effective March 5, 2007, for Mr. Esfandiari to continue
as the Company's Senior Vice President of Research and Development for an
additional term of three years. Mr. Esfandiari's salary under the
Employment Agreement is $185,000 for the first year, $210,000 for the second
year, and $235,000 for the final year. Mr. Esfandiari is eligible for
a cash bonus of up to 50% of his base salary for each respective year,
consisting of (i) a cash bonus of up to 37.5% of his calendar year base salary
based on the performance of the Company's Dual Path Platform Technology, which
is directly related to certain annual revenue targets budgeted by management
of
the Company, and (ii) a cash bonus of up to 12.5% of his calendar year base
salary that is at the complete discretion and determination of the board of
directors. The Company also granted Mr. Esfandiari a stock grant of
200,000 shares of the Company's common stock. 100,000 shares vested immediately,
50,000 shares vested on the first anniversary date of the effective date of
the Employment Agreement, and 50,000 shares will vest on the second
anniversary of the effective date of the Employment
Agreement. In addition, Mr. Esfandiari is eligible to tecieve up
to 50,000 shares of the Company's common stock for each of 2007 and 2008
based upon the performance of the Company's Dual Path Platform Technology,
which
is directly related to certain annual revenue targets budgeted by management
of
the Company. Pursuant to the Company's 1999 Equity Incentive Plan and
Stock Option Agreement, the Company also granted Mr. Esfandiari incentive stock
options to purchase 300,000 shares of the Company's common stock. The
price per share of these options is equal to the fair market value of the
Company's common stock on April 23, 2007, which is the date on which the
Agreement was entered into. 100,000 shares of the stock options
vested immediately, 100,000 shares of the stock options vested on the first
anniversary of the effective date of the Employment Agreement, and 100,000
shares of the stock options will vest on the second anniversary of the effective
date of the Employment Agreement. 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 twelve months.
None
of
the other officers of the Company has an employment contract with the
Company.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2007
Name
|
Number
of Securities Underlying Unexcercised Options Excerciseable
(#)
|
Number
of Securities Underlying Unexcercised Options
Unexcersable
(#)
|
Option
Exercise Price (5)
($)
|
Option
Expiration Date
|
Option
Vesting Date
|
Foot-
note
|
Lawrence
A. Siebert
|
10,000
|
|
0.75
|
12/31/2008
|
4/17/2006
|
2
|
|
10,000
|
|
0.75
|
5/4/2011
|
4/17/2006
|
2
|
|
50,000
|
|
0.75
|
5/28/2011
|
4/17/2006
|
2,
3
|
|
50,000
|
|
0.75
|
5/28/2011
|
1/1/2007
|
2,
3
|
|
50,000
|
|
0.75
|
5/4/2011
|
5/5/2004
|
4
|
Richard
J. Larkin
|
25,000
|
|
0.75
|
5/17/2010
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/17/2010
|
1/1/2007
|
2
|
|
18,750
|
|
0.62
|
3/24/2011
|
3/24/2006
|
1
|
|
18,750
|
|
0.62
|
3/24/2011
|
1/1/2007
|
1
|
|
50,000
|
|
0.45
|
9/15/2010
|
5/5/2004
|
4
|
Javan
Esfandiari
|
30,000
|
|
0.75
|
3/31/2008
|
4/17/2006
|
2
|
|
5,000
|
|
0.75
|
12/31/2008
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/17/2010
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/17/2010
|
1/1/2007
|
2
|
|
18,750
|
|
0.62
|
3/24/2011
|
3/24/2006
|
1
|
|
18,750
|
|
0.62
|
3/24/2011
|
1/1/2007
|
1
|
|
5,000
|
|
0.75
|
5/4/2011
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/28/2011
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/28/2011
|
4/17/2006
|
2
|
|
25,000
|
|
0.75
|
5/28/2011
|
5/28/2007
|
2
|
|
30,000
|
|
0.75
|
5/4/2011
|
5/5/2004
|
4
|
|
100,000
|
|
0.599
|
4/23/2012
|
4/23/2007
|
2,
3
|
|
100,000
|
|
0.599
|
4/23/2012
|
3/5/2008
|
2,
3
|
|
|
100,000
|
0.599
|
4/23/2012
|
3/5/2009
|
2,
3
|
Tom
Ippolito
|
15,000
|
|
0.62
|
3/24/2011
|
3/24/2006
|
1
|
Richard
Bruce
|
5,000
|
|
0.75
|
12/31/2008
|
4/17/2006
|
2
|
|
12,500
|
|
0.75
|
5/17/2010
|
4/17/2006
|
2
|
|
12,500
|
|
0.75
|
5/17/2010
|
1/1/2007
|
2
|
|
12,500
|
|
0.62
|
3/24/2011
|
3/24/2006
|
1
|
|
12,500
|
|
0.62
|
3/24/2011
|
1/1/2007
|
1
|
|
5,000
|
|
0.75
|
5/4/2011
|
4/17/2006
|
2
|
|
10,000
|
|
0.75
|
5/4/2011 |
5/5/2004 |
4
|
|
20,000
|
|
0.588
|
5/4/2011
|
5/5/2004
|
4
|
1
All options issued with a $.62 exercise price were issued during 2006 as
part of
the Company’s 1999 Option Plan. Pursuant to this plan, the Company
granted 244,000 options to all employees.
2
All options issued with a $.75 exercise price and an April 17, 2006 vesting
date
were issued on April 17, 2006 as part of the Company’s 1999 Option
Plan. Pursuant to this plan, the Company granted 244,000 options to
all employees. On April 17, 2006, the Company’s Compensation
Committee 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.
3
Options issued in connection with an employment contract.
4
All other options shown were issued prior to 2006 as part of the Company's
1999
Option Plan.
5
On February 15, 2008, the Company’s Compensation Committee approved the
reduction of the exercise price to $0.48 per share of each employee stock
option
award issued under the 1999 Equity Incentive Plan for which the exercise
price
was greater than $0.48 per share, including all options listed in this
table.
DIRECTOR
COMPENSATION
Name
|
Fees
Earned or Paid in Cash
($)
1
|
Option
Awards
($)
2
|
Total
($)
|
Alan
Carus
|
$ 30,500
|
$
38,148
|
$
68,648
|
Gary
Meller
|
26,750
|
42,090
|
68,840
|
Katherine
L. Davis
|
23,000
|
33,008
|
56,008
|
Gerald
Eppner3
|
21,500
|
4,782
|
26,282
|
1
|
Fees
earned or paid in cash represents a yearly fee and fees for meeting
expenses: (a) Mr. Carus received an $18,000 annual fee as a member
of the
board of directors, a $2,500 annual fee as audit committee chairman
and
$10,000 in meeting fees paid during 2007; (b) Mr. Eppner received
a
$20,000 fee as a member of the board of directors, and $1,500
in meeting fees paid during 2007; (c) Dr. Meller received an $18,000
annual fee as a member of the board of directors, and $8,750 in meeting
fees; (d) Ms. Davis received an $18,000 annual fee as a member of
the
board of directors, and $5,000 in meeting
fees.
|
2
|
Each
outside member of the board of directors is granted the right to
purchase
180,000 shares of the Company’s common stock with an exercise price equal
to the market price on the date of the grant as part of their annual
compensation. One-fifth of these options are exercisable on the
date of grant, one-fifth become exercisable on the first anniversary
of
the date of grant, and additional one-fifths become exercisable on
the
second through fourth anniversary of the date of grant. The
fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model.
|
3
|
Mr.
Eppner resigned from our Board of Directors on January 30,
2007.
|
Director
Compensation
All
non-employee directors are paid an $18,000 annual retainer, semi-annually,
and
once every five years stock options to acquire 180,000 shares of the Company's
common stock, with an exercise price equal to the market price on the date
of
the grant. Stock options to acquire 36,000 shares become exercisable
on the date of grant, and options to acquire an additional 36,000 shares become
exercisable on the date of each of the four succeeding annual meetings of
stockholders if and to the extent that the non-employee director is reelected
as
a director at each such annual meeting. The audit committee chairman
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 board
of
directors' meeting 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.
FINANCIAL
STATEMENTS
See
the
Consolidated Financial Statements beginning on page F-1, “Index to Consolidated
Financial Statements.”
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
ADDITIONAL
INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 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—
|
|
|
Page(s)
|
Report
of Registered Independent Public Accounting Firm
|
F-2
|
|
|
Consolidated
Financial Statements:
|
|
|
|
Balance
Sheets
|
|
December
31, 2007 and 2006
|
F-3
|
|
|
Statements
of Operations
|
|
Years
ended December 31, 2007 and 2006
|
F-4
|
|
|
Statements
of Changes in Stockholders’ Equity (Deficit)
|
|
Year
ended December 31, 2006
|
F-5
|
|
|
Statements
Of Changes in Stockholders’ Equity (Deficit)
|
F-6
|
Year
ended December 31, 2007
|
|
|
|
Statements
of Cash Flows
|
|
Years
ended December 31, 2007 and 2006
|
F-7
- F-8
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
- F-25
|
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 sheets of Chembio Diagnostics, Inc. and
Subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the
consolidated statements of operations, stockholders' equity (deficit) and
cash
flows for the two years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated
results of its operations and its cash flows for the two years in the period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
LAZAR
LEVINE & FELIX LLP
/s/
LAZAR LEVINE & FELIX LLP
New
York,
New York
March
7,
2008
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
AS
OF DECEMBER 31,
|
|
|
|
|
|
|
|
-
ASSETS -
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,827,369
|
|
|
$ |
4,290,386
|
|
Accounts
receivable, net of allowance for doubtful accounts of $10,045
and $42,967
for 2007 and 2006, respectively
|
|
|
946,340
|
|
|
|
1,350,240
|
|
Inventories
|
|
|
1,453,850
|
|
|
|
1,108,950
|
|
Prepaid
expenses and other current assets
|
|
|
243,748
|
|
|
|
204,092
|
|
TOTAL
CURRENT ASSETS
|
|
|
5,471,307
|
|
|
|
6,953,668
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, net of accumulated depreciation
|
|
|
829,332
|
|
|
|
603,603
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
284,358
|
|
|
|
349,306
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,584,997
|
|
|
$ |
7,906,577
|
|
|
|
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIENCY)-
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
2,175,791
|
|
|
$ |
1,709,939
|
|
Deferred
research and development revenue
|
|
|
43,334
|
|
|
|
-
|
|
Accrued
interest payable
|
|
|
-
|
|
|
|
93,160
|
|
Current
portion of obligations under capital leases
|
|
|
23,458
|
|
|
|
37,336
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,242,583
|
|
|
|
1,840,435
|
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
|
|
|
|
Obligations
under capital leases - net of current portion
|
|
|
79,588
|
|
|
|
7,081
|
|
Series
C preferred stock redemption put
|
|
|
-
|
|
|
|
449,677
|
|
TOTAL
LIABILITIES
|
|
|
2,322,171
|
|
|
|
2,297,193
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - Series C 7% Redeemable Convertible - $.01 par value:
None
and 165 shares issued and outstanding as of 2007 and 2006.
|
|
|
-
|
|
|
|
6,549,191
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIENCY):
|
|
|
|
|
|
|
|
|
Preferred
Stock – 10,000,000 shares authorized:
|
|
|
|
|
|
|
|
|
Series
A 8% Convertible - $.01 par value: None and 149.92119 shares
issued and
outstanding as of 2007 and 2006, respectively.
|
|
|
-
|
|
|
|
2,504,313
|
|
Series
B 9% Convertible - $.01 par value: None and 113.93591 shares
issued and
outstanding as of 2007 and 2006, respectively.
|
|
|
-
|
|
|
|
3,555,786
|
|
Common
stock - $.01 par value; 100,000,000 shares authorized 60,537,534
and
11,296,961 shares issued and outstanding as of 2007 and 2006,
respectively
|
|
|
605,375
|
|
|
|
112,970
|
|
Additional
paid-in capital
|
|
|
39,003,148
|
|
|
|
19,960,618
|
|
Accumulated
deficit
|
|
|
(35,345,697 |
) |
|
|
(27,073,494 |
) |
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
4,262,826
|
|
|
|
(939,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
6,584,997
|
|
|
$ |
7,906,577
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
FOR
THE YEARS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
REVENUES:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
8,764,877
|
|
|
$ |
6,294,012
|
|
Research
grant income
|
|
|
466,071
|
|
|
|
208,468
|
|
TOTAL
REVENUES
|
|
|
9,230,948
|
|
|
|
6,502,480
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
5,368,645
|
|
|
|
4,485,912
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
3,862,303
|
|
|
|
2,016,568
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
1,906,653
|
|
|
|
1,401,472
|
|
Selling,
general and administrative expenses
|
|
|
4,831,814
|
|
|
|
5,195,289
|
|
|
|
|
6,738,467
|
|
|
|
6,596,761
|
|
LOSS
FROM OPERATIONS
|
|
|
(2,876,164 |
) |
|
|
(4,580,193 |
) |
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
120,862
|
|
|
|
30,000
|
|
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
(386,895 |
) |
Interest
income
|
|
|
145,289
|
|
|
|
29,532
|
|
Interest
expense
|
|
|
(16,879 |
) |
|
|
(87,464 |
) |
|
|
|
249,272
|
|
|
|
(414,827 |
) |
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(2,626,892 |
) |
|
|
(4,995,020 |
) |
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(2,626,892 |
) |
|
|
(4,995,020 |
) |
|
|
|
|
|
|
|
|
|
Dividends
payable in stock to preferred stockholders
|
|
|
1,385,593
|
|
|
|
1,022,897
|
|
Non-recurring
deemed dividend
|
|
|
4,259,717
|
|
|
|
-
|
|
Dividend
accreted to preferred stock for associated costs and a beneficial
conversion feature
|
|
|
-
|
|
|
|
2,187,149
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$ |
(8,272,202 |
) |
|
$ |
(8,205,066 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.57 |
) |
|
$ |
(0.80 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic and
diluted
|
|
|
14,608,478
|
|
|
|
10,293,168
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
FOR
THE YEAR ENDED DECEMBER 31, 2006
|
|
|
Series
A Preferred Stock
|
|
|
Series
B Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
paid in capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
-
|
|
|
|
-
|
|
|
|
20.00000
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(112,750 |
) |
|
|
-
|
|
|
|
887,250
|
|
For
fees
|
|
|
-
|
|
|
|
-
|
|
|
|
2.00000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000 |
) |
|
|
-
|
|
|
|
-
|
|
For
dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
1.79797
|
|
|
|
89,899
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89,899 |
) |
|
|
-
|
|
|
|
-
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(481,470 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
1,880,185
|
|
|
|
-
|
|
|
|
1,398,715
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(463,434 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
2,187,149
|
|
|
|
-
|
|
|
|
1,723,715
|
|
Accretion
of preferred dividend
|
|
|
-
|
|
|
|
366,563
|
|
|
|
-
|
|
|
|
508,751
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,022,897 |
) |
|
|
(147,583 |
) |
Accretion
of beneficial conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
463,434
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,187,149 |
) |
|
|
(1,723,715 |
) |
Payment
of dividends
|
|
|
-
|
|
|
|
(369,123 |
) |
|
|
-
|
|
|
|
(473,982 |
) |
|
|
959,608
|
|
|
|
9,596
|
|
|
|
633,284
|
|
|
|
-
|
|
|
|
(200,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
converted from preferred
|
|
|
(8.75980 |
) |
|
|
(122,006 |
) |
|
|
(12.05966 |
) |
|
|
(360,651 |
) |
|
|
1,426,483
|
|
|
|
14,265
|
|
|
|
468,392
|
|
|
|
-
|
|
|
|
|
|
For
services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178,750
|
|
|
|
1,788
|
|
|
|
137,890
|
|
|
|
-
|
|
|
|
139,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants/Advisory
Board
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,022
|
|
|
|
-
|
|
|
|
137,022
|
|
Prior
CEO warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,000
|
|
|
|
-
|
|
|
|
34,000
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240,691
|
|
|
|
2,407
|
|
|
|
143,914
|
|
|
|
-
|
|
|
|
146,321
|
|
Issued
for bridge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
328,341
|
|
|
|
-
|
|
|
|
328,341
|
|
Option
valuation per 123R
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
278,991
|
|
|
|
-
|
|
|
|
278,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,995,020 |
) |
|
|
(4,995,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
149.92119
|
|
|
$ |
2,504,313
|
|
|
|
113.93591
|
|
|
$ |
3,555,786
|
|
|
|
11,296,961
|
|
|
$ |
112,970
|
|
|
$ |
19,960,618
|
|
|
$ |
(27,073,494 |
) |
|
$ |
(939,807 |
) |
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
FOR
THE YEAR ENDED DECEMBER 31, 2007
|
|
|
Series
A Preferred Stock
|
|
|
Series
B Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
paid in capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
Balance
at December 31, 2006
|
|
|
149.92119
|
|
|
$ |
2,504,313
|
|
|
|
113.93591
|
|
|
$ |
3,555,786
|
|
|
|
11,296,961
|
|
|
$ |
112,970
|
|
|
$ |
19,960,618
|
|
|
$ |
(27,073,494 |
) |
|
$ |
(939,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred dividend
|
|
|
-
|
|
|
|
331,375
|
|
|
|
- |
|
|
|
491,302
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,385,594 |
) |
|
|
(562,917 |
) |
Payment
of dividends
|
|
|
-
|
|
|
|
(391,343 |
) |
|
|
- |
|
|
|
(758,087 |
) |
|
|
3,442,467
|
|
|
|
34,425
|
|
|
|
1,705,505
|
|
|
|
- |
|
|
|
590,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
converted from preferred (including Series C)
|
|
|
(149.92119 |
) |
|
|
(2,444,345 |
) |
|
|
(113.93591 |
) |
|
|
(3,289,001 |
) |
|
|
41,861,540
|
|
|
|
418,615
|
|
|
|
16,425,733
|
|
|
|
(4,259,717 |
) |
|
|
6,851,285
|
|
For
services
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
200,000
|
|
|
|
2,000
|
|
|
|
117,800
|
|
|
|
- |
|
|
|
119,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants/Advisory
Board
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,000
|
|
|
|
- |
|
|
|
20,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,736,566
|
|
|
|
37,365
|
|
|
|
1,082,996
|
|
|
|
|
|
|
|
1,120,361
|
|
Fee
for plan
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(561,816 |
) |
|
|
- |
|
|
|
(561,816 |
) |
Option
valuation per 123R
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
252,312
|
|
|
|
- |
|
|
|
252,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,626,892 |
) |
|
|
(2,626,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
-
|
|
|
|
60,537,534
|
|
|
$ |
605,375
|
|
|
$ |
39,003,148
|
|
|
$ |
(35,345,697 |
) |
|
$ |
4,262,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
THE YEARS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Cash
received from customers
|
|
$ |
9,802,348
|
|
|
$ |
6,407,314
|
|
Cash
paid to suppliers and employees
|
|
|
(11,276,554 |
) |
|
|
(10,581,216 |
) |
Interest
received
|
|
|
145,289
|
|
|
|
29,532
|
|
Interest
paid
|
|
|
(16,879 |
) |
|
|
(58,553 |
) |
Net
cash used in operating activities
|
|
|
(1,345,796 |
) |
|
|
(4,202,923 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(410,425 |
) |
|
|
(374,513 |
) |
Net
cash used in investing activities
|
|
|
(410,425 |
) |
|
|
(374,513 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Sale
of Series C Preferred Stock and associated warrants, net of cash
cost of
financing of $110,000
|
|
|
-
|
|
|
|
7,440,285
|
|
Sale
of Series B Preferred Stock and associated warrants, net of cash
cost of
financing of $2,750
|
|
|
-
|
|
|
|
997,250
|
|
Payment
of obligation to related party
|
|
|
|
|
|
|
(182,181 |
) |
Proceeds
from bridge loan
|
|
|
-
|
|
|
|
1,300,000
|
|
Payment
on bridge loan
|
|
|
-
|
|
|
|
(699,755 |
) |
Payment
of accrued interest
|
|
|
(93,160 |
) |
|
|
(127,652 |
) |
Proceeds
from exercise of options and warrants, net of cash cost of financing
of
$561,816
|
|
|
558,545
|
|
|
|
146,321
|
|
Payment
of capital lease obligation
|
|
|
(52,181 |
) |
|
|
(38,368 |
) |
Payment
of dividends
|
|
|
(120,000 |
) |
|
|
(200,226 |
) |
Net
cash provided by financing activities
|
|
|
293,204
|
|
|
|
8,635,674
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
|
(1,463,017 |
) |
|
|
4,058,238
|
|
Cash
and cash equivalents - beginning of the period
|
|
|
4,290,386
|
|
|
|
232,148
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of the period
|
|
$ |
2,827,369
|
|
|
$ |
4,290,386
|
|
|
|
|
|
|
|
|
|
|
Continues
on next page
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
THE YEARS ENDED
|
(CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
RECONCILIATION
OF NET INCOME TO NET CASH FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(2,626,892 |
) |
|
$ |
(4,995,020 |
) |
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
283,359
|
|
|
|
209,541
|
|
Non-cash
interest expense
|
|
|
-
|
|
|
|
328,341
|
|
Loss
on retirement of fixed assets
|
|
|
12,146
|
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
(32,922 |
) |
|
|
22,479
|
|
Common
stock, options and warrants issued as compensation
|
|
|
342,163
|
|
|
|
565,668
|
|
Expenses
related to conversion of bridge into Series C Preferred
Stock
|
|
|
-
|
|
|
|
99,469
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
436,822
|
|
|
|
(117,645 |
) |
Inventories
|
|
|
(344,900 |
) |
|
|
(420,967 |
) |
Prepaid
expenses and other current assets
|
|
|
(9,706 |
) |
|
|
88,895
|
|
Other
assets and deposits
|
|
|
64,948
|
|
|
|
(239,723 |
) |
Accounts
payable and accrued expenses
|
|
|
529,186
|
|
|
|
256,039
|
|
Net
cash used in operating activities
|
|
$ |
(1,345,796 |
) |
|
$ |
(4,202,923 |
) |
|
|
|
|
|
|
|
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Preferred
B issued as payment for financing fees
|
|
$ |
-
|
|
|
$ |
100,000
|
|
Warrants
issued with bridge loan
|
|
|
-
|
|
|
|
-
|
|
Value
of warrants issued allocated to additional paid-in capital
|
|
|
20,000
|
|
|
|
1,880,185
|
|
Value
of common stock and stock options issued
|
|
|
41,181
|
|
|
|
-
|
|
Cost
of royalty rate reduction in other assets
|
|
|
-
|
|
|
|
200,000
|
|
Accreted
beneficial conversion to preferred stock
|
|
|
-
|
|
|
|
2,187,149
|
|
Value
of deemed dividend
|
|
|
4,259,717
|
|
|
|
-
|
|
Accreted
dividend to preferred stock
|
|
|
1,385,594
|
|
|
|
1,022,897
|
|
Value
of Common stock issued as payment of dividend
|
|
|
1,739,930
|
|
|
|
642,879
|
|
Value
of Preferred B issued as payment of dividend
|
|
|
-
|
|
|
|
89,899
|
|
Value
of Preferred stock converted to common stock
|
|
|
5,733,346
|
|
|
|
482,657
|
|
Bridge
debt and associated interest converted into Series C Preferred
Stock
|
|
|
-
|
|
|
|
699,714
|
|
Assets
acquired under capital leases
|
|
|
110,810
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
1 — DESCRIPTION OF BUSINESS:
Chembio
Diagnostics, Inc. (the “Company” or “Chembio”) and its subsidiaries develop,
manufacture, and market rapid diagnostic tests that detect infectious diseases.
The Company’s main products presently commercially available are three rapid
tests for the detection of HIV antibodies in whole blood, serum and plasma
samples, two of which were approved by the FDA in 2006; the third is sold
for
export only. These products all employ single path lateral flow
technology. The Company also has a rapid test for Chagas
disease (a parasitic disease endemic in Latin America) as well as a line
of
rapid tests for veterinary tuberculosis, the first one of which is USDA
approved. The Company’s products are sold to medical
laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail establishments.
Chembio’s products are sold under the Company’s STAT PAK® or SURE CHECK ®
registered trademarks or under the private labels of its marketing partners,
such as is the case with the Clearview® label owned by Inverness Medical
Innovations, Inc., which is the Company’s exclusive marketing partner for its
rapid HIV test products in the United States.
The
Plan
On
December 19, 2007 (the “Closing Date”) amendments to the governing documents for
the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”) not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”) were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants.
Pursuant
to the terms of the Plan, on the Closing Date, all of the outstanding Series
A
and Series B Preferred Stock, other than the Series A Preferred and Series
B
Preferred held by the Company’s Chief Executive Officer (“CEO”), was converted
into 21,538,479 shares of the Company’s $.01 par value common stock (the “Common
Stock”) at a conversion rate of $0.40 per share of Common Stock. The
Series A Preferred and Series B Preferred held by the CEO was converted at
the
rate of $0.48 per share into 2,534,593 shares of Common Stock. All of
the outstanding Series C Preferred Stock was also converted into 17,187,496
shares of Common Stock at the rate of $0.48 per share, and the Company issued
1,273,235 shares of Common Stock as payment for any accrued but unpaid dividends
on any shares of the Preferred Stock outstanding on the Closing
Date.
On
the
Closing Date, the holders of all the Non-Employee Warrants were permitted
to
exercise their Non-Employee Warrants for cash at a reduced exercise price
of
$0.40 per share, or on a cashless basis at an exercise price of $0.45 per
share. The exercise of these Non-Employee Warrants on a cash and
cashless basis resulted in the Company issuing 3,686,566 shares of Common
Stock.
Non-Employee Warrant Holders that exercised at least 10% of their Non-Employee
Warrants for cash at $0.40 per share on the Closing Date are now permitted,
but
not required, to exercise the remaining balance of their Non-Employee Warrants
for cash or on a cashless basis at an exercise price of $0.45 per share at
any
time on or before June 30, 2008.
Pursuant
to the terms of the approved Plan, if a Non-Employee Warrant holder exercised
at
least 10% of its warrants for cash at the Closing Date, but does not exercise
the remaining balance of its warrants for cash or on a cashless basis on
or
before June 30, 2008, the exercise price of its remaining warrants will revert
to the original exercise price on July 1, 2008, at which time they will be
permitted to exercise their Non-Employee Warrants on a cash or a cashless
basis.
For
a
consenting Non-Employee Warrant holder that did not exercise at least 10%
of its
warrants for cash at the Closing Date, the exercise price of its warrants
reverted to the original exercise price, subject to any applicable adjustment,
on December 20, 2007. Beginning April 1, 2008, in addition to
being exercisable for cash, a Non-Employee Warrant holder that did not exercise
at least 10% of its warrants for cash at the Closing Date will be permitted
to
exercise their warrants on a cashless basis based on the Volume Weighted
Average
Price (VWAP) for the ten-trading day period that ends on the first trading
day
immediately preceding the date of such warrant exercise. The Plan
amendments also provide that for those Non-Employee Warrant holders that
consented to the Plan, the anti-dilution and price reduction provisions of
the
Non-Employee Warrants will not cause any adjustment to the exercise price
or
number of shares issuable based on any issuance or other action taken in
connection with the Plan.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Certain
holders of the Non-Employee Warrants did not consent to the Plan
transactions. Pursuant to the anti-dilution terms existing in certain
of the Non-Employee Warrants held by these non-consenting holders, the number
of
warrants that these non-consenting holders are permitted to exercise has
been
increased by 2,395,466. In addition, the exercise prices of certain
of the Non-Employee Warrants held by non-consenting holders was reduced to
$0.40
pursuant to the terms of these warrants, and these non-consenting holders
are
permitted to exercise their warrants for cash only at $0.40 per share until
the
expiration of the warrants.
The
Plan’s cashless exercise provision permits Non-Employee Warrant holders to use
any excess of the market price of the Company’s Common Stock over the exercise
price of a Non-Employee Warrant as part of the exercise price for another
Warrant by submitting both warrants at the time of exercise. Pursuant
to the Plan, Non-Employee Warrant holders were permitted at the Closing Date
to
use the greater of (i) $0.53 or (ii) the VWAP for the ten-trading day period
that ended on December 17, 2007 as the value of the Common Stock, so that
each
Non-Employee Warrant used as part of the exercise price payment on the Closing
Date represented the difference between the greater of these two values and
the
$0.45 Non-Employee Warrant exercise price. In addition, Non-Employee
Holders that exercised at least 10% of all of such holder's Non-Employee
Warrants for cash on the Closing Date are permitted between the Closing Date
and
June 30, 2008 to use the difference between the greater of these two values
and
the $0.45 Non-Employee Warrant exercise price as part of their exercise price
payment. Non-Employee Warrant Holders that did not exercise (x) at
least 10% of all of such holder's Non-Employee Warrants for cash at the Closing
Date, or (y) its Non-Employee Warrants on cashless basis at $0.45 per share
on
the Closing Date will only be permitted to exercise its Non-Employee Warrants
on
a cashless basis beginning on April 1, 2008, and at that point the value
of a
warrant to be used as part of the exercise price payment in such cashless
exercise will equal the excess of the VWAP for the ten-trading day period
that
ends on the first trading day immediately preceding the date of such warrant
exercise over the exercise price of a warrant.
In
connection with the Plan closing, the Company obtained $1,089,361 of
Non-Employee Warrant cash exercises on the Closing Date.
The
Company worked with Collins Stewart LLC (“Collins Stewart”), an investment
banking advisor, with respect to the Plan transactions. As
compensation for the services rendered by Collins Stewart, the Company paid
Collins Stewart certain cash fees, as well as reimbursement for its reasonable
counsel and out-of-pocket expenses related to the Plan, aggregating
approximately $312,000.
NOTE
2 — SIGNIFICANT ACCOUNTING POLICIES:
(a)
|
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the Company, and
its
two wholly owned subsidiaries. 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.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
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.
Effective
January 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (“FIN 48”).
FIN 48 prescribes a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken, or expected to be taken,
in
a tax return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. Any interest and penalties accrued
related to unrecognized tax benefits will be recorded in tax
expense. The adoption of FIN 48 had no impact on the Company’s
financial statements for the year ended December 31, 2007.
(f)
|
Research
and Development:
|
Research
and development costs are charged to expense as incurred.
(g)
|
Stock
Based Compensation:
|
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. See
footnote 5 for further details.
(h)
|
Statements
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, 2007 AND 2006
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 collectability 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 projects and grants when
earned. Grants are invoiced after expenses are
incurred. Any projects or grants funded in advance are deferred until
earned.
(j)
|
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. The Company maintains
three accounts with a well established multi-national bank and as of December
31, 2007 had approximately $2.6 million above these limits. 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. We currently do not require collateral.
Fair
values of cash, accounts receivable, prepaid expenses and other current assets
and accounts payable and accrued expenses reflected in these financial
statements approximate carrying value as these are short-term in
nature.
(l)
|
Recent
Accounting Pronouncements Affecting the
Company:
|
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin ("SAB")
No. 108, which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 became effective in fiscal
year
end December 31, 2007. Adoption of SAB 108 did not have a material impact
on the
Company's consolidated financial position, results of operations or cash
flows.
In
December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2") which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with SFAS No. 5, "Accounting
for Contingencies." Adoption of FSP EITF 00-19-02 is required for fiscal
years
beginning after December 15, 2006, and did not have a material impact on
the
Company's consolidated financial position, results of operations or cash
flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In December 2007, the
FASB
released a proposed FASB Staff Position (FSP FAS 157-b - Effective Date of
FASB
Statement No. 157) which, if adopted as proposed, would delay the effective
date of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value
in the
financial statements on a recurring basis (at least annually). We do not
believe
that adoption of this statement would have a material impact on our financial
statements.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected are required to be reported in earnings at each
reporting date. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007, the provisions of which are required to be applied
prospectively. The Company expects to adopt SFAS No. 159 in the first quarter
of
Fiscal 2008 and is still evaluating the effect, if any, on its financial
position or results of operations.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business Combinations, which replaces SFAS No 141. The statement retains
the purchase method of accounting for acquisitions, but requires a number
of
changes, including changes in the way assets and liabilities are recognized
in
the purchase accounting. It also changes the recognition of assets acquired
and
liabilities assumed arising from contingencies, requires the capitalization
of
in-process research and development at fair value, and requires the expensing
of
acquisition-related costs as incurred. SFAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.
In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling
Interests in Consolidated Financial Statements-and Amendment of ARB No.
51.” SFAS 160 establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by parties other than
the
parent, the amount of net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of any retained noncontrolling equity investment when a subsidiary
is
deconsolidated. This statement also establishes disclosure
requirements that clearly identify and distinguish between the interests
of the
parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years beginning on or after December 15,
2008. The adoption of SFAS 160 is not currently expected to have a
material effect on the Company’s consolidated financial position, results of
operations, or cash flows.
Prior
to
the Plan (see Note 1), the Company’s Series C Preferred Stock contained
provisions whereby, under certain conditions outside of the control of
management, the holders could require redemption; accordingly, at December
31,
2006 it was classified outside of permanent equity.
As
per
the Plan (see Note 1) all classes of preferred stock were converted into
common
stock on December 19, 2007. Accordingly, no preferred stock was
outstanding on December 31, 2007.
The
following weighted average shares were used for the computation of basic
and
diluted earnings per share:
|
|
For
the years ended
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Basic
|
|
|
14,608,478
|
|
|
|
10,293,168
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,608,478
|
|
|
|
10,293,168
|
|
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, 2007 and 2006 is
the
same as basic loss per share, since the effects of the calculation were
anti-dilutive due to the fact that the Company incurred losses for all periods
presented. The following securities, presented on a common share equivalent
basis, have been excluded from the per share computations:
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
|
|
For
the years ended
|
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
1999
Plan Stock Options
|
|
|
2,015,352
|
|
|
|
1,629,750
|
|
Other
Stock Options
|
|
|
124,625
|
|
|
|
144,625
|
|
Warrants
|
|
|
25,972,223
|
|
|
|
24,713,994
|
|
Convertible
Preferred Stock
|
|
|
25,872,315
|
|
|
|
16,835,036
|
|
NOTE
3 — 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, 2007
|
|
|
December
31, 2006
|
|
Africa
|
|
$ |
3,784,791
|
|
|
$ |
1,552,043
|
|
Asia
|
|
|
158,577
|
|
|
|
250,243
|
|
Europe
|
|
|
153,808
|
|
|
|
92,248
|
|
Middle
East
|
|
|
239,838
|
|
|
|
194,767
|
|
North
America
|
|
|
4,226,442
|
|
|
|
1,384,933
|
|
South
America
|
|
|
201,421
|
|
|
|
2,819,778
|
|
|
|
$ |
8,764,877
|
|
|
$ |
6,294,012
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
4 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts
payable and accrued liabilities as of December 31:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Accounts
payable – suppliers
|
|
$ |
726,174
|
|
|
$ |
679,990
|
|
Accrued
commissions
|
|
|
14,251
|
|
|
|
91,920
|
|
Accrued
royalties / licenses
|
|
|
852,119
|
|
|
|
461,048
|
|
Accrued
payroll
|
|
|
279,598
|
|
|
|
87,637
|
|
Accrued
vacation
|
|
|
155,480
|
|
|
|
214,858
|
|
Accrued
legal and accounting
|
|
|
10,000
|
|
|
|
7,000
|
|
Accrued
expenses – other
|
|
|
138,169
|
|
|
|
167,486
|
|
TOTAL
|
|
$ |
2,175,791
|
|
|
$ |
1,709,939
|
|
NOTE
5 — EMPLOYEE STOCK OPTION PLAN:
The
Company had a 1999 Stock Option Plan (the “SOP”) originally covering 1,500,000
shares of Common Stock. Under the terms of the SOP, 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 SOP was amended at the Company’s
2005 stockholders’ meeting. The number of options under the SOP 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 SOP concerning non-qualified options.
Effective
January 1, 2006, the Company’s SOP 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.
As
a
result of the adoption of FAS 123(R), the Company's results for the years
ended
December 31, 2007 and 2006 include share-based compensation expense totaling
$252,000 and $279,000, respectively. Such amounts have been included
in the Condensed Consolidated Statements of Operations within cost of goods
sold
(none and $28,000, respectively), research and development ($100,000 and
$68,000, respectively) and selling, general and administrative expenses
($152,000 and $183,000, respectively). No income tax benefit has been
recognized in the income statement for share-based compensation arrangements
due
to the history of operating losses.
Stock
option compensation expense in the years ended December 31, 2007 and
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.
The
weighted average estimated fair value of stock options granted in the years
ended December 31, 2007 and 2006 was $.46 and $.53 per share,
respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model. 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.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
The
assumptions made in calculating the fair values of options are as
follows:
|
|
For
the years ended
|
|
December
31, 2007
|
|
December
31, 2006
|
Expected
term (in years)
|
5
|
|
4
to 5
|
Expected
volatility
|
102.84%
to 106.31%
|
|
116.2%
to 118.16%
|
Expected
dividend yield
|
n/a
|
|
n/a
|
Risk-free
interest rate
|
4.50%
to 5.06%
|
|
4.39%
to 4.92%
|
The
Company granted 960,000 new options under the SOP during the year ended
December 31, 2007 at prices ranging from $.53 to $0.88 per share.
The
following table provides stock options activity for the years ended December
31,
2007 and 2006:
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
|
|
|
$ |
0.70
|
|
|
|
|
|
|
Granted
|
|
|
1,147,250
|
|
|
$ |
0.57
|
|
|
|
|
|
|
Exercised
|
|
|
(100,000 |
) |
|
$ |
0.62
|
|
|
|
|
|
|
Forfeited/expired
/cancelled
|
|
|
(803,250 |
) |
|
$ |
0.65
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,529,750
|
|
|
$ |
0.65
|
|
3.60
years
|
|
$ |
204,866
|
|
Granted
|
|
|
960,000
|
|
|
$ |
0.57
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,000 |
) |
|
$ |
0.62
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(238,250 |
) |
|
$ |
0.67
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,201,500
|
|
|
$ |
0.64
|
|
3.52
years
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,445,500
|
|
|
$ |
0.68
|
|
3.06
years
|
|
$ |
-
|
|
The
following table summarizes information about stock options outstanding as
of
December 31, 2007:
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
Range
of Exercise Prices
|
Shares
|
Average
Remaining Contract Life (Year)
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Shares
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
$0.35
- 0.48
|
90,000
|
2.81
|
0.420
|
$ -
|
90,000
|
0.420
|
$ -
|
$0.53
- 0.60
|
887,500
|
4.29
|
0.557
|
-
|
243,500
|
0.572
|
-
|
$0.62
- 0.68
|
324,000
|
3.71
|
0.627
|
-
|
224,000
|
0.630
|
-
|
$0.75
- 0.88
|
900,000
|
2.80
|
0.755
|
-
|
888,000
|
0.755
|
-
|
Total
|
2,201,500
|
|
0.643
|
$ -
|
1,445,500
|
0.684
|
$ -
|
|
|
|
|
|
|
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
As
of
December 31, 2007, there was $217,000 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 0.53 years. The total
fair value of shares vested during the years ended December 31, 2007 and
2006,
was $276,000 and $421,000, respectively.
At
the
end of January 2008, subsequent to the balance sheet date, 210,000 options
were
forfeited. As of February 15, 2008, the board of directors voted to
re-price any SOP options in excess of $.48 to $.48, the estimated expense
related to this re-price is $20,000. In addition the board approved
the issuance of an additional 525,000 options under the SOP at an exercise
price, based on the closing market price on the date of grant, of $.22 per
share.
NOTE
6 — RELATED PARTIES:
The
Company had a liability to its President on December 31, 2006 for $65,000
of
accrued interest on prior debt that is not accruing additional
interest. The accrued interest was repaid in
2007. In addition, the Company had a liability to its
President for 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) which
was
repaid in October of 2006.
In
September 2006, the Company received an investment of $2,000,000 from Inverness
Medical Innovations, Inc. (“Inverness”). Inverness markets the
Company’s FDA-approved rapid HIV tests under Inverness’ Clearview® brand,
Chembio received a nonexclusive license to Inverness’ lateral flow
patents. The distribution agreements with Inverness contain gross
margin sharing formulae among Inverness, the Company and, in the case of
the HIV
barrel product, StatSure Diagnostic Systems, Inc.
NOTE
7 — INVENTORIES:
Inventories
consist of at December 31:
|
|
2007
|
|
|
2006
|
|
Raw
Materials
|
|
$ |
705,873
|
|
|
$ |
629,967
|
|
Work
in Process
|
|
|
234,077
|
|
|
|
257,208
|
|
Finished
Goods
|
|
|
513,900
|
|
|
|
221,775
|
|
|
|
$ |
1,453,850
|
|
|
$ |
1,108,950
|
|
Fixed
assets consist of at December 31:
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$ |
982,440
|
|
|
$ |
604,668
|
|
Furniture
and fixtures
|
|
|
156,313
|
|
|
|
139,624
|
|
Computer
and telephone equipment
|
|
|
308,591
|
|
|
|
259,078
|
|
Leasehold
improvements
|
|
|
306,676
|
|
|
|
226,415
|
|
Tooling
|
|
|
|
|
|
|
|
|
|
|
|
1,754,020
|
|
|
|
1,271,685
|
|
Less
accumulated depreciation and amortization
|
|
|
(924,688 |
) |
|
|
(668,082 |
) |
|
|
$ |
|
|
|
$ |
|
|
Included
in the above fixed assets is $121,000 and $53,000, net of accumulated
depreciation of $69,000 and $106,000 of assets held under capital leases
as of
December 31, 2007 and 2006, respectively. Depreciation expense
for the 2007 and 2006 years aggregated $283,359 and $209,541,
respectively.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
9 — LONG-TERM DEBT / ACCRUED INTEREST PAYABLE:
In
connection with the Series B Preferred Stock 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 additional interest accrues on
this payable. The accrued interest repaid was $93,160 and $120,000 in
the year ended 2007 and 2006, respectively. The balance
remaining unpaid was none and $93,160 as of December 31, 2007 and 2006,
respectively.
NOTE
10 — OBLIGATIONS UNDER CAPITAL LEASES:
The
Company is obligated under capitalized leases for certain manufacturing and
computer equipment.
Future
minimum lease payments under these capitalized lease obligations, including
interest as of December 31, 2007 were as follows:
Year
ending December 31,
2008
|
|
$ |
35,832
|
|
2009
|
|
|
28,572
|
|
2010
|
|
|
28,572
|
|
2011
|
|
|
28,572
|
|
2012
|
|
|
|
|
|
|
|
136,752
|
|
Less:
imputed interest
|
|
|
(33,706 |
) |
Present
value of future minimum lease payments
|
|
|
103,046
|
|
Less:
current maturities
|
|
|
(23,458 |
) |
|
|
$ |
|
|
These
leases have interest rates ranging from 9.5% - 15%.
NOTE
11 — RESEARCH GRANTS AND DEVELOPMENT CONTRACTS:
In
2007
and 2006, the Company earned research grants, feasibility and development
contracts in the amounts of $466,000 and $208,000,
respectively. The Company is now involved in additional
feasibility and development contracts related to its DPP™
technology. During 2007 we received $439,000 in fees for feasibility
studies and earned $396,000 on these contracts, the $43,000 difference is
reflected in deferred revenues. The Company expects to receive
additional feasibility and development contracts for its DPP technology in
2008.
No
provision for Federal income taxes was required for the years ended December
31,
2007 or 2006, due to the Company’s operating losses. At December 31,
2007 and 2006, the Company has unused net operating loss carry-forwards of
approximately $21,000,000 and $16,900,000 which expire at various dates through
2027. 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 $551,000 and $350,000 for the years
ended
December 31, 2007 and 2006, respectively which expire at various dates through
2027.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
As
of
December 31, 2007 and 2006, the deferred tax assets related to the
aforementioned carry-forwards 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:
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$ |
7,300,000
|
|
|
$ |
6,800,000
|
|
Research
and development credit
|
|
|
551,000
|
|
|
|
350,000
|
|
Other
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets |
|
|
7,988,000
|
|
|
|
7,183,000
|
|
Valuation
allowances
|
|
|
(7,988,000 |
) |
|
|
(7,183,000 |
) |
Net
deferred tax assets
|
|
$ |
|
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We
file
income tax returns in the U.S. federal and New York state
jurisdictions. Tax years for fiscal 2004 through 2006 are open and
potentially subject to examination by the federal and New York state taxing
authorities.
NOTE 13
— STOCKHOLDERS’ EQUITY:
(a) Common
Stock
On
December 19, 2007 the Company issued pursuant to the Plan (see Note
1):
i) 99,086,
599,331, and 574,818 shares of common stock for the payment of dividends
for the
Series A, B and C preferred stock, respectively. These shares were
valued, in the aggregate at $558,000, using the respective conversion price
at
the time of the conversion of the preferred stock;
ii) 10,134,954,
13,938,118, and 17,187,496 shares of common stock for the conversion of the
Series A, B and C preferred stock, respectively. These shares were valued,
in
the aggregate at $16,504,000, using the market price on December 19,
2007;
iii) 963,163
shares of common stock for the cashless exercise of 6,381,052 warrants,
and
iv) 2,723,403
shares of common stock for the cash exercise of warrants where the Company
received $1,089,000 less $562,000 paid in fees.
During
the year ended December 31, 2007, the Company issued 200,000 shares of its
Common Stock upon the execution of an employment agreement, of which 100,000
shares vested immediately, 50,000 shares will vest on March 5, 2008 and 50,000
shares will vest on March 5, 2009. These shares were valued at
the market price on the date of grant and aggregated $119,800 and are being
expensed over the vesting periods.
During
year ended December 31, 2007 the Company issued 50,000 shares of its Common
Stock upon the exercise of options and received cash of $31,000.
During
the year ended December 31, 2007 Series A Preferred shareholders, other than
in
the Plan, converted 8.33092 shares of Series A Preferred Stock into 416,546
shares of Common Stock.
During
the year ended December 31, 2007 Series B Preferred shareholders, other than
in
the Plan, converted 2.25 shares of Series B Preferred Stock into 184,426
shares
of Common Stock.
In
the
year ended December 31, 2007, other than in the Plan, the Company issued
897,896, 835,577 and 435,759 shares of its Common Stock as payment of dividends
on its Series C Preferred Stock, Series B Preferred Stock and Series A Preferred
Stock, respectively. These shares were valued, in the aggregate at $1,182,000,
using a volume weighted average price (VWAP) for the ten trading days
immediately preceding the issue date.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
During
the year ended December 31, 2006 the Company issued 163,750 shares, respectively
of its’ Common Stock to a consultant as compensation. The number of
shares issued was a fixed number set forth in the consultant’s contract, with
specific issue dates and without regard to the market price of the stock
on the
date of issuance. For accounting purposes, the shares were valued
based on the closing market price on dates of issuance from $0.55 to $0.91
per
share and the related compensation expense for the year ended December 31,
2006
was $129,029.
In
July
2006, the Company issued to a member of the Board of Directors 15,000 shares
of
common stock as additional compensation for services as the audit committee
chair. This stock was valued based on the market closing price on the
date of the grant and $10,650 was charged to expense.
During
the year ended December 31, 2006 Series A Preferred shareholders converted
8.75980 shares into 437,989 shares of Common Stock and Series B Preferred
shareholders converted 12.05966 shares into 988,494 shares of Common
Stock.
During
the year ended December 31, 2006 the Company issued 140,691 shares of its
Common
Stock upon the exercise of warrants and received cash of $86,321.
During
the year ended December 31, 2006 the Company issued 100,000 shares of its
Common
Stock upon the exercise of options and received cash of $60,000.
In
the
year ended December 31, 2006 the Company issued 543,168 shares of its Common
Stock as payment of dividends on its Series A Preferred Stock and 416,440
shares
of its Common Stock as payment of dividends on its Series B Preferred Stock,
These shares were valued using a 10 day volume weighted average price for
the
ten trading days immediately preceding the issue date.
(b) Warrants
On
December 19, 2007, in connection with the Plan (see Note 1) certain holders
of
the Non-Employee Warrants did not consent to the Plan
transactions. Pursuant to the anti-dilution terms existing in certain
of the Non-Employee Warrants held by these non-consenting holders, the number
of
warrants that these non-consenting holders are permitted to exercise has
been
increased by 2,395,466. In addition, the exercise prices of certain
of the Non-Employee Warrants held by non-consenting holders was reduced to
$0.40
pursuant to the terms of these warrants, and these non-consenting holders
are
permitted to exercise their warrants for cash only at $0.40 per share until
the
expiration of the warrants.
During
the year ended December 31, 2007, the Company issued warrants to purchase
33,381
shares of Common Stock at an exercise price of $0.81 per share to a sales
agent
as payment for commissions accrued at year end 2006 (value
$20,000). These warrants have a five-year life.
The
above
warrants were valued using a Black-Scholes option pricing model based on
assumptions for expected volatility of 104.8%, expected life of 5 years and
expected risk-free interest rate of 4.54%.
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. These warrants have an exercise price of $0.61 per
share and a five year life.
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. These warrants
have an exercise price of $0.75 per share and a five year life.
Warrants
to purchase 2,578,125 shares of Common Stock were issued in connection with
the
completed Series C Offering and were assigned a value of
$1,398,715. These warrants have an exercise price of $1.00 per
share and a five year life.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
During
the year ended December 31, 2006, the Company issued warrants to purchase
241,684 shares of Common Stock at exercise prices from $0.55 to $0.883 per
share
to a sales agent as payment for commissions (value $61,700) and commissions
accrued at year end 2005 (value $24,000) and to consultants as compensation
for
2006 ($51,324). These warrants have a five year life.
All
of
the above warrants were valued using a Black-Scholes option pricing model
based
on assumptions for expected volatilities from 116.2% to 118.16%, expected
lives
of 5 years and expected risk free interest rates from 4.39% to
5.13%.
(c) Series
A 8% Convertible Preferred Stock:
On
December 19, 2007, according to the Plan (see Note 1), all of the Series
A
preferred stock was converted into common stock. The common stock
issued was valued at the market price on December 19, 2007 of $.40 per
share. This value was adjusted against the carrying value of the
Series A Preferred Stock and the difference of $1,726,000 was charged to
deemed
dividends.
The
Series A Preferred Stock was issued in 2004 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 included:
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. In June 2006, the Series A Preferred Stock was amended to
provide, among other amendments 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. 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. To date all dividends have been paid in Common Shares, except
$180,000 which was paid in cash to Vicis Capital Master Fund.
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. As of December 31, 2007 and 2006 such conditions no longer
applied; accordingly, no accretion is being made to bring the value up to
its
redemption value. The liquidation preference was $30,000 per share
plus accrued and unpaid dividends. As of December 31, 2006, the
unpaid dividends were $400 per share, an aggregate for all such shares of
$4,557,604. Accrued but unpaid dividends of $62,528 are included in
the preferred stock carrying value as at December 31, 2006.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(d) Series
B 9% Convertible Preferred Stock:
On
December 19, 2007, according to the Plan (see Note 1), all of the Series
B
preferred stock was converted into common stock. The common stock
issued was valued at the market price on December 19, 2007 of $.40 per
share. This value was adjusted against the carrying value of the
Series B Preferred Stock and the difference of $2,349,000 was charged to
deemed
dividends.
The
Series B Preferred Stock was issued in January 2005 at a face value of $50,000
per share with detachable warrants. The recorded amount of the preferred
shares
was calculated using a fair value allocation between the preferred shares
and
detachable warrants. 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. 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 are as follows:
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 amendments 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.
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.
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. As of
December 31, 2006 and 2005 such conditions no longer applied; 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.
As of December 31, 2006, the unpaid dividends were $2,300 per share, an
aggregate for all such shares of $5,958,848. Accrued but unpaid
dividends of $262,053 are included in the preferred stock carrying value
as at
December 31, 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
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.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(e) Series
C 7% Convertible Preferred
Stock:
On
December 19, 2007, according to the Plan (see Note 1), all of the Series
C
preferred stock was converted into common stock. The common stock
issued was valued at the market price on December 19, 2007 of $.40 per
share. This value was adjusted against the carrying value of the
Series C Preferred Stock and the difference of $185,102 was charged to deemed
dividends.
On
September 29, 2006 and October 5, 2006, the Company sold $8.25 million of
Series
C Preferred Stock (see Note 1) pursuant to provisions of the September 29,
2006
as amended on October 5, 2006 Series C 7% Preferred Stock financing
agreements. In addition the Company issued 2,578,125 warrants to the
investors. See Note 13(b) for information on the
warrants. A summary of the significant terms as amended on October 5,
2006 are as follows:
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 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 C preferred stock and upon a liquidation event.
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.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series C Preferred Stock. The
redemption value is the greater of (i) 130% of the stated value or $65,000
and
(ii) the product of (a) daily volume weighted average price of the Company’s
common stock and (b) a quotient of $65,000 divided by the then existing
conversion price, plus accrued and unpaid dividends and all liquidated
damages.
Liquidation
preference: The liquidation preference is $50,000 per share plus accrued
and
unpaid dividends and all liquidated damages. The liquidation
preference is $50,000 per share plus accrued and unpaid
dividends. As of December 31, 2006, the unpaid dividends were
$894.44 per share, an aggregate for all such shares of $8,397,583. Accrued
but
unpaid dividends of $147,583 are included in the preferred stock carrying
value
as at December 31, 2006
The
Company has accounted for the Series C Offering 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 allocated the value
received between the preferred stock and the related warrants. The
allocated value for the preferred stock and the related warrants were $6,851,285
and $1,398,715, respectively. Further, the Company has determined
that the redemption feature in the Series C Preferred Stock needs to be
bifurcated and has valued the same at $449,677. The warrant value and
the value of the redemption feature is treated as a discount and the preferred
stock is reflected net of this discount. Due to the contingent
redemption feature, the Series C Preferred Stock is reflected as temporary
equity. The Series C 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 carrying value up to its redemption value. The
liability for the value of the redemption feature will be “marked to market” in
future accounting periods until such time as the redemption is exercised
or the
feature meets the criteria for equity classification. See Note 13(b)
for the valuation of warrants.
In
addition, as per EITF 00-27 “Application of Issue 98-5 to Certain Convertible
Instruments”, the Company evaluated the Series C Preferred Stock transaction
that occurred in September 2006 and found that there were associated beneficial
conversion features totaling $1,723,715; the preferred stock was further
discounted by this amount. The beneficial conversion amount related to the
valuation of the preferred stock was then accreted back to the preferred
stock
in accordance with the conversion provision which allowed for 100% to be
converted immediately. The accretion was reflected as dividend
expense.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
14 — COMMITMENTS AND CONTINGENCIES:
Employment
Contracts:
The
Company has contracts with two key employees. The contracts call for
salaries presently aggregating $425,000 per year. One contract
expires in May of 2008 and one contract expires in March of 2010. The
following table is a schedule of future minimum salary commitments:
2008
|
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$ |
314,167
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2009
|
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230,833
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2010
|
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$ |
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Pension
Plan:
The
Company has a 401(k) plan established for its employees. The Company
opted to match 20% of the first 5% (or 1% of salary) that an employee
contributes to their 401(k) plan. Expenses related to this match
aggregated $20,500 for the year ended December 31, 2007. The Company
did not elect to make any matching contributions for the year ended December
31,
2006.
Obligations
Under Operating Leases:
The
Company leases office and manufacturing facilities. The current lease
expires on April 30, 2009. The following is a schedule of future
minimum rental commitments:
Year
ending December 31,
The
Company has an option to renew the lease for an additional two year term
with a
nominal increase.
Rent
expense aggregated $123,500 and $100,500 for the years ended December 31,
2007
and 2006, respectively.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Economic
Dependency:
The
Company had sales to three customers each in excess of 10% of total sales
in the
year ended December 31, 2007. Sales to these customers aggregated
approximately $2,456,000, $2,249,000 and $1,398,000,
respectively. This represents approximately 70% of total
sales. Accounts receivable as of December 31, 2007 from these
customers approximated $222,000, none and none, respectively.
The
Company had sales to four customers each in excess of 10% of total sales
in the
year ended December 31, 2006. Sales to these customers aggregated
approximately $1,530,000, $1,223,000, $1,092,000 and $814,000,
respectively. This represents approximately 74% of total
sales. Accounts receivable as of December 31, 2007 from these
customers approximated $380,000, none, $568,000 and $174,000,
respectively.
The
Company had purchases from one vendor in excess of 10% of total purchases
for
the year ended December 31, 2007. Purchases from this vendor
aggregated approximately $356,000. Accounts payable as of December
31, 2007 to this vendor approximated $19,000.
The
Company had purchases from one vendor in excess of 10% of total purchases
for
the year ended December 31, 2006. Purchases from this vendor
aggregated approximately $244,000. Accounts payable as of December
31, 2006 to this vendor approximated $4,000.
Governmental
Regulation:
All
of
the Company’s existing and proposed diagnostic products are regulated by the
United States Food and Drug Administration (FDA), United States 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.
License
Agreement:
The
Company entered into a license agreement, effective February 1, 2008, whereby
it
agreed to pay $1,000,000 in non-refundable license fees: $500,000 during
2008
and $500,000 in 2009. The Company is also obligated to pay a royalty
based on eligible sales of the licensed product.
F-25