U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB
[
X ]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended
December
31, 2005
[
]
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No
Fee
Required]
For
the
transition period from
to
.
Commission
File No.
0-30379
CHEMBIO
DIAGNOSTICS, INC.
(Name
of
small business issuer in its charter)
Nevada
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88-0425691
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(State
or jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3661
Horseblock Road, Medford, NY
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11763
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
(631)
924-1135
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, $0.01 par value
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(Title
of Class)
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Check
whether the issuer is not required to file reports pursuant to Section 13
or
15(d) of the Exchange Act.
Yes
__ No
_
X
_
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such report), and (2) has been subject to such filing requirements for
the
past 90 days. Yes
X
No__
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B (Sec. 229.405 of this chapter) is not contained herein, and
will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB
or any amendment to this Form 10-KSB. [ X ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
Yes
__ No
_X_
State
issuer’s revenues for its most recent fiscal year:
$3,940,730
.
As
of
March 22, 2006, the registrant had 9,178,764 common shares outstanding, and
the
aggregate market value of the common shares held by non-affiliates
(*) was
approximately $4,235,651. This calculation is based upon the closing sale
price
of $0.58 per share on March 22, 2006.
*
Without
asserting that any of the issuer’s directors or executive officers, or the
entities that own 1,875,918 shares of common stock are affiliates, the shares
of
which they are beneficial owners have been deemed to be owned by affiliates
solely for this calculation.
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F-1
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General
Chembio
Diagnostics, Inc. (the Company) and its subsidiaries, develop, manufacture,
and
market lateral flow rapid diagnostic tests that detect infectious diseases.
These tests are sold in the U.S. and/or internationally to medical laboratories
and hospitals, governmental and public health entities, non-governmental
organizations, medical professionals and retail establishments. The products
are
made under the label of Chembio Diagnostic Systems, Inc. (CDS) or the private
labels of its distributors or their customers. The products
are
used
in the diagnosis of infectious diseases and other conditions in humans and
animals. The Company’s main products presently commercially available are its
three HIV Rapid Tests (SURE CHECK(R) HIV and HIV 1/2 STAT-PAK(TM) and HIV
1/2
STAT-PAK Dipstick) and its rapid test for Chagas Disease. The Company sold
in
2004 substantially all of the remaining business related to its private label
pregnancy test and is focusing on the products mentioned above.
HIV
Rapid Tests
We
continue to believe our revenue growth in 2006 will come primarily from sales
of
our rapid HIV tests. A large percentage of individuals that are HIV positive
worldwide are unaware of their status. Part of the reason for this is that
even
those that do get tested in public health settings will often not return
or call
back for their test results when samples have to be sent out to a laboratory
which can take at least several days to process. The increased availability,
greater efficacy, and reduced costs for anti-retroviral treatments (ARVs)
for
HIV is also having a tremendous impact on the demand for being tested, as
the
stigma associated with the disease is lessened and the ability to resume
normal
activities is substantially improved.
Our
SURE
CHECK HIV rapid test eliminates the need for a separate sample collection
system
when used to collect finger-stick whole blood samples. We believe this improves
ease of use and safety. Our HIV 1/2 STAT-PAK and HIV 1/2 STAT-PAK Dipstick,
like
all competitive rapid HIV tests, require that the finger-stick whole blood
sample first be transferred to the test device. HIV 1/2 STAT-PAK is value
priced
and more flexible than SURE CHECK for samples of venous whole blood, plasma
and
serum as well as finger-stick whole blood. HIV 1/2 STAT-PAK Dipstick is our
most
economical format and also flexible as to the aforementioned sample types.
This
product was designed in order to provide a low cost product with performance
equal to our other products for resource-constrained markets in the developing
world. All three of our HIV tests use a standardized test strip which we
developed by using patented materials licensed non-exclusively to us from
third
parties as well as our own proprietary know-how and trade secrets. All three
of
our rapid HIV tests are qualitative yes/no tests for the detection of antibodies
to HIV 1 & 2.
Regulatory
Status:
The
Company has made substantial progress toward FDA approval of its SURE CHECK
HIV
and HIV 1/2 STAT-PAK products. A pre-approval inspection of its facility
was
conducted in the third quarter of 2005 and based upon communications with
the
agency the Company believes it has met the requirements of an “approvable”
Pre-Marketing Approval (PMA) application, and expects to be so advised by
the
FDA during the first half of the second quarter of 2006; the Company further
expects to complete the full process during the first half of 2006, which
would
include receipt from the FDA of a waiver under the Clinical Laboratory
Improvement Act (“CLIA”). A CLIA waiver is essential in order to market the
product into public health clinics and physicians offices where the level
of
training is less than clinical laboratories and hospitals. The Company is
nearing completion of the CLIA waiver studies so it will be in a position
to
submit its waiver application immediately upon receipt of the PMA license
from
the FDA.
The
Company’s HIV products currently qualify under U.S. FDA export regulations to
sell, subject to any required approval by the importing country, to customers
outside the U.S. To date we have received approval from a number of potential
importing countries, although Brazil and Uganda are the only countries in
which
we have significant sales. Our HIV 1/2 STAT-PAK and HIV 1/2 STAT-PAK Dipstick
products were also evaluated by the World Health Organization in 2004 and
as a
result in 2005 they were qualified for inclusion in the WHO Bulk Procurement
Scheme, which is a pre-requisite for these products being eligible for
procurements from programs funded by the United Nations and their partners’
programs. SURE CHECK HIV and HIV 1/2 STAT-PAK are also eligible for procurements
pursuant to the President’s Emergency Plan for AIDS Relief (“PEPFAR”) as a
result of a “waiver” status granted these products by the United States Agency
for International Development.
Partners
Involved in the Product:
In
2004
we entered into a thirteen-year supply and technology transfer agreement
with
FIOCRUZ-Bio-Manguinhos, an affiliate of the Ministry of Health of Brazil
relating to our HIV 1/2 STAT-PAK product. FIOCRUZ-Bio-Manguinhos will supply
this product, which will eventually be produced completely in Brazil, to
the
Brazilian public health market and potentially other markets in the region.
In
September 2005 we were designated as the confirmatory test in Uganda’s national
rapid testing protocol and through the offices we have established in East
Africa and Nigeria, we hope to be selected in more such national testing
protocols. In February 2006 our HIV ½ STAT-PAK was designated by the Nigerian
Ministry of Health in four out of the eight screening protocols in the Nigerian
Interim Rapid Testing Algorithm. At the same time, we are identifying and
appointing distributors in these regions, and are engaged with the multitude
of
stakeholders that are responsible for the delivery of rapid testing and related
services in the markets. Our focus is on those African countries that are
receiving funding from PEPFAR and other large relief programs.
In
January of 2006 we became one of four recommended global suppliers to Former
President Clinton’s HIV/AIDS Initiative (“CHAI”), and through that we expect to
generate revenues in many of the fifty countries that have agreements with
CHAI.
For
the
US market, we are in discussions with potential marketing partners and direct
customers in the United States as we near US FDA approval.
CHAGAS
RAPID TEST
Chembio
has completed development of a rapid test for the detection of antibodies
to
Chagas Disease. This product, Chagas STAT-PAK, was developed in collaboration
with a consortium of leading researchers in Latin America that have granted
us
an exclusive license to their recombinant antigens. Chagas Disease is endemic
only in regions of Latin America yet there are an estimated 16-18 million
Chagas
Disease cases resulting in approximately 20,000 deaths annually, with an
estimated 300,000 new cases each year. It is transmitted by a parasitic bug
which lives in cracks and crevices of poor-quality houses usually in rural
areas, through blood transfusion or congenitally from infected mother to
fetus.
There is an effective therapy available to treat the early chronic phase,
but it
only eliminates the infection if administered to children that are diagnosed
with it. Chagas STAT-PAK is the only rapid test for Chagas disease to have
performed well in multi-center studies in endemic regions of Latin
America.
The
Company received, in January of 2006, an order for $1.2 million to supply
its
Chagas Disease rapid test to be delivered in the first half of 2006. This
procurement is being made by the Pan American Health Organization, headquartered
in Washington D.C., which is affiliated with the World Health Organization.
The
procurement will be used to implement a nationwide Chagas screening program
for
all children under the age of 10 in endemic regions of Bolivia. The Company
is
actively looking at developing additional business opportunities for this
product in Bolivia, and other markets in Latin America that are impacted
by this
disease.
Prior
to
2005, a majority of our revenues were from the contract manufacture of private
label pregnancy tests for regional pharmacies, drug stores and mass merchants
in
the United States, Europe, Canada, and Central America. However, as a result
of
pricing pressures, regulatory changes and potential patent litigation in
this
field, and in order to focus our efforts on rapid HIV tests we sold
substantially all of the business related to our private label pregnancy
test.
We have retained a profit share derived from the sales of these products
by the
buyer. This has resulted in a substantial reduction of our revenues from
these
products during 2004 and 2005. The extent to which we will derive a benefit
from
sales of these products is difficult to estimate because of uncertainties
in
regulatory changes, product pricing, manufacturing cost changes, and patent
litigation.
As
described below, we also have other commercially available products, such
as
rapid tests for Lyme disease and other products, the aggregate of whose revenues
are currently not material to us. We also are involved, as described below
under
“Research and Development,” in the development of new products.
Lateral
Flow Technology
All
our
current products employ lateral flow technology, which 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 the strip downstream from the point of application.
Lateral flow technology is well established and widely applied in the
development of rapid diagnostic tests. The functionality of our lateral flow
tests is based on the ability of an antibody to bind with a specific antigen
(or
vice versa) and for the binding to become visible through the use of the
colloidal gold and/or colored latex that we use in our products. The colloidal
gold or the colored latex produces a colored line if the binding has occurred
(the test line), in which case it means there has been a reactive or positive
result. In any case, a separate line (the control line) will appear to confirm
that the test has been validly run in accordance with the instructions for
use.
Our
lateral flow technology allows the development of easy-to-perform, single-use
diagnostic tests for rapid, visual detection of specific antigen-antibody
complexes on a test strip. This format provides a test that is simple (requires
neither electricity nor expensive equipment for test execution or reading,
nor
skilled personnel for test interpretation), rapid (turnaround time approximately
15 minutes), safe (minimizes handling of specimens potentially infected),
non-invasive
(requires
5-20 microliters of whole blood easily obtained with a finger prick, or
alternatively, serum or plasma), stable (24 months at room temperature storage
in the case of our HIV tests), and highly reproducible.
We
can
develop and produce lateral flow tests that are qualitative
(reactive/non-reactive), as in the case of our HIV tests, and we can develop
semi-quantitative tests, reflecting different concentrations of the target
marker(s) using different colored latex test lines for each concentration
We can
also develop tests for multiple conditions, using different colored lines.
We
have developed proprietary techniques that enable us to achieve high levels
of
sensitivity and specificity [see definition below] in our diagnostic tests
using
our proprietary latex conjugate and buffer systems. These techniques include
the
methods we employ in manufacturing and fusing the reagents with the colored
latex, or colloidal gold, blocking procedures used to reduce false positives,
and methods used in treating the materials used in our tests to obtain maximum
stability and resulting longer shelf life. We also have extensive experience
with a variety of lateral flow devices, including the sample collection device
used in our SURE CHECK HIV rapid test which we believe is easier to use than
other finger-stick whole blood rapid tests. SURE CHECK eliminates the need
for
transferring finger-stick whole blood samples from the fingertip onto a test
device, because the collection of the sample is performed within a tubular
test
chamber that contains the lateral flow test strip. The whole blood sample
is
absorbed directly onto the test strip through a small opening in one end
of the
test chamber and an absorbent pad positioned just inside this same end of
the
test chamber.
Please
refer to the section entitled “Legal Proceedings” for a discussion of the legal
issues we face with regard to SURE CHECK.
During
2005 we developed a patent-pending lateral flow platform, which we believe
provides several advantages for next generation product development
(
See
“Intellectual
Property”).
The
sensitivity of a test indicates how strong the sample must be before it can
be
detected by the test. The specificity of a test measures the ability of the
test
to analyze, isolate, and detect only th
e
matters
targeted by the test.
Target
Market
HIV
Rapid Tests
We
believe
that the prevention and treatment goals that have been established by large
programs financed to thwart the spread of HIV will drive the growth and demand
for rapid HIV tests geometrically in the coming years. Chembio is one of
only
two US-based manufacturers of rapid HIV tests and the only one with products
that it believes can meet the various demands of the global market.
Based
upon an analysis done by the Global Business Coalition of HIV/AIDS,
approximately 500 million people will need to be tested with at least one
rapid
test (also a confirmatory rapid test will be needed in the case of a positive
result) over the next three years in order to insure that treatment targets
are
achieved
1
.
This is
not just because of the continuing growth in the epidemic, but more importantly,
because anti-retroviral treatments are available, affordable and are being
funded, so that people actually have a reason to be tested.
1
www.businessfightsaids.org/site/pp.asp?c=gwKXJfNVJtF&b=1008825 - Policy
Documents/Facilitating Access to Testing
Because
HIV medicines have become much less expensive and more widely available,
unprecedented multi-billion dollar financial commitments are being allocated
in
each of the next few years. Some of these commitments are being made by the
UNAIDS “3 by 5” initiative
2
,
The
Global Fund
3
,
and the
U.S. Presidential Emergency Plan for AIDS Relief
4
,
which
will provide treatment to five million people, and in order to identify these
five million people, rapid testing is being implemented on a very large scale.
The United States is the largest donor, by far, to these programs. Each of
these
programs recognizes that a massive scale-up in the use of rapid HIV tests
is the
only way their treatment goals can hope to be achieved.
We
further believe that the global demand for rapid HIV testing will increase
at
very high rates well beyond the next few years and for the foreseeable future.
As of the end of 2004 (which is the latest data the Company has available
to
it), there were an estimated 40 million people infected with HIV/AIDS worldwide,
of which an estimated 6 million were in need of antiretroviral therapy. The
number of people in need of treatment will continue to grow as infection
rates
increase significantly worldwide, and there is little expectation for an
effective vaccine anytime soon. As such, even with relatively low prevalence
rates in Asia, UNAIDS estimates that 12 million new infections could occur
in
that region alone between 2005 and 2010
5
.
FDA
approval for two of our rapid HIV tests is anticipated in the first half
of
2006, and this will enable us to participate in the U.S. market as well,
which
is estimated to become at least a $50 million market during the next few
years
6
.
The
U.S. market opportunity has been developing first in the public health and
hospital emergency room segments, and as a result of increased advocacy for
routine testing, will likely increase and expand use of this technology into
the
physician’s office, prisons, and other venues. In his State of the Union Address
this year, President Bush called on Congress to reform and reauthorize the
Ryan
White CARE Act, which among other things provides counseling and testing
for
those in greatest need of HIV/AIDS assistance. The President has also proposed
to direct a total of more than $90 million to the purchase and distribution
of
rapid HIV test kits, facilitating the testing of more than 3 million additional
Americans. Test kits would be distributed in areas of the country with the
highest rates of newly discovered HIV cases and the highest suspected rates
of
undetected cases. We are also in preliminary discussions with a US marketing
partner to serve these markets.
Finally,
based upon recent pronouncements, we believe that the over the counter market
is
also likely to open up in the U.S., which would expand the U.S. market very
significantly. We are already developing OTC opportunities outside the US,
and
we will consider adding an oral fluid feature to our product lines as such
a
feature may offer greater convenience provided there is equal performance
when
using oral fluid samples.
Chagas
Rapid Test.
Chembio
had developed this test several years ago but the market for the product
was not
meaningful as most prevention efforts, which were minimal, were made using
laboratory tests used for blood bank screening of blood. However, there has
now
been a greater interest in Chembio’s rapid test because of an important
publication that demonstrated the effectiveness of the rapid test in the
screening of blood donors (as opposed to the blood in blood banks), and because
it can be effectively deployed in rural populations to screen children and
pregnant women. Also, studies that have been completed at multiple sites
in
Central and South America showing sensitivity of between 98.5% and 99.6%
and
specificity between 94.8% and 99.9%, shows that the test is a good alternative
to standard laboratory testing methods.
Other
Products Under Development.
Chembio
is developing rapid tests for other infectious diseases, particularly rapid
tests for human and veterinary tuberculosis.
Tuberculosis
(“TB”) is the leading killer of people who have AIDS. Chembio’s TB products will
leverage several years of basic NIH-funded research by Chembio’s scientists in
TB and, if successfully completed, will result in products applicable to
both
human and veterinary TB, while also leveraging a marketing and distribution
capability which the Company has been developing for its HIV products.
Tuberculosis
is also a problem in a number of animal species either because of potential
transmission to humans, costs to agricultural production or because of the
impact on the cost of the animals themselves. For example, nonhuman primates
used in research or in zoos are quite costly, and whole colonies can be lost
if
transmission is not effectively controlled through routine and accurate
diagnosis. Bovine (Cattle) TB can be transmitted from livestock or deer to
humans and to other animals. Under rules established by the Animal and Plant
Health Inspection Service, a state can lose the right to move cattle across
state lines if TB is detected in two or more herds as has recently happened
in
Texas and Michigan. TB control of meat at slaughterhouses is dependent upon
visual inspection. The Company believes that a rapid test could complement
or
supplant these visual inspections.
2
www.unaids.org/en/treat3millionby2005initiative.asp
3
www.theglobalfund.org/en
4
www.usaid.gov/our_work/global_health/aids/pepfar.html
5
www.unaids.org/html/pub/global-reports/bangkok/unaidsglobalreport2004_en_html.htm
6
Market
research prepared for Chembio
Chembio
has already completed development of a rapid lateral-flow test for the detection
of TB in Non-Human Primates (PrimaTB STAT-PAK), and has a similar test near
completion for multiple host species, including cattle, deer, elephant and
other
exotic wildlife. The tests can use serum, plasma, whole blood or “meat juice”
samples and provide results within 20 minutes. The Company believes, subject
to
USDA approvals, that commercialization of these products can begin in early
2007.
Distribution
Channels
&
Marketing Strategy
Approval
from the FDA of our HIV rapid tests will not only permit sales in the U.S.
but
will also enhance marketing capability in the international markets. HIV
1/2
STAT-PAK and HIV 1/2 STAT-PAK Dipstick were recently made part of the World
Health Organization (WHO) 2005 Bulk Procurement Scheme and, together with
SURE
CHECK HIV, the USAID blanket waiver list. These are both critically important
for international sales. The WHO’s endorsement is required for virtually all
international procurements by governmental and non-governmental organizations.
The USAID waiver allows our products to be procured with USAID and CDC (i.e.,
PEPFAR) funding even without FDA approval which, as mentioned above, is pending.
Our
marketing strategy is to:
|
·
|
Expand
our international sales effort and strategic partnerships in the
developing world for our global health rapid test products, particularly
our HIV and Chagas Disease tests. We are actively engaged in expanding
HIV
test sales and marketing through our recently established East
and West
African offices. These offices are headed by seasoned professionals
that
have extensive marketing and/or public health experience in Africa
and are
establishing distributor relationships throughout the continent.
We also
have new collaborations and sales opportunities that we are pursuing
in
Southeast Asia, China, and South America for our HIV and/or Chagas
Disease
tests, as well as other new tests that we have under development.
|
|
·
|
Launch
our rapid HIV tests in the US and Europe. We anticipate FDA approval
during the first half of 2006. Our products will be marketed initially
in
the public health and hospital markets, through our own direct
sales
people and/or with marketing and distribution partners with whom
we are
currently in discussion. Once we obtain approval we will move aggressively
on approval in Europe.
|
|
·
|
Pursue
potential OTC marketing in the U.S. and internationally. There
is
discussion now to allow over-the-counter sale of HIV rapid tests
in the
U.S. as well as in other markets.
|
|
·
|
Launch
in 2006 our initial veterinary TB product, Prima TB Stat Pak(TM),
within
our growing line of veterinary TB tests. We anticipate USDA approval
of
our initial product, a nonhuman primate TB test, in late 2006.
During 2007
we expect to obtain revenues from certain other veterinary TB products,
at
very favorable margins.
|
Strategic
Alliances
Strategic
alliances are a key element in Chembio’s business strategy.
Clinton
Foundation HIV/AIDS
Initiative
- In January we entered into an agreement with the William
J. Clinton Foundation’s HIV/AIDS Initiative (CHAI) to be recommended by CHAI to
receive the procurements from CHAI partner countries (more than 50 countries
in
the developing world and also including China, Brazil and India) that choose
to
access CHAI’s suppliers products and their preferred pricing in exchange for
their sharing information with CHAI and permitting CHAI to fill gaps that
will
improve and scale up the country’s health care delivery systems. We are one of
four companies worldwide (and the only US-based manufacturer) to be recommended
by CHAI for sales of HIV rapid tests. While CHAI is not a procurer of the
tests
per se, it is an increasingly major factor in influencing which tests are
to be
procured. CHAI also has major agreements with generic HIV ARV manufacturers
and
manufacturers of viral load and CD-4 monitoring diagnostic tests, and those
agreements have been very successful models.
Brazilian
Ministry of Health
- In
addition, the Company is committed to securing alliances and technology-transfer
agreements with government agencies and commercial entities. For example,
Chembio signed, in early 2004, a thirteen year technology transfer, supply
and
license agreement with Bio-Manguinhos, an affiliate of the Brazilian Ministry
of
Health (MOH) and the predominant supplier for meeting public health needs
in
Brazil. Over a three-year period, Chembio will transfer its proprietary
technology related to HIV 1/2 STAT-PAK to Bio-Manguinhos in exchange for
commitments to purchase at least one million rapid tests. This purchase
commitment was met during 2005, though we expect substantial additional
procurements prior to the completion of the technology transfer agreement,
currently anticipated for early 2007. Thereafter Bio-Manguinhos will have
the
right to produce its own rapid tests and Chembio will receive royalties for
ten
years.
Other
Partnerships in Development
-
Chembio is applying its Brazilian success to other areas of the world. The
Company will endeavor to partner with qualified entities that will assemble
and
package semi-finished tests produced by Chembio under Chembio’s quality control
in the U.S. These unique arrangements would create an effective public-private
partnership with local governments and ensure the availability of rapid HIV
tests. This will foster self-reliance in these countries, create local jobs
and
contribute to their economic and technological growth.
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;
·
Proprietary
know-how;
·
The
ability to develop and market products and processes;
·
The
ability to obtain FDA or other required regulatory approvals;
|
·
|
The
ability to manufacture products that meet applicable FDA requirements,
(i.e. FDA’s Quality System Regulations) see Governmental Regulation
section;
|
·
Access
to
adequate capital;
·
The
ability to attract and retain qualified personnel; and
·
The
availability of patent protection.
We
believe our scientific and technological capabilities and our proprietary
know-how relating to lateral flow rapid tests, particularly for HIV and
tuberculosis, are very strong.
Our
ability to develop and market other products is in large measure dependent
on
our having additional resources and/or collaborative relationships. Some
of our
product development efforts have been funded on a project or milestone basis.
We
believe that our proprietary know-how in lateral flow technology is instrumental
in our obtaining the collaborations we have and that we continue to pursue.
Prior
to
2005, we had very limited experience with regard to obtaining FDA or other
required regulatory approvals, and no experience with obtaining pre-marketing
approval of a biologic product such as HIV. See “Governmental Regulation” for
definition of pre-marketing approval. For this reason, during 2004 and 2005
we
hired employees and consultants that collectively have that experience from
other companies. We believe this has been critical in our progress toward
obtaining these approvals during the last year and in ensuring that we
manufacture our products in accordance with FDA, USDA and other regulatory
requirements.
Our
access to capital is much less than that of several of our competitors, and
this
is a competitive disadvantage. We believe however that our access to capital
may
increase as we get closer to FDA approval of our rapid HIV tests and/or as
we
complete the development of, and the requisite regulatory approvals related
to,
our other products, including those that we have under development. ( See
Management’s Discussion And Analysis Of Financial Condition And Results Of
Operations -
Overview
and in
particular the last paragraph)
To
date,
we believe we have been competitive in the industry in attracting and retaining
qualified personnel. Because of the greater financial resources of many of
our
competitors, we may not be able to complete effectively for the same individuals
to the extent that a competitor uses its substantial resources to attract
any
such individuals. With respect to the availability of patent protection,
we do
not have our own portfolio of patents or the financial resources to develop
and/or acquire a portfolio of patents similar to those of our larger
competitors. We have been able to obtain patent protection by entering into
licensing arrangements.
Competitive
factors specifically related to our HIV tests are product quality, price
and
ease of use. Product quality for an HIV rapid test primarily means accuracy
(sensitivity and specificity), early detection of cases, time elapsed between
testing and confirmation of results, and product shelf life.
We
believe that our product offerings and business model position us well to
compete effectively and win a meaningful share of this expanding market.
The
leading products in the international market are UniGold(R), produced by
Trinity
Biotech in Ireland, and Determine(R), produced by Abbott Diagnostics in Tokyo.
The Abbott Determine business was sold to Inverness Medical Innovations last
year, although Abbott retained the distribution rights to the Determine product
for approximately three years. Determine and UniGold have well established
presences in many of the developing world markets, often as the screening
and
confirmatory tests, respectively. Inverness’ Orgenics subsidiary in Israel has a
rapid test, Double Check Gold, and this is one of the other three products
recommeded by CHAI; the other two companies whose products were selected
by CHAI
are based in India and China, respectively, and they have not yet established
apparent marketing efforts outside their countries, although they are qualified
by the WHO. In the developed world, particularly the United States, our
competitors are Orasure Technologies with OraQuick(R), and, to a much lesser
degree Trinity with its UniGold(R) product, both of which are FDA-approved,
CLIA-waived products. We do not believe Inverness plans to submit either
the
Determine or the Orgenics product to the FDA.
We
are
targeting the developing world markets that are being funded by PEPFAR and
The
Global Fund where Determine and UniGold are the established tests. However,
neither one of those products contains a true IgG control. This means that
the
control line does not confirm that the test was run properly with the patient
sample; it only confirms that the buffer solution was applied. Thus the
appearance of the control line in these tests does not necessarily mean that
the
test was validly performed, so it may not be a true non-reactive or negative
result, and this can lead to potential false negative results.
Orasure
has been focusing on building its brand and market share in the US market,
and
successfully so; its developing world sales are not significant as we believe
its product is not suitable and not cost competitive to participate in the
international market. Orasure has been successful in bringing attention to
the
need and availability of rapid HIV testing in the United States. Its main
advantage is the fact that its test can be used with oral fluid samples,
though
its FDA approved sensitivity is 99.3% with these samples. OraQuick is not
approved for use with serum samples which may limit its marketability in
certain settings.
Chembio’s
HIV products’ shelf life is 24 months, which is double that of UniGold and four
times that of Orasure’s product. We expect that our products will be approved by
the FDA for finger-stick whole blood, venous whole blood, serum, and plasma.
Our
Sure Check format is extremely convenient, easier to use than OraQuick on
finger-stick whole blood sample, much more cost competitive, and provides
a
safe, closed system. We believe that having high level executives in the
field
in East and West Africa that are engaged with public health officials, NGOs,
and
other organizations provides us with a competitive advantage. None of the
competitors to the best of our knowledge has actually done a technology transfer
which we can now replicate in markets of our choosing.
We
believe that Chembio is in a leadership position as it relates to our rapid
tuberculosis test even though the product is still under evaluation and not
ready for marketing. We are not aware of any rapid whole blood test that
has the
sensitivity and specificity levels necessary to replace or complement the
current sputum smear microscopy method being employed in the high incidence
tuberculosis countries; and this is what we believe our rapid tuberculosis
test,
when fully developed and evaluated, will be able to do. We are also not aware
of
any rapid whole blood test to detect active pulmonary tuberculosis in non-human
primates and/or other animals for which Chembio is developing rapid tuberculosis
tests.
Research
and Development
We
are
focusing our research and development efforts on new rapid tests that will
leverage our expertise and sales channels. Our research and development
activities have been in three disease areas: HIV, Human and Veterinary
Tuberculosis, and Neglected Diseases such as Chagas Disease
(See
section entitled
General
)
.
HIV
(See section entitled
General
)
Our
HIV
development efforts are on developing different specialty next generation
rapid
tests such as tests for accurately screening newborns and confirmatory tests.
Prototypes have been developed using our patent-pending lateral flow technology
(See
Intellectual
Property).
Tuberculosis
Our
tuberculosis rapid tests for humans are being designed to significantly increase
the accuracy of existing tuberculosis screening methods and technologies.
Our
initial tuberculosis test was developed pursuant to Phase I and II Small
Business Innovative Research grants from the National Institute of Health
from
1998 until 2002, and our current test, TB STAT-PAK II, was completed in 2003.
This test was evaluated by the World Health Organization in 2005 alongside
more
than fifteen other tests from various manufacturers, and although it was
among
the best performers, its sensitivity and specificity were not high enough
as
compared to the benchmarks employed to result in a recommendation by the
WHO to
switch from the current methodologies to our test or to any of the other
tests
in this evaluation.
In
addition to our research and development efforts for tuberculosis tests for
humans, we have developed a test for detecting active pulmonary tuberculosis
in
non-human primates (monkeys). We submitted this product for approval to the
United States Department of Agriculture during the first quarter of 2005,
and we
expect to obtain approval of this product during the latter part of 2006.
We are
also engaged in collaborations related to the detection of active pulmonary
tuberculosis in other animals as we can leverage our current technology for
additional species. We do not anticipate any material revenues from these
efforts during 2006.
During
2005 and 200
4,
$1,364,898 and $1,508,849, respectively, was spent on research and development
activities. A significant portion of these expenditures have been on our
human
and non-human primate tuberculosis product development efforts.
Employees
At
December 31, 2005, we employed 64 people, including 62 full-time employees.
In
May 2004, we entered into employment agreements with Lawrence Siebert, President
and Chairman, Avi Pelossof, VP Sales, Marketing and Business Development,
and
Javan Esfandiari, Director of research and development.
Governmental
Regulation
The
Company’s existing and proposed diagnostic products are regulated by the U.S.
Food and Drug Administration (FDA), U.S. Department of Agriculture (USDA),
certain state and local agencies, and/or comparable regulatory bodies in
other
countries. This regulation governs almost all aspects of development,
production, and marketing, including product testing, authorizations to market,
labeling, promotion, manufacturing, and record keeping. The Company’s FDA and
USDA regulated products require some form of action by each agency before
they
can be marketed in the 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). Both before
and
after approval or clearance, failure to comply with the FDA’s requirements can
lead to significant penalties.
Most
of
the Company’s diagnostic products are regulated as medical devices, and some are
regulated as biologics. There are two review procedures by which medical
devices
can receive FDA clearance or approval. Some products may qualify for clearance
under Section 510(k) of the Federal Food, Drug and Cosmetic Act, in which
the
manufacturer provides a pre-market notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent
to
another legally marketed product (i.e., that it has the same intended use
and is
as safe and effective as a legally marketed device and does not raise different
questions of safety and effectiveness). In some cases, the submission must
include data from human clinical studies. Marketing may commence when the
FDA
issues a clearance letter finding such substantial equivalence. An applicant
must submit a 510(k) application at least 90 days before marketing of the
affected product commences. Although FDA clearance may be granted within
that
90-day period, in some cases as much as a year or more may be required before
clearance is obtained, if at all.
If
the
medical device does not qualify for the 510(k) procedure (either because
it is
not substantially equivalent to a legally marketed device, or because it
is
required by statute and the FDA’s implementing regulations to have an approved
application), the FDA must approve a pre-market approval (PMA) application
before marketing can begin. Pre-market approvals must demonstrate, among
other
matters, that the medical device provides a reasonable assurance of safety
and
effectiveness. A pre-market approval is typically a complex submission,
including the results of preclinical and clinical studies. Preparing a
pre-market approval is a detailed and time-consuming process. Once a pre-market
approval has been submitted, the FDA is required to review the submission
within
a statutory period of time. However, the FDA’s review may, and often is, much
longer, often requiring one year or more, and may include requests for
additional data.
Every
company that manufactures medical devices distributed in the 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 U.S. Department of Health and Human
Services (via the FDA) applicable to the category of examination or
procedure performed. Although a certificate is not required for the Company,
it
considers the applicability of the requirements of CLIA in the design and
development of its products.
The
statutory definition of “laboratory” is very broad, and many of our customers
are considered labs.
A CLIA waiver will remove certain quality
control and other requirements that must be met for certain customers to
use the
Company’s products and this is in fact critical to the marketability of a
product into the point of care diagnostics market.
In
addition, the FDA regulates the export of medical devices that have not been
approved for marketing in the 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 U.S. governmental approvals.
On
the
other hand, the fact that our HIV diagnostic tests are of value in the AIDS
epidemic may lead to some government process being expedited.
The
extent of potentially adverse governmental regulation affecting Chembio that
might arise from future legislative or administrative action cannot be
predicted.
The
Company’s HIV rapid tests have been evaluated and approved for marketing in
several foreign jurisdictions, including Mexico, India, and other nations
in the
developing world. Chembio completed clinical trials for the SURE CHECK HIV
and
HIV 1/2 STAT PAK rapid tests in 2004 and filed the pre-market approval
application with the FDA for approval of these products in February 2005.
A
facility inspection took place in September 2005 and an amendment was made
in
October 2005 to add an HIV-2 claim to the application. CLIA waiver studies
are
substantially completed. The Company believes that it will receive an approval
of its PMA and a CLIA waiver during the first half of 2006. The Company
also had its first veterinary tuberculosis rapid test under review by the
USDA
and expects to have its facility inspected by this agency during 2006 in
connection with that submission.
Environmental
Laws
To
date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Subject
to our available financial resources, our intellectual property strategy
is: (1)
to pursue licenses, trade secrets, and know-how within the area of lateral
flow
technology, and (2) to develop and acquire proprietary positions to reagents
and
new hardware platforms for the development and manufacture of rapid diagnostic
tests.
Trade
Secrets and Know-How
We
believe that we have developed a substantial body of trade secrets and know-how
relating to the development of lateral flow diagnostic tests, including but
not
limited to the sourcing and optimization of materials for such tests, and
how to
maximize sensitivity, speed-to-result, specificity, stability and
reproducibility.
The
Company possesses know-how to develop tests for multiple conditions using
colored latex which is proprietary. Our buffer formulations enable extremely
long shelf lives of our HIV rapid tests and we believe that this provides
us
with an important competitive advantage.
Lateral
Flow Technology and Reagent Licenses
Although
we own no patents covering lateral flow technology, we have obtained a
non-exclusive license from Abbott Laboratories to a portfolio of its lateral
flow patents. The issue of potential patent challenges is ongoing for us
as well
as for our competitors, and we continue to monitor the situation, consult
with
patent counsel, and seek licenses and/or redesigns of products that we believe
to be in the best interests of Chembio Diagnostics, Inc. and our stockholders.
Because of the costs and other negative consequences of time-consuming
litigation regardless of whether we would ultimately prevail, if we foresee
a
significant possibility of patent infringement litigation, our first priority
will be to attempt to obtain a license on reasonable terms. Nevertheless
there
is no assurance that Abbott’s lateral flow patents may not be challenged or that
licenses will be available on reasonable terms, if any.
In
the
event that it is determined that a license is required and it is not possible
to
negotiate a license agreement under a necessary patent, we may be able to
modify
our HIV rapid test products and other products such that a license would
not be
necessary. However, this alternative could delay or limit our ability to
sell
these products in the United States and other markets, which would adversely
affect our results of operations, cash flows and business.
During
2005 the Company has made substantial additions to its intellectual property
portfolio as a result of the development of a new rapid test platform that
has
shown improved sensitivity as compared with conventional platforms in a number
of preliminary studies using well characterized HIV, Tuberculosis and other
samples. This technology has formed the basis of two patent applications
that
were filed earlier this year and will likely result in additional applications
covering additional uses of this technology platform. The Company anticipates
signing new development projects based upon these new technologies in the
near
future that will provide new product applications and marketing opportunities.
The Company believes that this new lateral flow platform is outside of the
scope
of currently issued patents in the field of lateral flow technology, thereby
offering the possibility of a greater freedom to operate. There is no assurance
that the patent application will be granted, or that its claims won’t be
modified upon review, or that Chembio’s patents or its products incorporating
the patent claims will not be challenged at any time.
We
have
also filed two patents relating to our veterinary tuberculosis rapid tests
and
improvements to the sample collection method in our Sure Check HIV device.
The
peptides used in our HIV rapid tests are patented by Adaltis Inc. and are
licensed to us under a 10-year license agreement dated August 30, 2002 which
was
recently amended. We also have licensed the antigens used in our tuberculosis
and Chagas disease tests.
We
have
negotiated license agreements related to intellectual property rights associated
with HIV- 1 and HIV-2 and expect to conclude these agreements during
2006.
Our
Business Prior to the Merger
We
were
incorporated on May 14, 1999 in the state of Nevada under the name
“Trading
Solutions.com, Inc.” We were originally organized to develop a trading school
designed to educate people interested in online investing. We offered courses
for beginners as well as experienced traders, consisting of theory sessions
linked closely with practical hands-on training. We offered individual training,
small group sessions and seminars focusing on online trading and various
computer-related subjects.
We
were
not successful with our online trading school and on August 18, 2001, we
entered into an exchange agreement with Springland Beverages, Inc., an Ontario,
Canada corporation. Pursuant to the agreement, we exchanged 15,542,500 shares
of
common stock for all the issued and outstanding shares of Springland Beverages,
Inc., making Springland our wholly-owned subsidiary. Concurrent with the
agreement, there was a change in control and we changed our business plan
to
focus on developing and marketing soft drinks. Springland Beverages, Inc.
was
not able to implement its business plan and failed to achieve profitable
operations. On March 28, 2003, we sold the subsidiary back to its
president, leaving us with no immediate potential revenue sources.
Since
the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved
in
developing, manufacturing, selling and distributing tests, including rapid
tests, for a number of diseases and for pregnancy.
The
Merger
On
May 5, 2004, Chembio Diagnostic Systems Inc. completed the merger through
which it became our wholly-owned subsidiary, and through which the management
and business of Chembio Diagnostic Systems Inc. became our management and
business. As part of this transaction, we changed our name to Chembio
Diagnostics, Inc.
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human
Immunodeficiency Virus, HIV.
|
ANTIBODY
|
A
protein which is a natural part of the human immune system produced
by
specialized cells to neutralize antigens, including viruses and
bacteria
that invade the body. Each antibody producing cell manufactures
a unique
antibody that is directed against, binds to and eliminates one,
and only
one, specific type of antigen.
|
ANTIGEN
|
Any
substance which, upon entering the body, stimulates the immune
system
leading to the formation of antibodies. Among the more common
antigens are
bacteria, pollens, toxins, and viruses.
|
ARVs
|
Anti-Retroviral
Treatments for AIDS
|
CD-4
|
The
CD4+ T-lymphocyte is the primary target for HIV infection because
of the
affinity of the virus for the CD4 surface marker. Measures of CD4+
T-lymphocytes are used to guide clinical and therapeutic management
of
HIV-infected persons.
|
CDC
|
Centers
for Disease Control and Prevention
|
CHAGAS
DISEASE
|
Chagas
Disease is an infection caused by the parasite
Trypanosoma
cruzi
.
Worldwide, it is estimated that 16 to 18 million people are infected
with
Chagas disease; of those infected, 50,000 will die each
year.
|
CHAI
|
Clinton
HIV/AIDS Initiative
|
CLIA
|
Clinical
Laboratory Improvement Act
|
DIAGNOSTIC
|
Pertaining
to the determination of the nature or cause of a disease or condition.
Also refers to reagents or procedures used in diagnosis to measure
proteins in a clinical sample.
|
EITF
|
Emerging
Issues Task Force
|
FASB
|
Financial
Accounting Standards Board
|
FDA
|
U.S.
Food and Drug Administration
|
FDIC
|
Federal
Deposit Insurance Corporation
|
HIV
|
Human
Immunodeficiency Virus. HIV (also called HIV-1), a retrovirus,
causes AIDS. A similar retrovirus, HIV-2, causes a variant disease,
sometimes referred to as West African AIDS. HIV infection leads to
the destruction of the immune system.
|
IgG
|
IgG
or Immunoglobulin are proteins found in human blood. This protein
is
called an "antibody" and is an important part of the body's defense
against disease. When the body is attacked by harmful bacteria
or viruses,
antibodies help fight these invaders.
|
MOH
|
Ministry
of Health
|
MOU
|
Memoranda
of Understanding
|
NGO
|
Non-Governmental
Organization
|
OTC
|
Over
the Counter
|
PEPFAR
|
The
President’s Emergency Plan for AIDS Relief
|
PMA
|
Pre-Marketing
Approval
|
PROTOCOL
|
A
procedure pursuant to which an immunodiagnostic test is performed
on a
particular specimen in order to obtain the desired
reaction.
|
REAGENT
|
A
chemical added to a sample under investigation in order to cause
a
chemical or biological reaction which will enable measurement
or
identification of a target substance.
|
RETROVIRUS
|
A
type of virus which contains the enzyme Reverse Transcriptase
and is
capable of transforming infected cells to produce diseases in
the host
such as AIDS.
|
Ryan
White CARE Act
|
The
Ryan White Comprehensive AIDS Resources Emergency (CARE) Act
is Federal
legislation that addresses the unmet health needs of persons
living with
HIV disease by funding primary health care and support services.
The CARE
Act was named after Ryan White, an Indiana teenager whose courageous
struggle with HIV/AIDS and against AIDS-related discrimination
helped
educate the nation.
|
SAB
|
Staff
Accounting Bulletin
|
SENSITIVITY
|
Refers
to the ability of an assay to detect and measure small quantities
of a
substance of interest. The greater the sensitivity, the smaller
the
quantity of the substance of interest the assay can detect. Also
refers to the likelihood of detecting the antigen when
present.
|
SFAS
|
Statement
of Financial Accounting Standards
|
SPECIFICITY
|
The
ability of an assay to distinguish between similar materials. The
greater the specificity, the better an assay is at identifying
a substance
in the presence of substances of similar makeup.
|
SPUTUM
|
Expectorated
matter; saliva mixed with discharges from the respiratory
passages
|
TB
|
Tuberculosis
(TB) is a disease caused by bacteria called
Mycobacterium
tuberculosis
.
The bacteria usually attack the lungs. But, TB bacteria can attack
any
part of the body such as the kidney, spine, and brain. If not
treated
properly, TB disease can be fatal. TB is spread through the air
from one
person to another. The bacteria are put into the air when a person
with
active
TB disease
of
the lungs or throat coughs or sneezes. People nearby may breathe
in these
bacteria and become infected.
|
TESTING
ALGORITHM
|
For
rapid HIV testing this refers both to method or protocol for
using rapid
tests from different manufacturers in combination to screen and
confirm
patients at the point of care, and may also refer to the specific
tests
that have been selected by an agency or ministry of health to
be used in
this way.
|
UNAIDS
|
Joint
United Nations Program on HIV/AIDS
|
USAID
|
United
States Agency for International Development
|
USDA
|
U.S
Department of Agriculture
|
WHO
|
World
Health Organization
|
Our
administrative offices and research facilities are located in Medford, New
York.
We lease approximately 14,000 square feet of industrial space for $8,167
per
month. The space is utilized for R&D (approximately 1,600 square feet),
offices (approximately 4,700 square feet) and production (approximately 7,700
square feet). The lease term expires on April 30, 2007. 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.
From
time
to time, we may be involved in litigation relating to claims arising out
of our
operations in the normal course of business. Other than as set forth below,
we
know of no material, existing or pending legal proceedings against us, nor
are
we involved as a plaintiff in any material proceeding or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a
material interest to our interest. The outcome of the open unresolved legal
proceeding set forth below is presently indeterminable. We do not believe
the
potential outcome from this legal proceeding will significantly impact our
financial position, operations or cash flows.
Saliva
Diagnostic Systems, Inc. Dispute.
The
Company is involved in a patent litigation with Saliva Diagnostic Systems,
Inc.
(“SDS”), the assignee of a patent related to a method for collecting samples.
The Company has requested relief from the court that its Sure Check HIV test
does not infringe SDS’s patent, that such patent is invalid, and that it is
unenforceable due to inequitable procurement. SDS has answered and
counterclaimed, alleging that the Company has infringed the patent, which
the
Company has denied. In the years 2001 through 2003, the Company paid royalties
to SDS and took several other actions based upon SDS’s representations regarding
its alleged patent.
In
response to the Company’s aforementioned request for relief, the Court has
decided that it is not yet prepared to rule on the significant issues in
the
case. The Company does not believe that the Court’s decision adversely affects
the strength of its position. Accordingly, we are not presently appealing
this
decision, although we believe we have a meritorious basis for future
appeal. The discovery phase of the litigation is proceeding pursuant to a
scheduling order and trial is presently expected to convene in late
2006.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
NONE.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.”
Prior to May 14, 2004, our common stock was traded on the OTC Bulletin
Board under the symbol “TSUN.” For the periods indicated, the following table
sets forth the high and low bid prices per share of our common stock. These
prices represent inter-dealer quotations without retail markup, markdown,
or
commission and may not necessarily represent actual transactions. We completed
a
1 for 17 reverse stock split on March 12, 2004, and all of the prices in
this table have been adjusted to reflect this split.
Fiscal
Year 2005
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$0.90
|
$0.50
|
Second
Quarter
|
$0.87
|
$0.54
|
Third
Quarter
|
$0.66
|
$0.52
|
Fourth
Quarter
|
$0.62
|
$0.30
|
Fiscal
Year 2004
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$3.00
|
$0.34
|
Second
Quarter
|
$2.00
|
$1.00
|
Third
Quarter
|
$1.54
|
$1.01
|
Fourth
Quarter
|
$1.29
|
$0.55
|
Trades
of our common stock are subject to Rule 15g-9
of the Securities and Exchange Commission, known as the Penny Stock Rule.
This
rule imposes requirements on broker/dealers who sell securities subject to
the
rule to persons other than established customers and accredited investors.
For
transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the
purchaser’s written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer practices
in
connection with transactions in “penny stocks.” Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system)
,
except
for securities of companies that have tangible net assets in excess of
$2,000,000 or average revenue of at least $6,000,000 for the previous three
years
.
The
Penny Stock Rule requires a broker/ dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information
about
penny stocks and the nature and level of risks in the penny stock market.
The
broker/dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker/dealer and
its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer’s account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before
or
with the customer’s confirmation. These disclosure requirements have the effect
of reducing the level of trading activity in the secondary market for our
common
stock. As a result of these rules, investors may find it difficult to sell
their
shares.
Holders
As
of
December 31, 2005, there were approximately 322 record owners of our common
stock.
Dividends
The
Company
has
never paid cash dividends on its common stock and has no plans to do so in
the
foreseeable future. Our future dividend policy will be determined by our
board
of directors and will depend upon a number of factors, including our financial
condition and performance, our cash needs and expansion plans, income tax
consequences, and the restrictions that applicable laws, our current preferred
stock instruments, and our future credit arrangements may then
impose.
Currently
under Nevada law, a dividend may not be made by a corporation if, after giving
it effect:
|
·
|
the
corporation would not be able to pay its debts as they become due
in the
usual course of business; or
|
|
·
|
except
as otherwise specifically allowed by the corporation’s articles of
incorporation, the corporation’s total assets would be less than the sum
of its total liabilities plus the amount that would be needed,
if the
corporation were to be dissolved at the time of distribution, to
satisfy
the preferential rights upon dissolution of stockholders whose
preferential rights are superior to those receiving the
distribution.
|
The
certificates of designation authorizing our series A and series B preferred
stock also prohibit us from making any distribution with respect to any equity
securities that by their terms do not rank senior to the series A or series
B
preferred stock.
Recent
Sales Of Unregistered Securities; Use Of Proceeds From Registered Securities
On
October 26, 2005, the Company issued an option to acquire 10,000 shares of
common stock to Allen Moore, a member of the Company’s Advisory Committee. The
exercise price of the option is $.48 per share, one-half of the option is
exercisable immediately and one-half becomes exercisable on the first
anniversary of the grant date. The option expires on October 26, 2010. The
Company relied on Section 4(2) of the Securities Act of 1933 as the basis
for
its exemption from registration of this issuance.
On
November 17, 2005, the Company entered into a contract with Bio Business
Science
and Development, LTDA, a consulting company, and as part of the terms of
this
contract the Company issued a warrant to acquire 39,006 shares of common
stock
to the consulting company as a portion of the compensation for services to
be
performed. The conversion price for the warrant is $.55 per share, and the
warrant expires on November 17, 2010. The Company relied on Section 4(2)
of the
Securities Act of 1933 as the basis for its exemption from registration of
this
issuance.
On
December 1, 2005, the Company entered into a contract with The Investor
Relations Group, a consulting company, and as part of the terms of this contract
the Company issued 25,000 shares of common stock and a warrant to acquire
25,000
shares of common stock to the consulting company as a portion of the
compensation for services to be performed. The conversion price for the warrant
is $.70 per share and the warrant expires on November 30, 2010. The Company
relied on Section 4(2) of the Securities Act of 1933 as the basis for its
exemption from registration of this issuance.
On
December 16, 2005, the Company issued an option to acquire 15,000 shares
of
common stock to each of the Company’s non-employee directors: Alan Carus, Gary
Meller, and Gerald Eppner. The exercise price of each option is $.35 per
share,
and each option is exercisable immediately. Each option expires on December
16,
2010. The Company relied on Section 4(2) of the Securities Act of 1933 as
the
basis for its exemption from registration of this issuance.
|
MANAGEMENT
’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
|
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," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continues" or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
OVERVIEW
The
following management discussion and analysis relates to the business of Chembio
Diagnostics, Inc. (the Company) and its subsidiaries, which develop,
manufacture,
and market
lateral
flow rapid diagnostic tests that detect infectious diseases
.
These
tests are sold in the U.S. and/or internationally to medical laboratories
and
hospitals, governmental and public health entities, non-governmental
organizations, medical professionals and retail establishments. The products
are
made under the label of Chembio Diagnostic Systems, Inc. (CDS) or the private
labels of its distributors or their customers. The products are used in the
diagnosis of infectious diseases and other conditions in humans and
animals.
The
Company’s main products presently commercially available are its three HIV Rapid
Tests (SURE CHECK(R) HIV, HIV 1/2 STAT-PAK(TM) and HIV 1/2 STAT-PAK Dipstick)
and our rapid test for Chagas Disease. In 2005, the Company sold substantially
all of the business related to its private label pregnancy test and is focusing
on the products mentioned above.
The
Company has made substantial progress toward FDA approval of its SURE CHECK
HIV
and HIV 1/2 STAT-PAK products. A pre-approval inspection of its facility
was
conducted in the third quarter of 2005 and based upon communications with
the
agency the Company believes it has met the requirements of an “approvable”
Pre-Marketing Approval (PMA) application, and expects to be so advised by
the
FDA during the first half of the second quarter of 2006. The Company further
expects to complete the full process during the second quarter of 2006, which
would include receipt from the FDA of a waiver under the Clinical Laboratory
Improvement Act (“CLIA”). A CLIA waiver is essential in order to market the
product into public health clinics and physicians offices where the level
of
training is less than clinical laboratories and hospitals. The Company is
nearing completion of the CLIA waiver studies so it will be in a position
to
submit its waiver application immediately upon receipt of the PMA license
from
the FDA.
Chembio
Diagnostics, Inc. (the Company) was formerly known as Trading Solutions.com,
Inc. On May 5, 2004, the Company issued 4,000,000 shares of its Common Stock
to
acquire all the outstanding Common Stock of Chembio Diagnostic Systems, Inc.
(CDS) and assumed all outstanding options and warrants of CDS. On May 5,
2004,
New Trading Solutions, Inc., a wholly owned subsidiary of the Company merged
with and into CDS with CDS remaining as the surviving corporation (the
“Merger”). The historical information presented for periods prior to the Merger
is based on the activities of CDS. For financial reporting purposes, the
acquisition has been treated as a recapitalization of Chembio Diagnostics,
Inc.,
with CDS as the acquiror. The earnings per share presented in the statement
of
operations for periods prior to 2005 reflect the shares outstanding as if
the
merger had taken place as of January 1, 2004
.
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, which contemplate
continuation of the Company as a going concern. Although the Company’s revenues
and gross margins increased significantly in 2005 as compared to 2004, it
has
sustained significant operating losses in 2005 and 2004. At December 31,
2005,
the Company had a positive stockholders’ equity of $1,052,703
and
working capital of $650,000
.
The
Company believes its resources are sufficient to fund its needs through early
2006 and it is considering alternatives to provide for its capital requirements
for the balance of 2006 and beyond
in order
to continue as a going concern
.
Its
liquidity and cash requirements will depend on several factors. These factors
include (1) the level of revenue growth; (2) the extent to which, if any,
that
revenue growth improves operating cash flows; (3) it’s investments in research
and development, facilities, marketing, regulatory approvals, and other
investments it may determine to make, and (4) the investment in capital
equipment and the extent to which it improves cash flow through operating
efficiencies
.
There
are no assurances that it will be successful in raising sufficient
capital.
On
March
30, 2006, the Company sold $1 million of additional Series B preferred stock
to
a Series B Preferred shareholder pursuant to provisions of the January 2005
Series B 9% Preferred Stock financing agreements. Such provisions were exclusive
to said shareholder. The Company is continuing to pursue additional financing
opportunities in order to provide for its longer term financing
needs.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 AS COMPARED WITH THE YEAR
ENDED DECEMBER 31, 2004
Revenues:
Revenues
are comprised of $3,359,532 in net product sales, $250,000 in license revenue
and $331,198 in grants and development income for the year ended December
31,
2005 as compared with $2,749,143 in net product sales, no license revenue
and
$556,789 in grant and development income for the year ended December 31,
2004.
The increase in sales is attributable to increased sales of our HIV product
of
$1,158,000 which was partially offset by decreased sales of our pregnancy
test
kit of $443,000 and decreases in other product sales aggregating $94,000.
The
increase in license revenue of $250,000 is due to a technology transfer
agreement. The Company does not expect that this particular license revenue
will
continue in the future. The decrease in grant and development income of $225,591
was due to grants received in 2004 that weren’t continued or awarded in 2005. A
substantial portion of the grant-related income is not expected to continue
in
2006.
Net
product sales for 2005 increased 22% compared to 2004. HIV net product sales
increased 93% in 2005 compared to 2004. The Company believes that sales of
its
HIV products will continue to increase in 2006 both as a result of the
international marketing strategies that were implemented in 2005 and from
the
sales to the United States market after anticipated approval from the U.S.
Food
and Drug Administration (FDA). The Company also received its first significant
order for its Chagas test (Chagas is a disease which is primarily found in
Latin
America), in the amount of $1.2 million which it expects to ship in the first
half of 2006.
Net
product sales for the three months ended December 31, 2005 increased 27%
to
$1,356,000 compared to the same period in 2004. HIV product sales increased
64%
to $1,223,000 for the three months ended December 31, 2005 compared to the
same
period in 2004.
Gross
Margin:
Gross
margin on net product sales for the year ended December 31, 2005 was 22.3%,
as
compared to 5.4% for the year ended December 31, 2004. The increase in gross
margin percentage is primarily attributable to the increased sales of HIV
products, which were at a higher margin than other product lines; in addition,
because sales volume in 2004 was lower, fixed overhead expenses per dollar
of
sales were disproportionately high.
The
gross
margin on net product sales for the three months ended December 31, 2005
improved to 38.1% from 30.8% in the comparable 2004 period.
Research
and Development:
Research
and development expenses
for
the
year ended December 31, 2005
were
$1,364,898 compared with $1,508,849
for
the
year ended December 31, 2004
.
This
category includes costs incurred for regulatory approvals, product evaluations
and registrations. Expenses for Clinical & Regulatory Affairs, totaled
$411,000
for
the
year ended December 31, 2005
,
a
decrease of $472,000 compared to
the
year
ended December 31, 2004
.
This
category also includes costs for clinical studies which decreased by $437,000
and a reduction in outside regulatory consultants of $77,000. The costs related
to the clinical trials and consulting in 2004 were related to the evaluation
of
the Company’s HIV tests in preparation of its FDA Pre-Marketing Approval (“PMA”)
application submitted in February of 2005. Expenses other than Clinical &
Regulatory increased $329,000 and were related to increased salaries and
wage-related costs of $211,000 for new hires in the R&D group, increased
travel and entertainment of $46,000 and grant payments to a university of
$35,000.
The
Company presently plans to increase its spending on research and development
because it believes such spending will result in the development of new and
innovative products. The Company will continue to focus its development efforts
on its tuberculosis related products and new lateral flow technologies, some
of
which have patents pending.
The
Company currently has several R&D projects underway. Some highlights
include:
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis in
non-human primate whole blood samples
The
Company has filed an application with the United States Department of
Agriculture (USDA) to license its rapid test, Prima TB STAT-PAK(TM). A final
set
of clinical trials is scheduled for the second quarter of 2006, that, if
successful, would lead to a conditional license (the ability to sell the
product
commercially with USDA approval on an order by order basis) by late in the
fourth quarter of 2006. The Company anticipates that additional
commercialization will begin in the first quarter of 2007, although there
are no
assurances that it will be successful.
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis in
multiple host species
Chembio
has completed development and is approaching the final validation stage on
a
series of rapid lateral-flow tests for the detection of veterinary TB in
multiple host species including; cattle, cervids, badgers, camels, elephants,
and exotic wildlife species. The name for the technology is VETTB STAT-PAK(TM).
Application to the USDA is targeted for the third quarter of 2006 for all
species. The Company anticipates commercialization of these products to start
in
the first quarter of 2007, although there are no assurances that it will
be
successful.
New
Generation Rapid Tests Based Upon Patent Pending Platform
The
Company has done substantial laboratory work on prototypes of its new
patent-pending lateral flow rapid test platform. This work has confirmed
the
advantages of this new platform in terms of sensitivity to weak and early
sero-conversion samples. The Company believes that this platform may provide
the
level of sensitivity that will be needed in order to complete development
of a
human TB rapid test which could not be achieved with sufficient sensitivity
based upon the existing platform.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense increased $966,637 to $3,265,235 in the
year
ended December 31, 2005 compared with 2004. This increase was attributable
to
increased staff in the accounting, administration and sales and marketing
departments of $375,000 and related recruiting expenses of $89,000. Increased
sales resulted in an increase in royalties and commissions of $319,000. In
addition there was an increase of $174,000 in costs regarding investor
relations, $62,000 of which resulted from an increase in the number of members
of the Company’s Board of Directors, $22,000 from increased insurance liability
cost, $34,000 related to Sarbanes-Oxley compliance and increased legal and
accounting expenses of $237,000 related to patent applications, patent
litigation, the filing of a registration statement and other required year-end
and quarterly filings. These increases were partially offset by a reduction
in
officers’ salaries of $240,000, mostly due to the inclusion in 2004 of the cost
of common stock issued to a former officer.
As
the
Company’s sales of its HIV rapid test products increase, it expects selling,
general and administrative expense to also increase. This will be in large
measure due to increased costs for commissions and royalties on intellectual
property licenses. At the end of 2005, the Company renegotiated one of its
license agreements to provide for a decrease of 50% in the royalty rate,
from
10% to 5% of sales of HIV products, in exchange for $350,000 in up front
cash
payments. Such payment is being amortized over the life of the royalty
agreement.
Other
Income and Expense:
Interest
expense decreased by $174,875 for the year ended December 31, 2005 compared
with
the year ended December 31, 2004. This was primarily attributable to the
conversion during 2004 of $1,694,000 of existing debt of Chembio Diagnostic
Systems, Inc, into Series A Preferred Stock. Interest income for the year
December 31, 2005 increased $32,000 due to the availability of additional
funds.
In addition, approximately $22,000 and $209,000 is attributable to settlements
of old outstanding payables due that were settled during the years 2005 and
2004, respectively and are reflected in other income as settlement of accounts
payable.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had a working capital surplus of $650,000 at December 31, 2005 and
a
working capital deficiency of $452,000 at December 31, 2004. On January 28,
2005, the Company completed a private placement offering which raised $5,047,500
before costs in the form of 9% Convertible Series B Preferred Stock and
associated warrants (“Series B Offering”). The proceeds from the Series B
Offering have been and are being used primarily for general corporate purposes
including for sales and marketing, research and development, and intellectual
property, and also for working capital, investor relations, and capital
expenditures.
The
following table lists the future payments required on the Company
’s
debt
and any other contractual obligations as of December 31, 2005:
OBLIGATIONS
|
|
Total
|
|
Less
than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Greater
than
5
Years
|
|
Long
Term Debt(1)
|
|
$
|
220,812
|
|
$
|
120,000
|
|
$
|
100,812
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Leases (2)
|
|
$
|
82,785
|
|
$
|
38,368
|
|
$
|
44,417
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Leases
|
|
$
|
124,950
|
|
$
|
99,837
|
|
$
|
25,113
|
|
$
|
-
|
|
$
|
-
|
|
Other
Long Term Obligations(3)
|
|
$
|
899,092
|
|
$
|
644,367
|
|
$
|
126,600
|
|
$
|
25,000
|
|
$
|
103,125
|
|
Total
Obligations
|
|
$
|
1,327,639
|
|
$
|
902,572
|
|
$
|
296,942
|
|
$
|
25,000
|
|
$
|
103,125
|
|
|
(1)
|
This
represents accrued interest which is currently being paid out at
the rate
of $10,000 per month.
|
|
(2)
|
This
represents capital leases used to purchase capital
equipment.
|
|
(3)
|
This
represents contractual obligations for fixed cost licenses and
employment
contracts.
|
RECENT
DEVELOPMENTS AND
CHEMBIO’S
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Please
see section
entitled
Overview
and in
particular the last paragraph.
During
2006, the Company expects to start marketing its SURE CHECK HIV and HIV 1/2
STAT-PAK in the U.S. as it has made substantial progress toward its FDA approval
of these products as set for the in the second paragraph of Overview above..
Based
upon the expected FDA approval and CLIA waivers referred to above, the Company
is developing plans for marketing its HIV products in the U.S. and is
considering entering into marketing arrangements with major companies who
distribute diagnostic products in the U.S.
A
recent
development of note is the White House 2007 budget request for $90 million
to
test an additional three million Americans using rapid HIV tests. Also, the
Company has been following with great interest the consideration by an FDA
advisory committee of the conditions under which rapid HIV tests could be
approved for direct over-the-counter sales to U.S. consumers. On March 10,
2006,
proposed guidelines will be presented to this committee. While the Company
believes that both President Bush’s budget request and the possibility for
over-the-counter approval bode well for the expansion of the U.S. rapid HIV
test
market, there are still many obstacles and uncertainties to be overcome before
these items become a reality and can result in realizable opportunities for
the
Company, and there are no assurance that they will be realized.
During
2005, the Company established offices in Nigeria and Tanzania which it believes
will be significant in its continuing efforts to become part of the national
testing protocols in many countries in Africa. The Company’s STAT-PAK is
designated as the confirmatory test in all of the national rapid HIV testing
protocols in the Republic of Uganda and was just recently designated in four
of
the eight parallel testing algorithms (two tests used on each patient) adopted
by the Nigerian Ministry of Health in its Interim National Testing Algorithm.
The Company is making good progress towards having its HIV products designated
in other countries where it has focused its efforts. The Company has registered
its products and has established distribution partners in certain of these
countries and is in negotiations to do so in other countries. The Company
believes that its strategy of establishing offices in these challenging markets
is a very effective way to obtain sustainable and supportable business. The
Company is also actively looking at several new opportunities for establishing
distribution and/or local assembly programs for its rapid HIV tests with
strong
local partners such as it has done in Brazil.
In
early
2006, Chembio was named as one of four companies selected by the Clinton
Foundation HIV/AIDS Initiative ("CHAI") to make available low-cost rapid
HIV
tests in order to more quickly and cost effectively achieve treatment
objectives. Under the CHAI agreement, the Company has agreed to offer its
HIV
STAT-PAK Dipstick, Chembio’s lowest cost HIV rapid test product, at a reduced
price in the expectation that the Company will receive significant order
volume
not otherwise obtainable; this should result in efficiencies of scale that
will
more than justify the reduced sales price. If these order volumes are not
realized, the Company has the right to terminate the agreement or renegotiate
pricing. Chembio is the only U.S.-based manufacturer of the four companies
in
this agreement. The CHAI Procurement Consortium is currently comprised of
more
than 50 countries in Africa, Asia, Eastern Europe, Latin America and the
Caribbean that have Memoranda of Understanding (MOUs) with CHAI.
Consequently, the Company is now actively engaged with CHAI in developing
sales
opportunities in a many of these 50+ countries. Although in some of these
countries the Company has already made substantive sales efforts, there are
many
more where this is not the case.
There
is
no commitment or assurance that either the Company’s direct efforts to establish
additional distributors and/or local assembly, or its activities through
CHAI
will materialize into meaningful sales.
The
Company’s technology transfer and supply agreement in Brazil is moving forward.
The Company shipped 704,000 HIV rapid tests in 2005, a 254,000 test increase
over the quantity sold in 2004. The Company expects to deliver components
for an
additional 800,000 tests during all of 2006, although there is no assurance
that
this will occur.
The
Company also received, in January of 2006, an order for $1.2 million to supply
its Chagas Disease rapid test to be delivered in the first half of 2006.
This
procurement is being made by the Pan American Health Organization, headquartered
in Washington D.C., which is affiliated with the World Health Organization.
The
procurement will be used to implement a nationwide Chagas screening program
for
all children under the age of 10 in endemic regions of Bolivia. The Company
is
actively looking at developing additional business opportunities for this
product in Bolivia, and other markets in Latin America that are impacted
by this
disease.
In
September 2005, the Company hired a senior diagnostics marketing executive
to
focus on its Tuberculosis products, both for veterinary and human TB. The
Company’s Non-human primate Tuberculosis product is currently under review by
the United States Department of Agriculture (USDA) and it expects USDA approval
toward the end of 2006 provided its tests meet certain performance and other
criteria; and it plans to submit additional veterinary TB products to the
USDA
this year, including a cattle TB test, subject to having the necessary
performance data of which there is no assurance.
During
the second quarter of 2005 the Company filed a patent application for a new
lateral flow device and method which it believes will provide it with
proprietary intellectual property to develop a pipeline of products that
it
believes will have improved performance over currently available lateral
flow
technologies. The Company is continuing to refine this device and it believes
it
will be the basis for new product developments that can address significant
needs for screening of tuberculosis and other infectious diseases that occur
in
markets that the Company is already serving with its HIV rapid tests.
Critical
Accounting Policies and Estimates
The
preparation of
the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ materially from those
estimates.
The
Company believes that there are several accounting policies that are critical
to
understanding its historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, research and development costs, valuation
of
inventory, valuation of long-lived assets and income taxes. These policies,
and
the related procedures, are described in detail below.
Revenue
Recognition -
The
Company sells its products directly through its sales force and through
distributors. Revenue from direct sales of its product is recognized upon
shipment to the customer. Income from research grants when earned. Grants
are
invoiced after expenses are incurred. Sales are recorded net of discounts,
rebates and returns.
The
Company recognizes income from research grants when earned. Grants are invoiced
after expenses are incurred. Any grants funded in advance are deferred until
earned.
Research
& Development Costs -
Research
and development activities consist primarily of new product development,
continuing engineering for existing products, regulatory and clinical trial
costs. Costs related to research and development efforts on existing or
potential products are expensed as incurred.
Valuation
of Inventories -
Inventories
are stated at the lower of cost or market, using the first-in, first-out
method
(FIFO) to determine cost. The Company’s policy is to periodically evaluate the
market value of the inventory and the stage of product life cycle, and record
a
reserve for any inventory considered slow moving or obsolete.
Allowance
for doubtful accounts -
The
Company’s policy is to review its accounts receivable on a periodic basis, no
less than monthly. On a quarterly basis an analysis is made of the adequacy
of
its allowance for doubtful accounts and adjustments are made accordingly.
The
current allowance is approximately 1.6% of accounts receivable.
Income
Taxes
-
Income
taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” SFAS
No. 109 requires the asset and liability method of accounting for deferred
income taxes. Deferred tax assets and liabilities are determined based on
the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period
are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. For example, if the Company does not become profitable
it may
be unable to utilize its deferred tax asset, which approximates $6,128,000
at
December 31, 2005.
SFAS
109
also requires that a valuation allowance be established when it is more likely
than not that all or a portion of a deferred tax asset will not be realized.
A
review of all available positive and negative evidence needs to be considered,
including a company’s current and past performance, the market environment in
which the company operates, length of carryback and carryforward periods
and
existing contracts that will result in future profits.
Forming
a
conclusion that a valuation allowance is not needed is difficult when there
is
negative objective evidence such as cumulative losses in recent years.
Cumulative losses weigh heavily in the overall assessment. As a result, the
Company determined that it was appropriate to establish a valuation allowance
for the full amount of its deferred tax assets.
The
above
listing is not intended to be a comprehensive list of all of the Company’s
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles, generally
accepted in the United States of America, with no need for management’s judgment
in their application. There are also areas in which management’s judgment in
selecting any viable alternative would not produce a materially different
result. See the Company’s audited financial statements and notes thereto which
contain accounting policies and other disclosures required by accounting
principles, generally accepted in the United States of America.
The
Consolidated Financial Statements and schedules that constitute Item 7 are
attached at the end of this Annual Report on Form 10-KSB. An index to these
Financial Statements and schedules is also included on page F-1 of this Annual
Report on Form 10-KSB.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
Not
applicable.
As
of the
end of the period covered by this report, the Company conducted an evaluation
under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Company
’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports
that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. There was no change in the Company’s internal
controls over financial reporting during the Company’s most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Not
applicable.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(A) OF THE EXCHANGE ACT
|
Directors
and Executive Officers
Lawrence A.
Siebert (49),
President, Chief Executive Officer and Director. Mr. Siebert was appointed
President of Chembio Diagnostics, Inc. and a member of our board of directors
upon consummation of the merger. Mr. Siebert has been Chairman of Chembio
Diagnostic Systems Inc. for approximately 12 years and its President since
May
2002. Mr. Siebert’s background is in private equity and venture capital
investing. From 1982 to 1991, Mr. Siebert was associated with Stanwich Partners,
Inc, which during that period invested in middle market manufacturing and
distribution companies. From 1992 to 1999, Mr. Siebert was an investment
consultant and business broker with Siebert Capital Corp. and Siebert Associates
LLC, and was a principal investor in a privately held test and measurement
company which was sold in 2002. Mr. Siebert received a JD from Case Western
Reserve University School of Law in 1981 and a BA with Distinction in Economics
from the University of Connecticut in 1978.
Richard J.
Larkin (49),
Chief
Financial Officer. Mr. Larkin was appointed as Chief Financial Officer of
Chembio Diagnostics, Inc. upon consummation of the merger. Mr. Larkin oversees
our financial activities and information systems. Mr. Larkin has been the
Chief
Financial Officer of Chembio Diagnostic Systems Inc. since September 2003.
Prior
to joining Chembio Diagnostic Systems Inc., Mr. Larkin served as CFO at Visual
Technology Group from May 2000 to September 2003, and also led their consultancy
program that provided hands-on expertise in all aspects of financial service,
including the initial assessment of client financial reporting requirements
within an
Enterprise
Resource Planning (Manufacturing) environment through training and
implementation. Prior to joining VTG, he served as CFO at Protex International
Corporation from May 1987 to January 2000. Mr. Larkin holds a BBA in Accounting
from Dowling College and is a member of the American Institute of Certified
Public Accountants.
Avi
Pelossof (43),
Vice
President Sales, Marketing and Business Development. Mr. Pelossof joined
Chembio
Diagnostic Systems Inc. in 1996 and has been responsible for developing Chembio
Diagnostic System’s marketing strategy and collaborations. From 1991 to 1996, he
was Managing Director and co-founder of The IMS Group, Inc., which provided
strategic marketing advisory services to companies involved in Latin American
markets including Chembio Diagnostics, Inc. Prior to IMS he was a Citibank
Vice
President in the International Corporate Finance Group focused on Latin America.
Mr. Pelossof received his MBA in finance and international business from
New
York University in 1986 and a BA with Distinction in economics from the
University of Michigan in 1984.
Javan
Esfandiari
(39),
Director
of Research & 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.
Rick
Bruce (51),
Vice
President, Operations. Mr. Bruce was hired in April 2000 as Director of
Operations. He is responsible for production, maintenance, inventory, shipping,
receiving, and warehouse operations. Prior to joining Chembio Diagnostic
Systems
Inc., he held director level positions at Wyeth Laboratories from 1984 to
1993.
From 1993 to 1998, he held various management positions in the Operations
department at Biomerieux. From 1998 to 2000, he held a management position
at
V.I. Technologies. Mr. Bruce has over 25 years of operations management
experience with Fortune 500 companies in the field of in-vitro diagnostics
and
blood fractionation. Mr. Bruce received his BS in Management from National
Louis University in 1997.
Les
Stutzman (54),
VP
of
Marketing. In 2005, Mr. Stutzman joined Chembio as Vice President of Marketing
to lead the development and launch of rapid tests for veterinary and human
TB
and other veterinary products. Mr. Stutzman has spent over twenty years in
marketing leadership positions within various diagnostics companies. He has
held
Global Director and Business Development Director positions in Marketing
for
diagnostic companies including bioMérieux Inc., (formerly Organon Teknika
Corp.), Durham, North Carolina from 1997 to 2002 and TREK Diagnostic Systems,
Cleveland, Ohio from 2002 to 2005. Mr. Stutzman received his MBA in Marketing
from Duke University Fuqua School of Business in 1988 and his Masters in
Microbiology from Wagner College in 1982. Mr. Stutzman is MT (ASCP) SM
certified.
Tom
Ippolito (43),
VP
of
Regulatory Affairs, QA and QC. Mr. Ippolito joined Chembio in June 2005.
He has
over twenty years experience with in vitro diagnostics for infectious diseases,
protein therapeutics, vaccine development, Process Development, Regulatory
Affairs and Quality Management. Over the years, Mr. Ippolito has held Vice
President level positions at Biospecific Technologies, Corp. from 2000 -
2005,
Director level positions in Quality Assurance, Quality Control, Process
Development and Regulatory Affairs at United Biomedical, Inc. from 1987 -
2000.
Since 2003, he has been a guest instructor for "drug development process"
and
"FDA regulations", a BioScience Certificate program at New York State University
of Stony Brook.
Alan
Carus, CPA (67),
Director, Audit Committee chair. Mr. Carus was elected to Chembio’s Board of
Directors on April 15, 2005. He is a co-founder of LARC Strategic Concepts
LLC, a consulting firm dedicated to guiding emerging companies to next stage
development. Prior to co-founding LARC Strategic Concepts LLC, Mr. Carus
was
Senior Vice President of Maritime Overseas Corporation (“MOC”) and a senior
executive of Overseas Ship holding Group, Inc. (“OSG”) from 1981 to 1998 when he
retired. MOC was managing agent for OSG, one of the world’s largest ship-owners.
He was a member of OSG’s senior management committee and had senior
responsibility in areas relating to administration, accounting, tax, finance,
budgets, long-range projections, and human resources. Mr. Carus was involved
in
numerous acquisitions, debt and equity offerings, complex transaction
structuring, and was active in the management of OSG’s major investments in the
cruise industry and other development stage companies. From 1964 to 1981,
he was
with Ernst & Young (including predecessors), the last seven years as a
partner. Mr. Carus has a B.B.A. from the Baruch School of Business of the
City
College of New York.
Dr.
Gary Meller (55),
Director. Dr. Meller was elected to our Board of Directors on March 15, 2005.
Dr. Meller has been the president of CommSense Inc., a healthcare business
development company, since 2001. CommSense Inc. works with clients in Europe,
Asia, North America, and the Middle East on medical information technology,
medical records, pharmaceutical product development and financing, health
services operations and strategy, and new product and new market development.
From 1999 until 2001 Dr. Meller was the executive vice president, North America,
of NextEd Ltd., a leading internet educational services company in the Asia
Pacific region. Dr. Meller also is a limited partner and a member of the
Advisory Board of Crestview Capital Master LLC, which was the lead investor
in
our series B preferred stock private placement. Dr. Meller is a graduate
of the
University of New Mexico School of Medicine and has an MBA from the Harvard
Business School.
Gerald
A. Eppner (66),
Director.
Mr. Eppner was elected to our Board of Directors on March 15, 2005. Mr.
Eppner is Counsel in the Corporate and Finance Department of Kaye Scholer
where
his practice includes matters under the federal securities laws. He has
engaged in private law practice in New York City for over 40 years and retired
as a partner in Cadwalader, Wickersham & Taft at the end of 2004 and as
Senior Counsel to that firm in 2005. Mr. Eppner is Vice Chairman and General
Counsel of Emeritus Capital Partners, LLC, a New York City-based capital
strategies firm that specializes in large asset-based securitizations and
secondary market intermediation of senior life settlement insurance
portfolios. He is also a Managing Director of Access Equity Partners, LLC,
a New York-and Chicago-based venture capital firm. Prior to coming to New
York, Mr. Eppner was an employee of agencies and departments of the United
States government.
Section
16(a) Beneficial Ownership Reporting Compliances
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the Company’s directors, executive officers and holders of more than
10% of the Company’s common stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership
of
common stock and other equity securities of the Company. The Company believes
that during the year ended December 31, 2005, its officers, directors and
holders of more than 10% of the Company’s common stock complied with all Section
16(a) filing requirements, except the following filings were filed late:
(i)
Form 4 for Gerald Eppner filed on March 25, 2005; (ii) Form 4 for Gary Meller
filed on March 25, 2005; (iii) Form 4 for Alan Carus filed on April 22, 2005;
(iv) Form 4 for Richard Larkin on May 17, 2005; (v) Form 4 for Avi Pelossof
filed on May 17, 2005; (vi) Form 4 for Lawrence Siebert filed on May 17,
2005;
(vii) Form 4 for Lawrence Siebert filed on November 17, 2005.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer, controller,
and persons performing similar functions. A copy of the Company’s code of ethics
is filed as Exhibit 14.1 to this Form 10-KSB.
Identification
of Audit Committee; Audit Committee Financial Expert
The
Company’s board of directors has established an audit committee. Alan Carus,
Gerald A. Eppner and Dr. Gary Meller each serve on the audit committee. The
Company’s board of directors has determined that Alan Carus is an audit
committee financial expert.
The
following table summarizes the annual compensation paid to Chembio Diagnostics,
Inc.
’s
named
executive officers for the three years ended December 31, 2005, 2004 and
2003:
Name
and Position
|
|
Year
|
|
Annual
Compensation Salary
|
|
Long-Term
Compensation Awards—Securities
Underlying
Stock
Options
|
|
Lawrence
A. Siebert, President, CEO, Chairman of Board of Chembio Diagnostics,
Inc.
(1)
|
|
|
2005
2004
2003
|
|
$
|
160,151
145,994
140,641
|
|
|
—
160,000
—
|
|
Avi
Pelossof, Vice President of Chembio Diagnostics, Inc.
(2)
|
|
|
2005
2004
2003
|
|
$
|
154,165
154,635
83,077
|
|
|
50,000
250,000
—
|
|
Javan
Esfandiari, Vice President of Chembio Diagnostic Systems, Inc.
(3)
|
|
|
2005
2004
2003
|
|
$
|
155,046
129,323
88,269
|
|
|
50,000
110,000
—
|
|
Richard
Bruce, Vice President of Chembio Diagnostic Systems, Inc.
(4)
|
|
|
2005
2004
2003
|
|
$
|
116,765
114,286
110,326
|
|
|
25,000
35,000
—
|
|
Richard
J. Larkin, CFO of Chembio Diagnostics, Inc.
(5)
|
|
|
2005
2004
2003
|
|
$
|
123,673
97,385
19,594
|
|
|
50,000
—
50,000
|
|
|
(1)
|
Mr.
Siebert currently is a director, the President and Chief Executive
Officer
of Chembio Diagnostics, Inc., and the President of Chembio Diagnostic
Systems Inc. The compensation information represents compensation
earned
while employed by Chembio Diagnostic Systems Inc. In 2004, Mr.
Siebert
received, prior to the merger, 50,000 options exercisable at $0.75
and
10,000 options exercisable at $1.00. In addition as part of his
contract
signed in May 2004, Mr. Siebert received 50,000 options with an
exercise
price of $1.20 per share, becoming exercisable in May 2005 and
50,000
options with an exercise price of $1.50 per share becoming exercisable
in
May of 2006.
|
|
(2)
|
Mr.
Pelossof currently is a Vice President of both Chembio Diagnostics,
Inc.
and Chembio Diagnostic Systems, Inc. The compensation information
represents compensation earned while employed by Chembio Diagnostic
Systems Inc. In 2004, Mr. Pelossof received, prior to the merger,
40,000
options exercisable at $0.75 and 10,000 options exercisable at
$1.00. In
addition as part of his contract signed in May 2004, Mr. Pelossof
received
100,000 options exercisable at $0.60 per share, becoming exercisable
in
May 2004, 50,000 options exercisable with an exercise price of
$0.90 per
share, becoming exercisable in May 2005 and 50,000 options with
an
exercise price of $1.35 per share becoming exercisable in May of
2006. In
May 2005, Mr. Pelossof received 25,000 options with an exercise
price of
$0.80 per share, becoming exercisable in January 2006 and 25,000
options
with an exercise price of $0.80 per share becoming exercisable
in January
of 2007.
|
|
(3)
|
Mr.
Esfandiari currently is a Vice President of Chembio Diagnostics,
Inc. and
Chembio Diagnostic Systems, Inc. The compensation information represents
compensation earned while employed by Chembio Diagnostic Systems
Inc. In
2004, Mr. Esfandiari received, prior to the merger, 30,000 options
exercisable at $0.75 and 5,000 options exercisable at $1.00. In
addition
as part of his contract signed in May 2004, Mr. Esfandiari received
25,000
options exercisable at $0.90 per share, becoming exercisable in
May 2005,
25,000 options with an exercise price of $1.20 per share, becoming
exercisable in May 2006 and 25,000 options with an exercise price
of $1.50
per share becoming exercisable in May of 2007. In May 2005, Mr.
Esfandiari
received 25,000 options with an exercise price of $0.80 per share,
becoming exercisable in January 2006 and 25,000 options with an
exercise
price of $0.80 per share becoming exercisable in January of 2007.
|
|
(4)
|
Mr.
Bruce currently is a vice president of Chembio Diagnostic Systems
Inc. The
compensation information represents compensation earned while employed
by
Chembio Diagnostic Systems Inc. Mr. Bruce received, prior to the
merger,
20,000 options exercisable at $0.588, 10,000 options exercisable
at $0.75
and 5,000 options exercisable at $1.00. In May 2005, Mr. Bruce
received
12,500 options with an exercise price of $0.80 per share, becoming
exercisable in January 2006 and 12,500 options with an exercise
price of
$0.80 per share becoming exercisable in January of
2007.
|
|
(5)
|
Mr.
Larkin currently is the Chief Financial Officer of both Chembio
Diagnostics, Inc. and Chembio Diagnostic Systems, Inc. The compensation
information represents compensation earned while employed by Chembio
Diagnostic Systems Inc. In 2003, Mr. Larkin received, prior to
the merger,
50,000 options exercisable at $0.45. In May 2005, Mr. Larkin received
25,000 options with an exercise price of $0.80 per share, becoming
exercisable in January 2006 and 25,000 options with an exercise
price of
$0.80 per share becoming exercisable in January of
2007.
|
The
following table sets forth certain information regarding stock options granted
to the named executive officers during the year ended of December 31, 2005.
Individual
Grants
|
Name
|
Number
of Securities Underlying Options/SARs Granted (#)
|
Percentage
of Total Options/ SARs Outstanding
|
Exercise
or Base Price (#/Sh)
|
Expiration
Date
|
Avi
Pelossof
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Avi
Pelossof
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Javan
Esfandiari
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Javan
Esfandiari
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Richard
Bruce
|
12,500
|
.87%
|
0.80
|
5/17/10
|
Richard
Bruce
|
12,500
|
.87%
|
0.80
|
5/17/10
|
Richard
J. Larkin
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
Richard
J. Larkin
|
25,000
|
1.75%
|
0.80
|
5/17/10
|
There
were no options were exercised by the named executive officers in the last
fiscal year.
Employment
Agreements
Mr.
Siebert.
On May
5, 2004, Mr. Siebert and the Company entered into an employment agreement,
effective May 10, 2004, which terminates on May 10, 2006. 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
$150,000 per year, subject to periodic review by the Board of Directors of
the
Company. Mr. Siebert is eligible to participate in any profit sharing, stock
option, retirement plan, medical and/or hospitalization plan, and/or other
benefit plans except for disability and life insurance that the Company may
from
time to time place in effect for the Company’s executives during the term of Mr.
Siebert’s employment agreement. If Mr. Siebert’s employment agreement is
terminated by the Company without cause, or if Mr. Siebert terminates his
employment agreement for a reasonable basis, including within 12 months of
a
change in control, the Company is required to pay as severance Mr. Siebert’s
salary for six months. Mr. Siebert has agreed for a period of two years after
the termination of his employment with the Company not to induce customers,
agents, or other sources of distribution of the Company’s business under
contract or doing business with the Company to terminate, reduce, alter,
or
divert business with or from the Company.
Mr.
Pelossof.
On May
5, 2004, Mr. Pelossof and the Company entered into an employment agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant to the
employment agreement Mr. Pelossof serves as the Vice President of Sales,
Marketing, and Business Development of the Company and is entitled to receive
a
base compensation of $120,000 per year, with annual salary increases of not
less
than five percent, and subject to periodic review by the Board of Directors
of
the Company. Mr. Pelossof is eligible to participate in any profit sharing,
stock option, retirement plan, medical and/or hospitalization plan, and/or
other
benefit plans except for disability and life insurance that the Company may
from
time to time place in effect for the Company’s executives during the term of Mr.
Pelossof’s employment agreement. If Mr. Pelossof’s employment agreement is
terminated by the Company without cause, or if Mr. Pelossof terminates his
employment agreement for a reasonable basis, including within 12 months of
a
change in control, the Company is required to pay as severance Mr. Pelossof’s
salary for six months. Mr. Pelossof has agreed for a period of two years
after
the termination of his employment with the Company not to induce customers,
agents, or other sources of distribution of the Company’s business under
contract or doing business with the Company to terminate, reduce, alter,
or
divert business with or from the Company.
Mr.
Esfandiari.
On May
5, 2004, Mr. Esfandiari and the Company entered into an employment agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant to the
employment agreement Mr. Esfandiari serves as the Director of Research &
Development for the Company and is entitled to receive a base compensation
of
$115,000 per year, subject to periodic review by the Board of Directors of
the
Company. Mr. Esfandiari is eligible to participate in any profit sharing,
stock
option, retirement plan, medical and/or hospitalization plan, and/or other
benefit plans except for disability and life insurance that the Company may
from
time to time place in effect for the Company’s executives during the term of Mr.
Esfandiari’s employment agreement. If Mr. Esfandiari’s employment agreement is
terminated by the Company without cause, or if Mr. Esfandiari terminates
his
employment agreement for a reasonable basis, including within 12 months of
a
change in control, the Company is required to pay as severance Mr. Esfandiari’s
salary for six months. Mr. Esfandiari has agreed for a period of two years
after
the termination of his employment with the Company not to induce customers,
agents, or other sources of distribution of the Company’s business under
contract or doing business with the Company to terminate, reduce, alter,
or
divert business with or from the Company.
Director
Compensation
All
non-emploee
directors are paid an annual retainer of $18,000, paid semi-annually, and
36,000
stock options, with an exercise price equal to the market price on the date
of
the grant. One-third of each non-employee director's stock options are
exercisable on the date of grant, one-third become exercisable on the first
anniversary of the date of grant, and one-third become exercisable on the
second
anniversary of the date of grant. The audit committee chair director is paid
an
annual retainer of $2,500, paid semi-annually. In addition, the non-employee
directors are paid $1,000 in cash for each meeting of the Board of Directors
attended, and paid $500 in cash for each telephonic Board of Directors meeting.
The non-employee directors who are members of a committee of the Board of
Directors are paid $500 in cash for each committee meeting attended, or $750
in
cash for each committee meeting attended if that non-employee director is
the
committee chairman. In addition, in December 2005, each of the three
non-employee directors was granted options to purchase 15,000 shares of the
Company’s common stock at an exercise price equal to the market price of the
underlying common stock on the date of grant.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
|
The
following table sets forth certain information regarding the beneficial
ownership of our common stock by each person or entity known by us to be
the
beneficial owner of more than 5% of the outstanding shares of common stock,
each
of our directors and each of our
“named
executive officers” and all of our directors and executive officers as a group
as of December 31, 2005.
Name
and Address of Beneficial Owner
|
Number
of Shares Beneficially Owned
|
Percent
of Class
|
Lawrence
Siebert
(1)
3661
Horseblock Road
Medford,
NY 11763
|
1,996,139
|
22.51%
|
Avi
Pelossof
(2)
3661
Horseblock Road
Medford,
NY 11763
|
524,314
|
5.97%
|
Javan
Esfandiari
(3)
3661
Horseblock Road
Medford,
NY 11763
|
142,080
|
1.65%
|
Richard
Bruce
(4)
3661
Horseblock Road
Medford,
NY 11763
|
88,000
|
1.03%
|
Richard
J. Larkin
(5)
3661
Horseblock Road
Medford,
NY 11763
|
80,763
|
.94%
|
Alan
Carus
(6)
3661
Horseblock Road
Medford,
NY 11763
|
39,000
|
.46%
|
Gary
Meller
(7)
3661
Horseblock Road
Medford,
NY 11763
|
39,000
|
.46%
|
Gerald
Eppner
(8)
3661
Horseblock Road
Medford,
NY 11763
|
39,000
|
.46%
|
All
officers and directors as a group
(9)
|
2,948,296
|
30.83%
|
Mark
Baum
(10)
580
Second Street, Suite 102
Encinitas,
CA 92024
|
1,562,963
|
16.73%
|
Thunderbird
Global Corporation
(11)
c/o
The Baum Law Firm
580
Second Street, Suite 102
Encinitas,
CA 92024
|
487,504
|
5.74%
|
Daniel
Gressel
(12)
460
E. 79
th
Street, Apt. 17B
New
York, NY 10021
|
462,501
|
5.42%
|
Tomas
Haendler
(13)
31
Cogswell Lane
Stamford,
CT 06902
|
454,720
|
5.33%
|
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
term
“named
executive officer” refers to our chief executive officer and each of our other
executive officers who received at least $100,000 of compensation in
2005.
This
table does not include convertible securities which, due to contractual
restrictions, are not exercisable within 60 days of the date of this prospectus.
Specifically, at no time may a holder of shares of series A or series B
preferred stock convert shares of the series A or series B preferred stock
if
the number of shares of common stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of common stock owned
by
such holder at such time, the number of shares of common stock which would
result in such holder beneficially owning (as determined in accordance with
Section 13(d) of the Securities Exchange Act) in excess of either 4.999%
or
9.999% of the then issued and outstanding shares of common stock outstanding
at
such time, unless the holder has provided us with sixty-one (61) days notice
that the holder has elected to waive this restriction.
|
(
1)
|
Includes
170,000 shares issuable upon exercise of options exercisable within
60
days and 207,566 warrants. Does not include 50,000 shares issuable
upon
exercise of options that are not exercisable within the next 60
days. Also
does not include 1,937,220 shares issuable upon conversion of series
A
preferred stock, 2,324,666 shares issuable upon exercise of warrants,
88,971 shares issuable upon conversion of series B preferred stock
and
77,868 shares issuable upon exercise of warrants because conversion
of any
of those shares of series A or series B preferred stock or exercise
of
those warrants would result in the holder beneficially owning in
excess of
4.99% of the then issued and outstanding shares of common stock
outstanding at that time.
|
|
(
2)
|
Includes
275,000 shares issuable upon exercise of options exercisable within
60
days and 22,555 shares issuable upon exercise of warrants. Does
not
include 50,000 shares issuable upon exercise of options that are
not
exercisable within the next 60 days. Also does not include 10,078
shares
issuable upon conversion of series A preferred stock and 12,095
shares
issuable upon exercise of warrants because conversion of any of
those
shares of series A preferred stock or exercise of any of those
warrants
would result in the holder beneficially owning in excess of 4.99%
of the
then issued and outstanding shares of common stock outstanding
at that
time.
|
|
(
3)
|
Includes
120,000 shares issuable upon exercise of options exercisable within
60
days and 2,007 shares issuable upon exercise of warrants. Does
not include
75,000 shares issuable upon exercise of options that are not exercisable
within the next 60 days.
|
|
(
4)
|
Includes
82,500 shares issuable upon exercise of options exercisable within
60 days
and 500 shares issuable upon exercise of warrants. Does not include
12,500
shares issuable upon exercise of options that are not exercisable
within
the next 60 days
|
|
(
5)
|
Includes
75,000 shares issuable upon exercise of options exercisable within
60 days
and 250 shares issuable upon exercise of warrants. Does not include
25,000
shares issuable upon exercise of options that are not exercisable
within
the next 60 days. Also does not include 30,236 shares issuable
upon
conversion of series A preferred stock and 25,196 shares issuable
upon
exercise of warrants because conversion of any of those shares
of series A
preferred stock or exercise of any of those warrants would result
in the
holder beneficially owning in excess of 4.99% of the then issued
and
outstanding shares of common stock outstanding at that
time.
|
|
(
6)
|
Includes
39,000 shares issuable upon exercise of options exercisable within
60.
|
|
(
7)
|
Includes
39,000 shares issuable upon exercise of options exercisable within
60.
|
|
(
8)
|
Includes
39,000 shares issuable upon exercise of options exercisable within
60.
|
|
(
9)
|
Includes
footnotes (1)-(8).
|
|
(10)
|
Includes
850,000 shares issuable upon exercise of warrants. Does not include
108,333 shares issuable upon conversion of series A preferred stock
and
130,000 shares issuable upon exercise of warrants because conversion
of
any of those shares of series A preferred stock or exercise of
those
warrants would result in the holder beneficially owning in excess
of 4.99%
of the then issued and outstanding shares of common stock outstanding
at
that time.
|
|
(11)
|
Does
not include 251,963 shares issuable upon conversion of series A
preferred
stock and 302,356 shares issuable upon exercise of warrants because
conversion of any of those shares of series A preferred stock or
exercise
of any of those warrants would result in the holder beneficially
owning in
excess of 4.99% of the then issued and outstanding shares of common
stock
outstanding at that time. Gustavo Montilla may be deemed to have
voting or
investment control over the shares held by Thunderbird Global Corporation.
|
|
(12)
|
Includes
42,065 shares issuable upon exercise of warrants exercisable within
60
days.
|
|
(13)
|
Includes
38,197 shares issuable upon exercise of options exercisable within
60
days. Does not include 35,556 shares issuable upon conversion of
series A
preferred stock and 53,334 shares issuable upon the exercise of
warrants
because conversion of any of those shares of series A preferred
stock or
exercise of any of those warrants would result in the holder beneficially
owning in excess of 4.99% of the then issued and outstanding shares
of
common stock outstanding at that
time.
|
Equity
Compensation Plan Information
Equity
Compensation Plan Information
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders
|
1,285,750
|
$1.20
|
1,714,250
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
Total
|
1,285,750
|
$1.20
|
1,714,250
|
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Mark
L.
Baum, our former president prior to the merger and a
former
director of Chembio Diagnostics, Inc., entered into a nine-month employment
agreement with Chembio Diagnostics, Inc., effective upon the closing of the
merger, pursuant to which Mr. Baum received 400,000 shares of our common
stock
as well as a warrant to acquire 425,000 shares of common stock at $.60 per
share
and a warrant to acquire an additional 425,000 shares of common stock at
$.90
per share. The warrants expire five years after the date of grant. Pursuant
to
the employment agreement, Mr. Baum was to advise Chembio Diagnostics, Inc.
concerning management, marketing, strategic planning, corporate structure,
business operations, expansion of services, acquisitions and business
opportunities, matters related to our public reporting obligations, and our
overall needs through February 5, 2005. Mr. Baum also invested $65,000 in
the private placement of series A preferred stock, pursuant to which he received
2.167 shares of series A preferred stock convertible into 108,350 shares
of
common stock, and a warrant to purchase 130,020 shares of common stock. Mr.
Baum
also owns 300,000 shares of our common stock in addition to the stock and
warrants described above. In November of 2004 as payment of dividends on
the
series A preferred he received 4,333 shares of common stock. Prior to the
merger, Mr. Baum was the sole director and officer of Chembio Diagnostics,
Inc. On March 18, 2005, as compensation for Mr. Baum’s service on the Board of
Directors of Chembio Diagnostics, Inc., the exercise price of Mr. Baum’s warrant
to acquire 425,000 shares of common stock at $.90 per share was reduced to
$.75
per share. Mr. Baum received no other compensation for his services on the
Board
of Directors.
Lawrence
A. Siebert, the president and chairman of the board of directors of Chembio
Diagnostics, Inc. beginning at the time of and after the merger, and the
president and chairman of Chembio Diagnostic Systems Inc. since May 2002,
held
two promissory notes issued by Chembio Diagnostic Systems Inc. One note was
issued on August 1, 1999 in the original principal amount of $338,125, bearing
interest at a rate of 11% per annum. The other was issued on April 25, 2001
in
the original principal amount of $795,937, bearing interest at a rate of
12% per
annum. Mr. Siebert converted the entire outstanding principal amount of the
11%
note and $561,875 principal amount of the 12% note into 30 shares of Chembio
Diagnostics, Inc.’s series A preferred stock, together with warrants to acquire
1,800,000 shares of common stock at $.90 per share, pursuant to Chembio
Diagnostics, Inc.’s private placement of its series A preferred stock on
May 5, 2004. The shares of series A preferred stock held by Mr. Siebert are
convertible into 1,547,100 shares of Chembio Diagnostics, Inc.’s common stock.
The remaining debt of $234,062 held by Mr. Siebert was exchanged on December
29,
2004 into 7.80208 shares of Chembio Diagnostics, Inc.’s series A preferred
stock, together with warrants to acquire 468,125 shares of common stock at
$.90
per share, pursuant to the terms of Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. Approximately
$236,852 of accrued interest on the debt is also due to Mr. Siebert, but
is not
accruing interest. The accrued interest will be paid out according to the
terms
of Chembio Diagnostics, Inc.’s private placement of its series B preferred stock
on January 28, 2005. Mr. Siebert also invested $50,000 in our series B preferred
stock private placement pursuant to which he received 1 share of series B
preferred stock convertible into 81,967 shares of common stock and a warrant
to
purchase 77,868 shares of common stock.
Mr.
Siebert also invested $18,700 in Chembio Diagnostic Systems Inc. pursuant
to a
private placement of convertible notes on March 22, 2004. Mr. Siebert
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .942 shares of Chembio Diagnostics, Inc.’s
series A preferred stock, together with warrants to acquire 56,520 shares
of
common stock at $.90 per share, pursuant to Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. In November of
2004 as payment of dividends on the series A preferred he received 61,884
shares
of common stock. Mr. Siebert exercised a warrant to purchase 66,869 shares
of
common stock on December 30, 2004 at a price of $0.45 per share. These shares
were gifted by Mr. Siebert to a third party. In May of 2005 as payment of
dividends on the series A preferred he received 72,234 shares of common stock.
In July of 2005 as payment of dividends on the series B preferred he received
.03871 shares of series B preferred stock In November of 2005 as payment
of
dividends on the series A preferred he received 77,488 shares of common stock.
Mr.
Siebert prior to March 22, 2004 had either advanced funds to Chembio
Diagnostic Systems, Inc. or paid vendors directly on Chembio Diagnostic Systems,
Inc.’s behalf. The total amount so paid or advanced and not repaid totaled
$182,181 as of December 31, 2005.
Richard
J. Larkin, the Chief Financial Officer of Chembio Diagnostics, Inc., invested
$10,000 in Chembio Diagnostic Systems Inc. pursuant to the March 22, 2004
private placement of convertible notes. Mr. Larkin converted the entire
principal amount of the note that he received, together with accrued interest
thereon, into .504 shares of Chembio Diagnostics, Inc.’s series A preferred
stock, together with warrants to acquire 30,240 shares of common stock at
$.90
per share, pursuant to Chembio Diagnostics, Inc.’s private placement of its
series A preferred stock on May 5, 2004. In November of 2004 as payment of
dividends on the series A preferred he received 1,007 shares of common stock.
In
May of 2005 as payment of dividends on the series A preferred he received
999
shares of common stock. In November of 2005 as payment of dividends on the
series A preferred he received 1,007 shares of common stock.
Avi
Pelossof, the vice president of sales and marketing of Chembio Diagnostics,
Inc., invested $4,000 in Chembio Diagnostics, Inc. pursuant to the
March 22, 2004 private placement of convertible notes. Mr. Pelossof
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .202 shares of Chembio Diagnostics, Inc.’s
series A preferred stock, together with warrants to acquire 22,555 shares
of
common stock at $.90 per share, pursuant to Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. In November of
2004 as payment of dividends on the series A preferred he received 403 shares
of
common stock. In May of 2005 as payment of dividends on the series A preferred
he received 399 shares of common stock. In November of 2005 as payment of
dividends on the series A preferred he received 403 shares of common
stock.
Number
|
Description
|
2.1(2)
|
Agreement
and Plan of Merger dated as March 3, 2004 (the “Merger Agreement”), by and
among the Registrant, New Trading Solutions, Inc. (“Merger Sub”) and
Chembio Diagnostic Systems Inc.
|
2.2(1)
|
Amendment
No. 1 to the Merger Agreement dated as May 1, 2004, by and among
the
Registrant, Merger Sub and Chembio Diagnostic Systems
Inc.
|
3.1(7)
|
Articles
of Incorporation, as amended.
|
3.2(2)
|
Bylaws.
|
3.3(1)
|
Amendment
No. 1 to Bylaws dated May 3, 2004.
|
4.2(1)
|
Certificate
of Designation of the Relative Rights and Preferences of the series A
convertible preferred stock of the Registrant.
|
4.3(1)
|
Registration
Rights Agreement, dated as of May 5, 2004, by and among the Registrant
and
the Purchasers listed therein.
|
4.4(1)
|
Lock-Up
Agreement, dated as of May 5, 2004, by and among the Registrant
and the
shareholders of the Registrant listed therein.
|
4.5(1)
|
Form
of Common Stock Warrant issued pursuant to the Stock and Warrant
Purchase
Agreement.
|
4.6(1)
|
Form
of $.90 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated as of May 5, 2004 between the Registrant and Mark
L.
Baum.
|
4.7(1)
|
Form
of $.60 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated as of May 5, 2004 between the Registrant and Mark
L.
Baum.
|
4.8(4)
|
Form
of Warrant issued to Placement Agents pursuant to the Series A
Convertible Stock Private Placement
|
4.9(5)
|
Certificate
of Designation of Preferences, Rights, and Limitations of Series
B 9%
Convertible Preferred Stock of the Registrant.
|
4.10(5)
|
Form
of Common Stock Warrant issued to Midtown Partners & Co.,
LLC
|
4.11(5)
|
Form
of Common Stock Warrant issued pursuant to the Securities Purchase
Agreement.
|
4.12(5)
|
Registration
Rights Agreement, dated as of January 26, 2005, by and among the
Registrant and the purchasers listed therein.
|
10.2(3)
|
Employment
Agreement between the Registrant and Lawrence A. Siebert dated
as of May
5, 2004.
|
10.3(3)
|
Employment
Agreement between the Registrant and with Avi Pelossof dated as
of May 5,
2004.
|
10.4(3)
|
Employment
Agreement between the Registrant and with Javan Esfandiari dated
as of May
5, 2004.
|
10.5(1)
|
Series A
Convertible Preferred Stock and Warrant Purchase Agreement (the
“Stock and
Warrant Purchase Agreement”), dated as of May 5, 2004, by and among the
Registrant and the purchasers listed therein.
|
10.6(3)
|
License
and Supply Agreement dated as of August 30, 2002 by and between
Chembio
Diagnostic Systems Inc. and Adaltis Inc.
|
10.8(4)
|
Contract
for Transfer of Technology and Materials with
Bio-Manguinhos.
|
10.9(6)
|
Agreement
with Abbott Laboratories.
|
10.10(5)
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
January 26, 2005, by and among the Registrant and the purchasers
listed
therein.
|
10.11(6)
|
Amendment
No. 1 to Securities Purchase Agreement, dated as of January 28,
2005 by
and among the Registrant and the purchasers listed
therein.
|
10.12(6)
|
Equity
Exchange Agreement, dated as of January 28, 2005, by and between
the
Registrant and Kurzman Partners, LP.
|
10.13(8)
|
1999
Equity Incentive Plan
|
14.1
|
|
21
|
|
23.1
|
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
|
(1)
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on May 14, 2004.
(2)
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed with
the Commission on August 23, 1999.
(3)
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed with
the Commission on June 7, 2004.
(4)
Incorporated
by reference to the Registrant’s registration statement on Form SB-2/A filed
with the Commission on August 4, 2004.
(5)
Incorporated
by reference to the Registrant’s current report on Form 8-K filed with the
Commission on January 31, 2005.
(6)
Incorporated by reference to the Company’s registration statement of Form SB-2
filed with the Commission on March 28, 2005.
(7)
Incorporated
by reference to the Registrant’s Annual report on Form 10-KSB filed with the
Commission on March 31, 2005.
(8)
Incorporated
by reference to the Registrant’s Proxy Statement filed with the Commission on
May 11, 2005.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Audit
Fees
For
the
years ended December 31, 2005 and December 31, 2004, Lazar, Levine & Felix
LLP, the Company
’s
principal accountants, billed the Company $99,000 and $92,000, respectively,
for
fees for the audit of the Company’s annual financial statements and review of
financial statements included in the Company’s Forms 10-QSB and 10-KSB.
Audit-Related
Fees
For
the
years ended December 31, 2005 and December 31, 2004, Lazar, Levine & Felix
LLP, did not provide the Company with any assurances or related services
reasonably related to the performance of the audit or review of the
Company
’s
financial statements that are not reported above under “Audit
Fees.”
Tax
Fees
For
the
years ended December 31, 2005 and December 31, 2004, Lazar, Levine & Felix
LLP billed the Company $9,100 and $14,008, respectively, for professional
services for tax compliance, tax advice, and tax planning.
All
Other Fees
For
the
years ended December 31, 2005 and December 31, 2004, Lazar, Levine & Felix
LLP billed the Company $17,700 and $48,890 for fees associated with the
preparation and filing of the Company
’s
registration statements, responses to SEC comment letters, and other related
matters.
Audit
Committee Pre-Approval Policies
The
Audit
Committee (and prior to the adoption of the Audit Committee, the Board of
Directors) approves in advance all audit and non-audit services performed
by
Lazar, Levine & Felix LLP. There are no other specific policies or
procedures relating to the pre-approval of services performed by Lazar, Levine
& Felix LLP.
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
CHEMBIO
DIAGNOSTICS, INC.
Date:
March 30, 2006
By
/s/
Lawrence A. Siebert
Lawrence
A. Siebert
President,
Chief Executive Officer and
Chairman
of the Board
In
accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
Signatures
|
Title
|
Date
|
/s/
Lawrence A. Siebert
Lawrence
A. Siebert
|
Chief
Executive Officer, President and Chairman Of The Board
(Principal
Executive Officer)
|
March
30, 2005
|
/s/
Richard J. Larkin
Richard
J. Larkin
|
Chief
Financial Officer (Principal Financial & Accounting
Officer)
|
March
30, 2005
|
/s/
Alan Carus
Alan
Carus
|
Director
|
March
30, 2005
|
/s/
Gary Meller
Dr.
Gary Meller
|
Director
|
March
30, 2005
|
/s/
Gerald A. Eppner
Gerald
A. Eppner
|
Director
|
March
30, 2005
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
Index
to Consolidated Financial Statements
|
Page(s)
|
|
F-2
|
|
|
Financial
Statements:
|
|
|
|
December
31, 2005
|
F-3
|
|
|
Years
ended December 31, 2005 and 2004
|
F-4
|
|
|
|
|
Year
ended December 31, 2004
|
F-5
|
|
|
|
F-6
|
Year
ended December 31, 2005
|
|
|
|
Years
ended December 31, 2005 and 2004
|
F-7
|
|
|
|
F-8
- F-19
|
REPORT
OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING
FIRM
To
The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiaries
Medford,
New York
We
have
audited the consolidated balance sheet of Chembio Diagnostics, Inc. and
Subsidiaries (the “Company”) as of December 31, 2005 and the consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the
two years in the period ended December 31, 2005. These financial statements
are
the responsibility of the Company's management. Our responsibility is to
express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Chembio Diagnostics,
Inc. and Subsidiaries as of December 31, 2005, and the consolidated results
of
its operations and its cash flows for the two years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying financial statements have been prepared assuming that
Chembio
Diagnostics, Inc. and Subsidiaries
will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses from operations. If such losses
continue and the Company is unable to raise sufficient capital, its ability
to
continue as a going concern would be in doubt. Management's plans in regard
to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
LAZAR
LEVINE & FELIX LLP
/s/
LAZAR LEVINE & FELIX LLP
New
York,
New York
February
3, 2006
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
|
|
AS
OF DECEMBER 31, 2005
|
|
-
ASSETS -
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$
|
232,148
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$20,488
|
|
|
1,255,073
|
|
Inventories
|
|
|
687,983
|
|
Prepaid
expenses and other current assets
|
|
|
292,989
|
|
TOTAL
CURRENT ASSETS
|
|
|
2,468,193
|
|
|
|
|
|
|
FIXED
ASSETS, net of accumulated depreciation
|
|
|
438,632
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
109,581
|
|
|
|
|
|
|
|
|
$
|
3,016,406
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY-
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,477,925
|
|
Current
portion of accrued interest payable
|
|
|
120,000
|
|
Current
portion of obligations under capital leases
|
|
|
38,368
|
|
Payable
to related party
|
|
|
182,181
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
1,818,474
|
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
Obligations
under capital leases, net of current portion
|
|
|
44,417
|
|
Accrued
interest, net of current portion
|
|
|
100,812
|
|
TOTAL
LIABILITIES
|
|
|
1,963,703
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
Preferred
Stock – 10,000,000 shares authorized:
|
|
|
|
|
Series
A 8% Convertible - $.01 par value: 158.68099 shares issued and
outstanding. Liquidation preference $4,822,957
|
|
|
2,628,879
|
|
Series
B 9% Convertible - $.01 par value: 102.19760 shares issued and
outstanding. Liquidation preference-$5,341,896
|
|
|
3,173,239
|
|
Common
stock - $.01 par value; 100,000,000 shares authorized 8,491,429
shares
issued and outstanding.
|
|
|
84,914
|
|
Additional
paid-in capital
|
|
|
14,034,099
|
|
Accumulated
deficit
|
|
|
(18,868,428
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
1,052,703
|
|
|
|
|
|
|
|
|
$
|
3,016,406
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
|
|
FOR
THE YEARS ENDED
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
REVENUES:
|
|
|
|
|
|
Net
sales
|
|
$
|
3,359,532
|
|
$
|
2,749,143
|
|
License
revenue
|
|
|
250,000
|
|
|
-
|
|
Research
grants and development income
|
|
|
331,198
|
|
|
556,789
|
|
TOTAL
REVENUES
|
|
|
3,940,730
|
|
|
3,305,932
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,608,584
|
|
|
2,601,847
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,332,146
|
|
|
704,085
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,265,235
|
|
|
2,298,598
|
|
Research
and development expenses
|
|
|
1,364,898
|
|
|
1,508,849
|
|
|
|
|
4,630,133
|
|
|
3,807,447
|
|
LOSS
FROM OPERATIONS
|
|
|
(3,297,987
|
)
|
|
(3,103,362
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
Settlement
of accounts payable
|
|
|
21,867
|
|
|
209,372
|
|
Interest
income
|
|
|
39,803
|
|
|
8,126
|
|
Interest
(expense)
|
|
|
(15,683
|
)
|
|
(190,558
|
)
|
Loss
on retirement of fixed assets
|
|
|
-
|
|
|
(22,469
|
)
|
LOSS
BEFORE INCOME TAXES
|
|
|
(3,252,000
|
)
|
|
(3,098,891
|
)
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(3,252,000
|
)
|
|
(3,098,891
|
)
|
|
|
|
|
|
|
|
|
Dividends
payable in stock to preferred stockholders
|
|
|
818,321
|
|
|
240,001
|
|
Dividend
accreted to preferred stock for associated costs and a beneficial
conversion feature
|
|
|
2,698,701
|
|
|
1,703,072
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(6,769,022
|
)
|
$
|
(5,041,964
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.88
|
)
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
Weighted
number of shares outstanding, basic and
diluted
|
|
|
7,705,782
|
|
|
5,966,769
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF
CHANGES
IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2004
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
Common
Stock
|
|
Additional
paid in capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Balance
at December 31, 2003
|
|
|
-
|
|
$
|
-
|
|
|
4,902,608
|
|
$
|
49,026
|
|
$
|
4,550,975
|
|
$
|
(7,057,442
|
)
|
$
|
(2,457,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
73.33330
|
|
|
2,200,000
|
|
|
-
|
|
|
-
|
|
|
(418,862
|
)
|
|
-
|
|
|
(418,862
|
)
|
Conversion
of debt
|
|
|
90.29853
|
|
|
2,372,958
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
(1,920,460
|
)
|
|
-
|
|
|
-
|
|
|
1,920,460
|
|
|
-
|
|
|
1,920,460
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
(1,964,740
|
)
|
|
-
|
|
|
-
|
|
|
1,964,740
|
|
|
-
|
|
|
1,964,740
|
|
Accretion
of preferred dividend
|
|
|
-
|
|
|
58,114
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(240,001
|
)
|
|
(240,001
|
)
|
Accretion
of beneficial conversion
|
|
|
-
|
|
|
1,703,072
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,703,072
|
)
|
|
(1,703,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt
|
|
|
-
|
|
|
-
|
|
|
826,741
|
|
|
8,267
|
|
|
322,430
|
|
|
-
|
|
|
330,697
|
|
For
Fees
|
|
|
-
|
|
|
-
|
|
|
65,667
|
|
|
657
|
|
|
(657
|
)
|
|
-
|
|
|
-
|
|
Upon
conversion of Preferred
|
|
|
(1.25942
|
)
|
|
(21,914
|
)
|
|
62,971
|
|
|
630
|
|
|
21,284
|
|
|
-
|
|
|
21,914
|
|
Preferred
dividend
|
|
|
-
|
|
|
-
|
|
|
303,145
|
|
|
3,031
|
|
|
178,856
|
|
|
|
|
|
181,887
|
|
For
services
|
|
|
-
|
|
|
-
|
|
|
679,142
|
|
|
6,791
|
|
|
358,454
|
|
|
-
|
|
|
365,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
91,589
|
|
|
-
|
|
|
91,589
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
66,869
|
|
|
669
|
|
|
29,422
|
|
|
-
|
|
|
30,091
|
|
To
debt holders, pre-merger
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,650
|
|
|
-
|
|
|
60,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,098,891
|
)
|
|
(3,098,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
162.37241
|
|
$
|
2,427,030
|
|
|
6,907,143
|
|
$
|
69,071
|
|
$
|
9,079,341
|
|
$
|
(12,099,406
|
)
|
$
|
(2,950,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF
CHANGES
IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2005
|
|
|
|
Series
A Preferred 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, 2004
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
6,907,143
|
|
$
|
69,071
|
|
$
|
9,079,341
|
|
$
|
(12,099,406
|
)
|
$
|
(2,950,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to reflect reclassification of Series A Preferred to permanent
equity
|
|
|
162.37241
|
|
|
2,427,030
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,427,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
-
|
|
|
-
|
|
|
100.95000
|
|
|
5,047,500
|
|
|
-
|
|
|
-
|
|
|
(321,639
|
)
|
|
-
|
|
|
4,725,861
|
|
For
fees
|
|
|
-
|
|
|
-
|
|
|
4.98000
|
|
|
249,000
|
|
|
-
|
|
|
-
|
|
|
(249,000
|
)
|
|
-
|
|
|
-
|
|
Exchanged
from Series A Preferred to Series B Preferred
|
|
|
(0.66666
|
)
|
|
(11,600
|
)
|
|
0.40000
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
(8,400
|
)
|
|
-
|
|
|
-
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,349,893
|
)
|
|
-
|
|
|
-
|
|
|
2,349,893
|
|
|
-
|
|
|
-
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,437,035
|
)
|
|
-
|
|
|
-
|
|
|
2,437,035
|
|
|
-
|
|
|
-
|
|
Series
B Preferred dividend
|
|
|
-
|
|
|
-
|
|
|
4.06988
|
|
|
435,509
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(435,509
|
)
|
|
-
|
|
Accretion
of beneficial conversion
|
|
|
-
|
|
|
261,666
|
|
|
-
|
|
|
2,437,035
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,698,701
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
conversion of Preferred
|
|
|
(3.02476
|
)
|
|
(52,631
|
)
|
|
(8.20228
|
)
|
|
(228,877
|
)
|
|
823,654
|
|
|
8,237
|
|
|
273,271
|
|
|
-
|
|
|
-
|
|
Series
A Preferred dividend
|
|
|
|
|
|
4,414
|
|
|
|
|
|
|
|
|
630,632
|
|
|
6,306
|
|
|
372,092
|
|
|
(382,812
|
)
|
|
-
|
|
For
services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
95,000
|
|
|
950
|
|
|
52,300
|
|
|
-
|
|
|
53,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
90,288
|
|
|
-
|
|
|
90,288
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,000
|
|
|
350
|
|
|
24,850
|
|
|
-
|
|
|
25,200
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(65,932
|
)
|
|
-
|
|
|
(65,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,252,000
|
)
|
|
(3,252,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
158.68099
|
|
$
|
2,628,879
|
|
|
102.19760
|
|
$
|
3,173,239
|
|
|
8,491,429
|
|
$
|
84,914
|
|
$
|
14,034,099
|
|
$
|
(18,868,428
|
)
|
$
|
1,052,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
|
|
FOR
THE YEARS ENDED:
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
(REVISED)
|
|
Net
loss
|
|
$
|
(3,252,000
|
)
|
$
|
(3,098,891
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
98,508
|
|
|
109,965
|
|
Loss
on retirement of fixed assets
|
|
|
-
|
|
|
22,469
|
|
Provision
for doubtful accounts
|
|
|
4,120
|
|
|
-1,136
|
|
Increase
in accrued interest
|
|
|
-
|
|
|
93,918
|
|
Expenses
related to shares, options and warrants issued for
services
|
|
|
77,606
|
|
|
451,622
|
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,094,137
|
)
|
|
118,814
|
|
Restricted
cash
|
|
|
250,000
|
|
|
(250,000
|
)
|
Inventory
|
|
|
(149,336
|
)
|
|
(72,149
|
)
|
Accounts
payable and accrued expenses
|
|
|
212,939
|
|
|
(26,632
|
)
|
Grant
and other current liabilities
|
|
|
-
|
|
|
(12,648
|
)
|
Other
|
|
|
(153,060
|
)
|
|
(55,288
|
)
|
Net
cash used in operating activities
|
|
|
(4,005,360
|
)
|
|
(2,647,807
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(348,741
|
)
|
|
(60,552
|
)
|
Net
cash used in investing activities
|
|
|
(348,741
|
)
|
|
(60,552
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Sale
of Series B Preferred Stock and associated warrants, net of cash
cost of
financing of $321,639
|
|
|
4,725,861
|
|
|
-
|
|
Payment
of obligations to bank
|
|
|
-
|
|
|
(67,434
|
)
|
Payment
of capital lease obligation
|
|
|
(42,511
|
)
|
|
(55,410
|
)
|
Payment
of accrued interest
|
|
|
(112,138
|
)
|
|
-
|
|
Proceeds
from working capital loan
|
|
|
161,917
|
|
|
295,000
|
|
Payment
of working capital loan
|
|
|
(206,917
|
)
|
|
(250,000
|
)
|
Proceeds
from sale of common stock including bridge loan
|
|
|
-
|
|
|
330,698
|
|
Exercise
of warrants
|
|
|
25,200
|
|
|
30,091
|
|
Sale
of Series A Preferred Stock including bridge loan, net of the
cost of
financing of $418,856
|
|
|
-
|
|
|
2,460,251
|
|
Net
cash provided by financing activities
|
|
|
4,551,412
|
|
|
2,743,196
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
197,311
|
|
|
34,837
|
|
Cash
- beginning of the period
|
|
|
34,837
|
|
|
-
|
|
|
|
|
|
|
|
|
|
CASH
- end of the period
|
|
$
|
232,148
|
|
$
|
34,837
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
124,805
|
|
$
|
1,985
|
|
Cash
paid during the period for corporate taxes
|
|
|
3,763
|
|
|
1,693
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Common
Stock issued as payment for financing fees
|
|
$
|
-
|
|
$
|
39,400
|
|
Warrants/Options
issued as payment for consulting services
|
|
|
24,363
|
|
|
42,237
|
|
Warrants
issued for shareholder consent to merger
|
|
|
|
|
|
144,643
|
|
Warrants
issued as payment for financing fees
|
|
|
364,268
|
|
|
337,973
|
|
Long
term debt converted to Series A Preferred Stock
|
|
|
-
|
|
|
1,693,851
|
|
Series
B Preferred issued as payment for financing fees
|
|
|
249,000
|
|
|
-
|
|
Series
A Preferred and associated warrants exchanged for Series B Preferred
and
associated warrants
|
|
|
20,000
|
|
|
-
|
|
Dividend
and beneficial conversion accreted to Series A and Series B Preferred
Stock
|
|
|
3,517,022
|
|
|
1,373,750
|
|
Series
B Preferred issued as payment of Series B dividend
|
|
|
203,493
|
|
|
-
|
|
Common
Stock issued as payment of Series A Preferred dividend
|
|
|
378,398
|
|
|
181,887
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
1
|
—
|
Description
of Business:
|
Chembio
Diagnostics, Inc. (the Company) and its subsidiaries develop, manufacture,
and
market lateral flow rapid diagnostic tests that detect infectious diseases.
These tests are sold in the U.S. and/or internationally to medical laboratories
and hospitals, governmental and public health entities, non-governmental
organizations, medical professionals and retail establishments. The products
are
made under the label of Chembio Diagnostic Systems, Inc. (CDS) or the private
labels of its distributors or their customers. The products are used in the
diagnosis of infectious diseases and other conditions in humans and animals.
The
Companies main products presently commercially available are its three HIV
Rapid
Tests (SURE CHECK(R) HIV, HIV 1/2 STAT-PAK(TM) and HIV 1/2 STAT-PAK Dipstick)
and its rapid test for Chagas Disease.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. Although
the
Company’s revenues and gross margins increased significantly in 2005 as compared
to 2004, it has sustained significant operating losses in 2005 and 2004.
At
December 31, 2005, the Company had a positive stockholders’ equity of $1,053,000
and working capital of $650,000.
The
Company believes its resources are sufficient to fund its needs through early
2006 and it is considering alternatives to provide for its capital requirements
for the balance of 2006 and beyond
in order
to continue as a going concern
.
The
Company’s liquidity and cash requirements will depend on several factors. These
factors include (1) the level of revenue growth; (2) the extent to which,
if
any, that revenue growth improves operating cash flows; (3) its investments
in
research and development, facilities, marketing, regulatory approvals, and
other
investments it may determine to make, and (4) the investment in capital
equipment and the extent to which it improves cash flow through operating
efficiencies. There are no assurances that the Company will be successful
in
raising sufficient capital.
RECENT
DEVELOPMENTS:
On
March
30, 2006, the Company sold $1 million of additional Series B preferred stock
to
a Series B Preferred shareholder pursuant to provisions of the January 2005
Series B 9% Preferred Stock financing agreements. Such provisions were exclusive
to said shareholder. The Company is continuing to pursue additional financing
opportunities in order to provide for its longer term financing
needs.
Approximately $140,000 of these proceeds will be used to pay cash dividends
which were accrued as of December 31, 2005.
NOTE
|
2
|
—
|
SERIES
B FINANCING:
|
On
January 28, 2005, the Company completed a private placement of 9% Series
B
Convertible Preferred Stock and associated warrants for $5,047,500. The purchase
price per unit (one share plus associated warrants) was $50,000 and a total
of
100.95 shares and warrants to purchase 7,860,846 shares of Common Stock were
issued in the transaction. In addition one Series A Preferred stockholder
exercised its right to exchange $20,000 worth of Series A 8 % Preferred Stock
and associated warrants for .40 shares of 9% Series B Preferred Stock and
warrants to purchase 31,146 shares of Common Stock.
Placement
Agents were paid a cash commission of 5% of the gross cash proceeds and 4.98
shares of 9 % Series B Preferred Stock and warrants to purchase 388,588 shares
of Common Stock. In addition, they received warrants to purchase 737,712
shares
of Common Stock at an exercise price of $0.80 per share. The warrants may
not be
exercised until the majority investor in the Series B financing has given
notice
of its intent to exercise its warrants. See also note 13.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
3
|
—
|
MERGER
TRANSACTION:
|
Chembio
Diagnostics, Inc. (the Company) was formerly known as Trading Solutions.com,
Inc. On May 5, 2004, the Company issued 4,000,000 shares of its Common Stock
to
acquire all the outstanding Common Stock of Chembio Diagnostic Systems, Inc.
(CDS) and assumed all outstanding options and warrants of CDS. On May 5,
2004,
New Trading Solutions, Inc., a wholly owned subsidiary of the Company merged
with and into CDS with CDS remaining as the surviving corporation (the
“Merger”). The historical information presented for periods prior to the merger
is based on the activities of CDS. For financial reporting purposes, the
acquisition has been treated as a recapitalization of Chembio Diagnostics,
Inc.
with CDS, as the acquiror. The earnings per share presented in the statement
of
operations for periods prior to 2005 reflect the shares outstanding as if
the
merger had taken place as of January 1, 2004.
Trading
Solutions.com, Inc. had no assets, liabilities or transactions (other than
a
1:17 reverse split of its Common Stock) in the fiscal year preceding the
merger.
Prior to the merger, Trading Solutions.com, Inc.’s fiscal year ended September
30. After the merger, Chembio Diagnostics, Inc. adopted a fiscal year ending
on
December 31, the fiscal year-end of CDS.
NOTE
|
4
|
—
|
SIGNIFICANT
ACCOUNTING POLICIES:
|
|
(a)
|
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the Company, and
its
subsidiaries all wholly owned. All intercompany transactions and balances
have
been eliminated in consolidation.
Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out method.
Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
computed using the straight line method over the estimated useful lives of
the
respective assets, which range from three to seven years. Leasehold improvements
are amortized over the useful life of the asset or the lease term, whichever
is
shorter.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and the tax bases
of
assets and liabilities using enacted tax rates in effect in the years in
which
the differences are expected to reverse.
|
(f)
|
Research
and Development:
|
Research
and development costs are charged to expense as incurred.
|
(g)
|
Stock
Based Compensation:
|
The
Company accounts for stock-based employee compensation under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
its related interpretations. The Company has adopted the disclosure-only
provisions of SFAS No. 123, as amended, “Accounting for Stock-Based
Compensation.” See also note 4(m).
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
|
(h)
|
Statement
of Cash Flows:
|
For
purposes of the statements of cash flows the Company considers all highly
liquid
investments with an original maturity of three months or less to be cash
equivalents.
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB
104, revenue is recognized when there is persuasive evidence of an arrangement,
delivery has occurred or services have been rendered, the sales price is
determinable, and collectibility is reasonably assured. Revenue typically
is
recognized at time of shipment. Sales are recorded net of discounts, rebates
and
returns.
The
Company recognizes income from research grants when earned. Grants are invoiced
after expenses are incurred. Any grants funded in advance are deferred until
earned.
|
(j)
|
Comprehensive
Income:
|
The
Company adopted SFAS No. 130 “Reporting Comprehensive Income”, which prescribes
standards for reporting other comprehensive income and its components. The
Company currently does not have any items of other comprehensive income and
accordingly no separate statements are required.
|
(k)
|
Concentrations
of Credit Risk:
|
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments and trade receivables.
The Company places its temporary cash instruments with well-known financial
institutions and, at times, may maintain balances in excess of the $100,000
FDIC
Insurance limit. The Company monitors the credit ratings of the financial
institutions to mitigate this risk. Concentration of credit risk with respect
to
trade receivables is principally mitigated by the Company’s obtaining of letters
of credit from certain foreign customers, and its diverse customer base both
in
number of customers and geographic locations.
Fair
values of cash, accounts receivable, prepaid expenses and other current assets
and accounts payable reflected in these financial statements approximate
carrying value as these are short-term in nature.
|
(m)
|
Recent
Accounting Pronouncements
Affecting the Company:
|
SFAS
No.
154, Accounting Changes and Error Corrections - a replacement of APB Opinion
No.
20 (Accounting Changes) and FASB No. 3 (Reporting Accounting Changes in Interim
Financial Statements) was issued in June 2005. It changes requirements for
the
accounting for and reporting of a change in accounting principle. This Statement
requires retrospective application to prior periods’ financial statements of
changes in accounting principle unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. When
it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, this Statement requires
that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to
the
opening balance of retained earnings (or other appropriate components of
equity
or net assets in the statement of financial position) for that period rather
than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting principle
to
all prior periods, this Statement requires that the new accounting principle
be
applied as if it were adopted prospectively from the earliest date
practicable.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
SFAS
No.
154 is effective for accounting changes and error corrections made in fiscal
years beginning after December 15, 2005 (calendar year 2006). Early adoption
is
permitted.
A
revision of SFAS No. 123 “Share-Based Payment” (No. 123R) was issued in December
of 2004. The revised statement establishes standards for the accounting for
transactions in which an entity exchanges its equity investments for goods
and
services. It also addresses transactions in which an entity receives goods
or
services that are exchanged for or that may be settled by the issuance of
equity
instruments. The statement does not change the accounting guidance for
share-based payments with parties other than employees. The statement requires
a
public entity to measure the cost of employee service received in exchange
for
an award of equity instruments based on the grant-date fair value of the
award
(with limited exception). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award
(usually the vesting period). A public entity will initially measure the
cost of
employee services received in exchange for an award of an equity instrument
based on its current fair value; the fair value of that award will be remeasured
subsequently at each reporting date through the settlement date. Changes
in fair
value during the requisite service period will be recognized as compensation
over that period. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted
for
the unique characteristics of these instruments. The Company will be required
to
comply with this pronouncement for periods beginning after December 15, 2005.
The adoption of SFAS 123R in 2006, is expected to have an impact on the results
of operations of the Company which will be calculated starting in the first
reporting period of 2006.
The
Company’s Series A and Series B Preferred Stock both contained provisions
whereby, under certain conditions outside of the control of management, the
holders could have required redemption; accordingly, they were initially
classified outside of permanent equity. At December 31, 2005, such conditions
no
longer apply; accordingly, the Series A and Series B Preferred have been
reclassified to permanent equity at December 31, 2005.
Prior
years financial statements have been reclassified to conform with current
year
presentation.
|
(p)
|
Geographic
Information:
|
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for the way that business enterprises report information
about operating segments in financial statements and requires that those
enterprises report selected information. It also establishes standards for
related disclosures about product and services, geographic areas, and major
customers.
The
Company produces only one group of similar products known collectively as
“rapid
medical tests”. As per the provisions of SFAS 131, management believes that it
operates in a single business segment. Net sales by geographic area are as
follows:
|
|
For
the years ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Africa
|
|
$
|
802,925
|
|
$
|
120,002
|
|
Asia
|
|
|
124,467
|
|
|
215,131
|
|
Australia
|
|
|
10,585
|
|
|
25,478
|
|
Europe
|
|
|
125,135
|
|
|
157,516
|
|
Middle
East
|
|
|
55,652
|
|
|
69,737
|
|
North
America
|
|
|
503,456
|
|
|
994,540
|
|
South
America
|
|
|
1,737,312
|
|
|
1,166,739
|
|
|
|
$
|
3,359,532
|
|
$
|
2,749,143
|
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
|
(q)
|
Accounts
payable and accrued
liabilities
|
Accounts
payable and accrued liabilities:
Accounts
payable - suppliers
|
|
$
|
550,247
|
|
Accrued
commissions
|
|
|
171,587
|
|
Accrued
royalties
|
|
|
381,510
|
|
Accrued
payroll and other taxes
|
|
|
63,146
|
|
Accrued
vacation
|
|
|
145,566
|
|
Accrued
legal and accounting
|
|
|
50,024
|
|
Accrued
expenses - other
|
|
|
115,845
|
|
TOTAL
|
|
$
|
1,477,925
|
|
The
following weighted average shares were used for the computation of basic
and
diluted earnings per share:
|
|
For
the years ended
|
|
|
December
31, 2005
|
December
31, 2004
|
Basic
|
|
7,705,782
|
5,966,769
|
|
|
|
|
Diluted
|
|
7,705,782
|
5,966,769
|
Basic
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding
for the
period. Diluted loss per share reflects the potential dilution from the exercise
or conversion of other securities into Common Stock, but only if dilutive.
Diluted loss per share for the years ended December 31, 2005 and December
31,
2004 is the same as basic loss per share, since the effects of the calculation
were anti-dilutive due to the fact that the Company incurred losses for all
periods presented. The following securities, presented on a common share
equivalent basis, have been excluded from the per share
computations:
|
|
For
the years ended
|
|
|
December
31, 2005
|
December
31, 2004
|
Stock
Options
|
|
1,430,375
|
1,300,250
|
Warrants
|
|
21,327,972
|
12,226,054
|
Preferred
Stock
|
|
16,311,602
|
8,118,611
|
NOTE
|
5
|
—
|
EMPLOYEE
STOCK OPTION PLAN:
|
As
part
of the merger (see note 3), the Company adopted the 1999 Stock Option Plan
(the
“Plan”) of CDS covering 1,500,000 shares of Common Stock. Under the terms the
Plan, the Compensation Committee of the Company’s board is authorized to grant
incentive options to key employees and to grant non-qualified options to
key
employees and key individuals. The options become exercisable at such times
and
under such conditions as determined by the Compensation Committee. The Plan
was
amended at the Company’s 2005 stockholders’ meeting. The number of options under
the Plan was increased to cover 3,000,000 shares of common stock. It was
also
amended to allow independent directors to be eligible for grants under the
portion of the Plan concerning non-qualified options.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
Company applies Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” and related Interpretations to account for the
options issued to employees and or directors using the intrinsic value method.
Had compensation cost for the options been determined using the fair value
based
method, as defined in Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), the Company’s net loss
and loss per share would have been adjusted to the pro forma amounts indicated
below. The Company adopted Statement of Financial Accounting Standards No.
148,
“Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123” requiring interim period disclosure for the
years ending after December 15, 2002. The effect of the fair value method
allowed under SFAS 123 is shown below.
|
|
For
the years ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Net
loss attributable to common stockholders, as reported
|
|
$
|
(6,769,022
|
)
|
$
|
(5,041,964
|
)
|
Add:
Stock-based compensation included in reported net loss
|
|
|
-
|
|
|
969
|
|
Deduct:
Total stock based compensation expense determined under the fair
value
based method for all awards (no tax effect)
|
|
|
(180,195
|
)
|
|
(490,348
|
)
|
Pro
forma net loss attributable to common stockholders
|
|
$
|
(6,949,217
|
)
|
$
|
(5,531,343
|
)
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted loss per share - as reported
|
|
$
|
(0.88
|
)
|
$
|
(0.85
|
)
|
Basic
and diluted loss per share - pro forma
|
|
$
|
(0.90
|
)
|
$
|
(0.93
|
)
|
The
fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
·
|
For
the year ended December 31, 2005: expected volatility of 110.28%;
risk-free interest rate of 3.69% to 4.46%; expected lives of 3
to 5 years
and no dividends.
|
|
·
|
For
the year ended December 31, 2004: expected volatility of 82.6%;
risk-free
interest rate of 3.31%; expected lives of 4 to 7 years and no
dividends.
|
The
effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts since future amounts will be affected by the
number
of grants awarded and additional awards are generally expected to be made
at
varying prices.
The
Company granted 481,500 options under the Plan during the year ended December
31, 2005 at exercise prices ranging from $0.35 per share to $0.80 per
share.
Plan
activity is summarized as follows:
|
|
Number
of shares
|
|
Weighted
Average Exercise Price
|
|
Options
outstanding at December 31, 2003
|
|
|
365,000
|
|
$
|
2.75
|
|
Granted
|
|
|
740,000
|
|
|
0.95
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Options
outstanding at December 31, 2004
|
|
|
1,105,000
|
|
$
|
1.55
|
|
Granted
|
|
|
481,500
|
|
|
0.74
|
|
Canceled
|
|
|
(300,750
|
)
|
|
1.75
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Options
outstanding at December 31, 2005
|
|
|
1,285,750
|
|
$
|
1.20
|
|
Additional
Plan information as of December 31, 2005 is as follows:
Range
of Exercise Prices
|
Options
Outstanding
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (yrs)
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
$2.17
— 4.00
|
202,500
|
$3.12
|
2.05
|
202,500
|
$3.08
|
$0.90
— 1.50
|
310,000
|
$1.20
|
5.40
|
160,000
|
$1.02
|
$0.75
— 1.50
|
530,750
|
$0.79
|
4.60
|
176,000
|
$0.76
|
$0.35
— 0.60
|
242,500
|
$0.52
|
5.12
|
222,500
|
$0.51
|
|
1,285,750
|
$1.20
|
4.49
|
761,000
|
$1.36
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
6
|
—
|
RELATED
PARTIES:
|
The
Company
’s
former
president, also a former director received, in March 2005, as compensation
for
his service on the Board of Directors, a reduction from $.90 per share to
$.75
per share in the exercise price of a warrant to acquire 425,000 shares of
Common
Stock.
The
Company is accounting for these warrants as variable from the date of the
modification to the date the award is exercised, forfeited, or expires
unexercised. At December 31, 2005 the stock price was less than the revised
exercise price; therefore there was no adjustment to compensation is
required.
Such
warrants remain unexercised as of December 31, 2005.
The
Company has a liability to its President for i) funds advanced by him to
it or
paid directly by him to vendors on its behalf of $182,000 (non-interest bearing
and payable on demand) and ii) $165,000 of accrued interest on prior debt
that
is not accruing additional interest. The accrued interest is being repaid
according to the terms related to the Series B offering (see notes 2 and
9).
Inventories
consist of:
Raw
Materials
|
|
$
|
425,758
|
|
Work
in Process
|
|
|
86,001
|
|
Finished
Goods
|
|
|
176,224
|
|
|
|
$
|
687,983
|
|
Fixed
assets consist of:
Machinery
and equipment
|
|
$
|
604,243
|
|
Furniture
and fixtures
|
|
|
126,277
|
|
Computer
and telephone equipment
|
|
|
94,283
|
|
Leasehold
improvements
|
|
|
131,157
|
|
Tooling
|
|
|
41,900
|
|
|
|
|
997,860
|
|
Less
accumulated depreciation and amortization
|
|
|
(559,228
|
)
|
|
|
$
|
438,632
|
|
Included
in the above fixed assets is $74,183, net of accumulated depreciation of
$84,058, of assets held under capital leases as of December 31, 2005.
Depreciation for the 2005 and 2004 years aggregated $98,508 and $109,965,
respectively.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
In
connection with the Series B offering (see note 2) interest payable on certain
debt was agreed to be paid
over
33
months in installments of $10,000 per month and a final payment of $2,950
in the
34
th
month
.
These
payments are subordinate to the redemption rights of the Series B preferred
stockholders. No interest accrues on this payable.
NOTE
|
10
|
—
|
OBLIGATIONS
UNDER CAPITAL LEASES:
|
The
Company is obligated under capitalized leases for certain computer and telephone
equipment.
Future
minimum lease payments under these capitalized lease obligations, including
interest as of December 31, 2005 were as follows:
Year
ending December 31,
2006
|
|
$
|
45,546
|
|
2007
|
|
|
40,113
|
|
2008
|
|
|
7,260
|
|
|
|
|
92,919
|
|
Less:
imputed interest
|
|
|
10,134
|
|
Present
value of future minimum lease payments
|
|
|
82,785
|
|
Less:
current maturities
|
|
|
38,368
|
|
|
|
$
|
44,417
|
|
These
leases have interest rates ranging from 8% - 15%.
NOTE
|
11
|
—
|
RESEARCH
GRANTS AND DEVELOPMENT
CONTRACTS:
|
In
2005
and 2004 the Company received research grants and development contracts in
the
amount of $331,198 and $556,789 respectively. A substantial portion of the
revenues realized in 2005 is not expected to recur in 2006.
No
provision for Federal income taxes was required for the years ended December
31,
2005 or 2004, due to the Company’s operating losses. At December 31, 2005, the
Company has unused net operating loss carryforwards of approximately $14,500,000
which expire at various dates through 2024. Most of this amount is subject
to
annual limitations under certain provisions of the Internal Revenue Code
related
to “changes in ownership”. In addition the Company has a research and
development credit carryforward of approximately $288,000.
As
of
December 31, 2005 and 2004, the deferred tax assets related to the
aforementioned carryforwards have been fully offset by valuation allowances,
since significant utilization of such amounts is not presently expected in
the
foreseeable future.
Deferred
tax assets and valuation allowances consist of:
|
|
December
31, 2005
|
|
December
31, 2004
|
|
Net
operating loss carryforwards
|
|
$
|
5,800,000
|
|
$
|
4,424,000
|
|
Research
and development credit
|
|
|
288,000
|
|
|
230,000
|
|
Other
|
|
|
40,000
|
|
|
73,000
|
|
Gross
deferred tax assets
|
|
|
6,128,000
|
|
|
4,727,000
|
|
Valuation
allowances
|
|
|
(6,128,000
|
)
|
|
(4,727,000
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
13—STOCKHOLDERS’ EQUITY:
(a)
Common
Stock
During
2005 the Company issued 95,000 shares of its Common Stock to consultants
as
compensation. The shares were valued from $0.43 to $0.75 per share and were
expensed over the lives of the related contracts.
In
2005
Series A Preferred shareholders converted 3.02476 shares into 151,237 shares
of
Common Stock. Series B Preferred shareholders converted 8.20228 shares into
672,417 shares of Common Stock and warrants were exercised to purchase 35,000
shares of Common Stock at an exercise price of $0.72 per share.
On
May
14, 2005 and November 15, 2005 the Company issued 312,773 and 317,859 shares,
respectively, of its Common Stock as payment of dividends on its series A
preferred stock.
(b)
Warrants
The
warrants to purchase 8,280,550 shares of Common Stock issued in connection
with
the Series B offering were assigned a value of $2,349,893.
Warrants
were issued in January 2005 to placement agents in connection with the Series
B
Preferred Stock financing to purchase a total of 737,712 shares of Common
Stock
at an exercise price of $0.80. The fair values of these warrants are $364,268.
The effect of this transaction was reflected in Additional Paid in
Capital.
In
March
2005, the Company re-priced certain warrants - see note 6.
During
2005, the Company issued warrants to purchase 133,656 shares of Common
Stock
at
exercise prices from $0.55 to $0.70 per share
to
a
distributor as payment for commissions. The value of these warrants was
expensed.
(c)
Other
Common Stock
Options
During
2005 the Company issued options to purchase 20,000 shares of Common Stock
to
advisory board members. These options were valued at $6,969 and are being
expensed over the vesting periods.
(d)
Series
A 8% Convertible Preferred Stock
:
The
Series A Preferred Stock was issued at a face value of $30,000 per share
and
came with detachable warrants. The recorded amount of the preferred shares
was
calculated using a fair value allocation between the preferred shares and
detachable warrants. Some key features include:
Dividends:
The 8% per annum dividend is payable semi-annually, in cash or, at the Company’s
option, in Common Stock. To date all dividends have been paid in Common
Stock.
Conversion:
Series A preferred stock is convertible, at the option of the holders, into
shares of Common Stock at a conversion price of $0.60 per share. Based on
its
original purchase price of $30,000 per share, each share of Series A Preferred
Stock is convertible into 50,000 shares of Common Stock.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series A Preferred Stock. The Series
A Preferred Stock is not currently redeemable and there is no likelihood
that it
will become redeemable; accordingly, no accretion is being made to bring
the
value up to its redemption value (The liquidation preference is $30,000 per
share plus accrued and unpaid dividends, presently $394.05 per share, an
aggregate for all such shares of $4,822,957). Accrued but unpaid dividends
of
$62,528 are included in the preferred stock carrying value as at December
31,
2005.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the series A preferred stock transaction and found that
there
was an associated beneficial conversion feature totaling $1,635,416; the
preferred stock was further discounted by this amount. The beneficial conversion
amount was then accreted back to the preferred stock in accordance with the
conversion provision which allowed for 20% to be converted immediately and
100%
after the earlier of ten months from the merger or 6 months after the
registration statement registering the underlying common shares became
effective. The amount accreted back to the preferred and charged to dividends
in
2005 was $261,666.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
(e)
Series
B 9% Convertible Preferred Stock
:
The
Series B Preferred Stock was issued at a face value of $50,000 per share
and
came with detachable warrants. The recorded amount of the preferred shares
was
calculated using a fair value allocation between the preferred shares and
detachable warrants. Some key features of the Series B Preferred Stock (see
note
2) are as follows:
Dividends:
The 9% Series B Preferred Stock accrues dividends at 9% per annum, payable
semi-annually. Dividends are payable in either Series B Preferred Stock (plus
associated warrants) or cash. The majority investor in the Series B financing
has the option as it pertains to its dividend payment to choose cash or
preferred shares. The Company has the option to choose cash or preferred
shares
as to the balance of the dividends. To date all dividends have been paid
in
Preferred Shares.
Conversion:
The Series B Preferred Stock is convertible, at the option of the holders,
into
shares of Common Stock at a conversion price of $.61 per share. Based on
the
original purchase price of $50,000 per share, each share of Series B Stock
is
convertible into 81,967 shares of Common Stock.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series B Preferred Stock. The Series
B preferred is not currently redeemable and there is no likelihood that it
will
become redeemable; accordingly, no accretion is being made to bring the value
up
to its redemption value (The liquidation preference is $50,000 per share
plus
accrued and unpaid dividends, presently $2,270.27 per share, an aggregate
for
all such shares of $5,341,896). Accrued but unpaid dividends of $232,016
are
included in the preferred stock carrying value as at December 31, 2005. The
accrued but unpaid dividend was paid on January 2, 2006 by the issuance of
4.60249 shares Series B Preferred Stock.
On
July
1, 2005, the Company issued 4.06988 shares of Series B Preferred Stock as
payment of dividends on the Company’s Series B Preferred Stock. No cash was
exchanged in this issuance.
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the series B preferred stock transactions and found that
there
was an associated beneficial conversion feature totaling $2,437,035; the
preferred stock was further discounted by this amount. The beneficial conversion
amount was then accreted back to the preferred stock in accordance with the
conversion provision which allowed for 100% to be converted
immediately.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
|
14
|
—
|
COMMITMENTS
AND CONTINGENCIES:
|
Employment
Contracts:
The
Company has contracts with three key employees. The contracts call for salaries
presently aggregating $420,000 per year. Two contracts expire in May of 2006
and
one contract expires in May of 2007.
Pension
Plan
:
The
Company has a 401(k) plan established for its employees. The Company has
the
option to make matching contributions to the plan. The Company has not elected
to make any matching contributions for the years ended December 31, 2005
and
2004 and accordingly no expense has been recorded.
Obligations
Under Operating Leases:
The
Company leases office and manufacturing facilities. The following is a schedule
of future minimum rental commitments:
Year
ending December 31,
2006
|
99,837
|
2007
|
25,113
|
|
$124,950
|
Rent
expense aggregated $97,000 and 88,000 for the years ended December 31, 2005
and
2004, respectively.
Economic
Dependency:
The
Company had sales to three customers in excess of 10% of total sales in the
year
ended December 31, 2005. Sales to these customers aggregated approximately
$1,125,000, $474,000 and $412,000, respectively.
The
Company had sales to two customers in excess of 10% of total sales in the
year
ended December 31, 2004. Sales to these customers aggregated approximately
$1,071,000 and $309,000, respectively.
The
Company had no purchases from any vendor in excess of 10% of total purchases
for
the years ended December 31, 2005 and 2004.
Governmental
Regulation:
All
of
the Company’s existing and proposed diagnostic products are regulated by the
Food and Drug Administration (FDA), U.S. Department of Agriculture, certain
state and local agencies, and/or comparable regulatory bodies in other
countries. Most aspects of development, production, and marketing, including
product testing, authorizations to market, labeling, promotion, manufacturing,
and record keeping are subject to review. After marketing approval has been
granted, Chembio must continue to comply with governmental regulations. Failure
to comply with these regulations can result in significant
penalties.
The
Company is involved in a patent litigation with Saliva Diagnostic Systems,
Inc.
(
“SDS”),
the assignee of a patent related to a method for collecting samples. The
Company
has requested relief from the court that its Sure Check HIV test does not
infringe SDS’s patent, that such patent is invalid, and that it is unenforceable
due to inequitable procurement. SDS has answered and counterclaimed, alleging
that the Company has infringed the patent, which the Company has denied.
In the
years 2001 through 2003, the Company paid royalties to SDS and took several
other actions based upon SDS’s representations regarding its alleged
patent.
In
response to the Company’s aforementioned request for relief, the Court has
decided that it is not yet prepared to rule on the significant issues in
the
case. The Company does not believe that the Court’s decision adversely affects
the strength of its position. Accordingly, we are not presently appealing
this
decision, although we believe we have a meritorious basis for future
appeal. The discovery phase of the litigation is proceeding pursuant to a
scheduling order and trial is presently expected to convene in late
2006.
CHEMBIO
DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
16
—
SUBSEQUENT
EVENTS
|
(a)
|
During
January of 2006, holders of Series B Preferred shares converted
6.70680
shares into approximately 550,000 shares of Common
Stock.
|
|
(b)
|
Please
see note 1
Recent
Developments.
|