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, 2006
|
|
[
]
|
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
|
88-0425691
|
|
|
(State
or jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
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|
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3661
Horseblock Road, Medford, NY
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11763
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|
|
(Address
of principal executive offices)
|
(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
|
Name
of each exchange on which registered
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|
|
None
|
None
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
|
Common
Stock, $0.01 par value
|
|
(Title
of Class)
|
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 (§ 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: $6,502,480.
As
of
March 23,
2007,
the registrant had 11,754,015 common shares outstanding, and the aggregate
market value of the common shares held by non-affiliates (*) was approximately
$6,432,947. This calculation is based upon the closing sale price of $0.68
per
share on March 19, 2007.
*
Without
asserting that any of the issuer’s directors or executive officers, or the
entities that own 2,293,800 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.
TABLE
OF CONTENTS
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Page
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PART
I
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3
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ITEM
1.
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DESCRIPTION
OF BUSINESS
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3
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ITEM
2.
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DESCRIPTION
OF PROPERTY
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15
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ITEM
3.
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LEGAL
PROCEEDINGS
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15
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|
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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15
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PART
II
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16
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|
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ITEM
5.
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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16
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ITEM
6.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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17
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ITEM
7.
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FINANCIAL
STATEMENTS
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25
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|
ITEM
8.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
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25
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ITEM
8A.
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CONTROLS
AND PROCEDURES
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25
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ITEM
8B.
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OTHER
INFORMATION
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25
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PART
III
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25
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|
|
ITEM
9.
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(A) OF THE EXCHANGE ACT
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25
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ITEM
10.
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EXECUTIVE
COMPENSATION
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27
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|
ITEM
11.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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31
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ITEM
12.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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33
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ITEM
13.
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EXHIBITS
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36
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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38
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SIGNATURES
|
39
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PART
I
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ITEM
1.
|
DESCRIPTION
OF BUSINESS
|
General
Chembio
Diagnostics, Inc. (the “Company”,
"We", "Our", or "Us") and our subsidiaries develop, manufacture, and market
rapid diagnostic tests that detect infectious diseases. Our main products
presently commercially available are three rapid tests for the detection of
HIV
antibodies in whole blood, serum and plasma samples, two of which were approved
by the FDA last year. These products employ single path lateral flow technology
which we have licensed from Inverness Medical Innovations, Inc. (“Inverness”),
who is also our exclusive marketing partner for those two products in the United
States under its Clearview® brand. Inverness launched its marketing of these
products in the United States in February 2007. Chembio’s two HIV STAT-PAK®
rapid HIV tests are marketed outside the United States through different
partners and channels under license from Inverness. We also have a rapid test
for Chagas disease (a parasitic disease endemic in Latin America) as well as
a
line of rapid tests for tuberculosis, including tests for tuberculosis in
animals for which USDA approval is pending.
On
March
13, 2007, we were issued United States patent #7,189,522 for our Dual Path
Platform (DPP™) rapid test system. We believe that as a result of the patent
protection we now have with DPP™, we have a significant opportunity to develop
and license many new rapid tests in a number of fields including but not limited
to infectious diseases. We have already completed initial development on some
products in this new platform. We believe the DPP™ provides significant
advantages over standard single path lateral flow assays, and are developing
most of our new products using this platform.
Our
products are sold to medical laboratories and hospitals, governmental and public
health entities, non-governmental organizations, medical professionals and
retail establishments. Our products are sold either under our STAT-PAK® or SURE
CHECK® registered trademarks and/or the private labels of our marketing
partners, such as is the case with the Inverness Clearview® label.
Rapid
HIV Tests
A
major
component of our revenue growth in 2006 was increased sales of our rapid HIV
tests. A large percentage of individuals that are HIV positive worldwide are
unaware of their status. Part of the reason for this is that even those that
do
get tested in public health settings will often not return or call back for
their test results when samples have to be sent out to a laboratory that can
take at least several days to process. The increased availability, greater
efficacy and reduced costs for anti-retroviral treatments (ARVs) for HIV is
also
having a tremendous impact on the demand for testing, as the stigma associated
with the disease is lessened and the ability to resume normal activities is
substantially improved.
All
three
of our rapid HIV tests are qualitative “yes/no” tests for the detection of
antibodies to HIV 1 & 2 with results available within approximately 15
minutes. The tests differ only in the method of sample collection and test
procedure, flexibility with different sample types, and cost of manufacture.
Our
rapid HIV tests have been marketed under our SURE CHECK® and STAT-PAK®
trademarks. Pursuant to our agreement with Inverness Medical Innovations, Inc.,
the SURE CHECK® product is now being marketed globally (with limited exceptions)
by Inverness as Clearview® Complete HIV 1/2 and the cassette format of our
STAT-PAK (we also have a third product known as HIV 1/2 STAT-PAK dipstick)
is
now being marketed by Inverness in the United States as Clearview HIV 1/2
STAT-PAK®. We continue to market our STAT-PAK® cassette and dipstick
outside the United States through other marketing channels.
Regulatory
Status:
Rapid
HIV Tests
The
FDA
approved our Pre-Market Applications for our SURE CHECK HIV 1/2 (now Inverness’
Clearview® Complete HIV 1-2 and HIV 1/2 STAT-PAK (now Inverness’ Clearview HIV
1/2 STAT-PAK) products on May 25, 2006. A Clinical Laboratory Improvement Act
(“CLIA”) waiver was granted by the FDA for the HIV 1/2 STAT-PAK on November 20,
2006. Labeling changes to the Inverness Clearview® brands for both products were
approved during the first quarter of 2007. CLIA waiver is still pending for
the
Clearview Complete HIV 1-2; accordingly this product is presently only available
as a non-waived product. CLIA waiver is required in order to market the products
in public health clinics and physicians’ offices where the level of training is
traditionally less than the training at clinical laboratories and hospitals.
Public health clinics and physicians’ offices now constitute the largest portion
of the available market for our products. We were advised by the FDA in February
2007 that additional user studies will be required in order to obtain CLIA
waiver for the Clearview Complete HIV 1/2, and this work is in progress. We
believe that we will be able to receive a CLIA waiver for this product during
2007.
3
Our
third
rapid HIV test, HIV 1/2 STAT-PAK Dipstick,
though
not FDA approved, qualifies under FDA export regulations to sell, subject to
any
required approval by the importing country, to customers outside the United
States. The dipstick product is our most competitively priced version of our
three rapid HIV tests, and was designed primarily for resource-constrained,
donor-funded markets that have large test volume needs.
Although
we have received approval from a number of potential importing countries for
all
three of our HIV tests, Brazil, Mexico, Nigeria and Uganda are the only
countries in which we have realized significant sales. As a result of favorable
evaluations of our HIV 1/2 STAT-PAK and HIV 1/2 STAT-PAK Dipstick products
by
the World Health Organization (the “WHO”), these products are qualified for
procurements from programs funded by the United Nations and their partners’
programs. All three of our HIV tests have qualified for procurements under
the
President’s Emergency Plan for AIDS Relief.
Partners
Involved in the Products:
On
September 29, 2006 we executed marketing and license agreements with Inverness.
These agreements not only provide for the marketing of our rapid HIV tests
in
the United States, but also grant us a license to Inverness’ single path lateral
flow patents that may be applicable to our other products, including those
that
we had under development at the time of the grant. As part of these agreements
we settled litigation that had been ongoing with another company, StatSure
Diagnostics, Inc., relating to the barrel device that is incorporated into
our
Sure Check® (now Inverness Clearview Complete) HIV 1/2 product.
In
2004
we entered into a thirteen-year supply and technology transfer agreement with
FIOCRUZ-Bio-Manguinhos (“FBM”), an affiliate of the Ministry of Health of Brazil
relating to our HIV 1/2 STAT-PAK product. FBM will supply this product, which
will eventually be produced by FBM completely in Brazil, to the Brazilian public
health market and potentially other markets in the region.
In
September 2005 we were designated as the confirmatory test in Uganda’s national
rapid testing protocol, and through the offices we have established in East
Africa and Nigeria, each staffed with experienced executives, we hope to be
selected in more such national testing protocols. In February 2006 our HIV
1/2
STAT-PAK was designated by the Nigerian Ministry of Health in four out of the
eight screening protocols in the Nigerian Interim Rapid Testing Algorithm.
We
have identified and/or appointed distributors in several countries in Africa
(Kenya, Mozambique, South Africa, and others) so that we will be positioned
to
service those markets if we are selected in their national testing protocols.
Our focus is on those African countries that are receiving funding from PEPFAR
and other large relief programs.
In
January 2006, we became one of four recommended global suppliers to former
President Clinton’s HIV/AIDS Initiative (“CHAI”), and through that we hope to
generate revenues in many of the nearly sixty countries that have agreements
with CHAI.
In
November 2006, we received an order for 990,000 units of our Sure Check product
from our distributor in Mexico, a division of Bio-Rad Laboratories, Inc. This
distribution agreement is the one exception to our otherwise global exclusive
agreement with Inverness as it relates to this product. Approximately half
of
this order was shipped during the fourth quarter of 2006 and the balance has
been shipped during the first quarter of 2007. Absent other arrangements, this
exception to Inverness’ global exclusivity will be eliminated on September 29,
2007.
We
are
establishing distributors in a number of other markets where we believe there
is
or will be a significant market opportunity for our products.
CHAGAS
RAPID TEST
We
have
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. Although the Chagas disease
is
endemic only in regions of Latin America there are an estimated 16-18 million
existing Chagas disease cases, resulting in approximately 20,000 deaths
annually, and an estimated 300,000 new cases each year. Chagas disease is
transmitted by a parasitic bug which lives in cracks and crevices of
poor-quality houses usually in rural areas, through blood transfusions or
congenitally from infected mother to fetus. There is an effective therapy
available to treat the early chronic phase, but this therapy only eliminates
the
infection if it is administered to children that are diagnosed with the disease.
Our Chagas STAT-PAK product is the only rapid test for Chagas disease which
has
performed well in multi-center studies in endemic regions of Latin
America.
In
January 2006, we received a $1.2 million order from the Pan American Health
Organization to supply our Chagas disease rapid tests for a screening program
in
Bolivia. These tests were delivered in the first three quarters of 2006. The
Pan
American Health Organization, headquartered in Washington D.C., is affiliated
with the World Health Organization, and that procurement was used to implement
a
nationwide Chagas screening program for all children under the age of 10 in
endemic regions of Bolivia. We are actively looking at developing additional
business opportunities for this product in those regions of Latin America that
are impacted by this disease.
4
Other
Products
Prior
to
2005, a majority of our revenues were from the contract manufacture of private
label pregnancy tests for regional pharmacies, drug stores and mass merchants
in
the 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 tests.
We have retained a profit share derived from the sales of these products by
the
buyer. This has resulted in a substantial reduction of our revenues from these
products and this is no longer a material part of our revenues. We also have
other commercially available products, such as rapid tests for Lyme disease
and
other products, whose aggregate revenues are currently not material to us.
We
also are involved in the development of new products, as described below under
“Research and Development”.
Lateral
Flow Technology
All
our
current products employ single path lateral flow technology. Lateral flow,
whether single or dual path, generally refers to the process of a sample flowing
from the point of application on a test strip to provide a test result on a
portion of a strip downstream from either the point of application of the sample
or of another reagent. Single path lateral flow technology is well established
and widely applied in the development of rapid diagnostic tests. The
functionality of our lateral flow tests is based on the ability of an antibody
to bind with a specific antigen (or vice versa) and for the binding to become
visible through the use of the colloidal gold and/or colored latex that we
use
in our products. The colloidal gold or the colored latex produces a colored
line
if the binding has occurred (the test line), in which case it means there has
been a reactive or positive result. In any case, a separate line (the control
line) will appear to confirm that the test has been validly run in accordance
with the instructions for use.
Our
lateral flow technology, whether single or dual path, allows the development
of
accurate, easy-to-perform, single-use diagnostic tests for rapid, visual
detection of specific antigen-antibody complexes on a test strip. This format
provides a test that is simple (requires neither electricity nor expensive
equipment for test execution or reading, nor skilled personnel for test
interpretation), rapid (turnaround time approximately 15 minutes), safe
(minimizes handling of specimens potentially infected), non-invasive (requires
5-20 micro liters of whole blood easily obtained with a finger prick, or
alternatively, serum or plasma), stable (24 months at room temperature storage
in the case of our HIV tests), and highly reproducible.
The
sensitivity of a test indicates how strong the sample must be before it can
be
detected by the test.
The
specificity of a test measures the ability of the test to analyze, isolate,
and
detect only the matters targeted by the test. The sensitivity and specificity
of
our rapid HIV tests during our clinical trials undertaken in connection with
our
FDA Pre-Marketing Applications were 99.7% and 99.9%, respectively.
We
can
develop and produce lateral flow tests that are qualitative
(reactive/non-reactive), as in the case of our HIV tests, and we can develop
semi-quantitative tests, reflecting different concentrations of the target
marker(s) using different colored latex test lines for each concentration.
We
can also develop tests for multiple conditions, using different colored lines.
We have developed proprietary techniques that enable us to achieve high levels
of sensitivity and specificity [see definition above] in our diagnostic tests
using our proprietary latex and colloidal gold conjugates and buffer systems.
These techniques include the methods we employ in manufacturing and fusing
the
reagents with the colored latex, or colloidal gold, blocking procedures used
to
reduce false positives, and methods used in treating the materials used in
our
tests to obtain maximum stability and resulting longer shelf life. We also
have
extensive experience with a variety of lateral flow devices, including the
sample collection device used in our SURE CHECK rapid HIV test which eliminates
the need for transferring finger-stick whole blood samples from the fingertip
onto a test device, because the collection of the sample is performed within
a
tubular test chamber that contains the lateral flow test strip. The whole blood
sample is absorbed directly onto the test strip through a small opening in
one
end of the test chamber and an absorbent pad positioned just inside this same
end of the test chamber.
On
March
13, 2007, we were issued United States patent number #7,189,522
describing a Dual Path Immunoassay system which we believe provides several
advantages over standard single path lateral flow test systems (See
“Intellectual Property”). We believe that this system, which we refer to as DPP™
(for Dual Path Platform), provides us with significant new product development
and licensing opportunities.
Target
Market
Rapid
HIV Tests
We
believe that the prevention and treatment goals that have been established
by
large programs that are designed to provide greater access to ARVs
(Anti-Retroviral Treatments for AIDS) and thwart the spread of HIV will drive
the growth and demand for rapid HIV tests in the coming years. We are presently
one of only two United States-based manufacturers of rapid HIV tests; and we
believe that we are the only one with products that can meet the various demands
of the global market.
5
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 over the next three years in order to insure that treatment targets are
achieved1 .
In
addition, a confirmatory test is needed in the case of a positive result. This
is a result of the continuing growth in the epidemic and because anti-retroviral
treatments are available, affordable and are being funded, so that people
actually have a reason to be tested.
Because
HIV medicines have become much less expensive and more widely available,
unprecedented multi-billion dollar financial commitments are being allocated
in
each of the next few years. Some of these commitments are being made by The
Global Fund2
and the
United States Presidential Emergency Plan for AIDS Relief
(“PEPFAR”).
PEPFAR
alone has a goal to provide treatment to two million people in order to identify
these two 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.
According to the UNAIDS 2006 Update Report, as of the end of 2006, there were
an
estimated nearly 40 million people infected with HIV/AIDS worldwide, of which
an
estimated 6 million were in need of antiretroviral therapy. There were nearly
4.3 million new infections and 2.9 million AIDS-related deaths in 2006. The
number of people in need of treatment will continue to grow as expected
infection rates increase significantly worldwide, and there is little
expectation for an effective vaccine anytime soon. 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.
The
marketing of our FDA-approved rapid HIV tests in the United States was just
launched by Inverness during the first quarter of 2007. In the United States
the
need for rapid HIV tests has been developing first in the public health and
hospital emergency room segments. However, as a result of recently revised
and
broadly supported recommendations for routine testing issued by the United
States Centers for Disease Control (“CDC”) in September 2006, we expect the
United States market to expand as this technology is increasingly employed
in
physicians’ offices, prisons and other venues. Before the FDA Blood Products
Advisory Committee endorsed the FDA’s recommendation to provide rapid HIV tests
in the over-the-counter markets, and before the CDC recommendations were
published, the United States rapid HIV test market was estimated to become
at
least a $50 million market during the next few years. The market may grow much
faster and larger however as a result of these two developments.
The
non-exclusive licenses we received from Inverness to their lateral flow patents
to market our two HIV 1/2 STAT-PAK products outside the United States enable
us
to further expand our international marketing efforts beyond developing
countries. In addition to our efforts in Africa, we have distribution
initiatives underway in new markets in Latin America, Europe, and Asia.
Registration and regulatory requirements for these markets vary
widely.
Chagas
Rapid Test
We
had
developed a Chagas rapid test several years ago, but the market for the product
was not meaningful, as most prevention efforts, were minimal and were made
using
laboratory tests used for blood bank screening of blood. However, there is
now a
greater interest in our Chagas rapid test because of an important publication
that demonstrated the effectiveness of the rapid test in the screening of blood
donors (as opposed to the blood in blood banks), and because it can be
effectively deployed in rural populations to screen children and pregnant women.
Also, studies that have been completed at multiple sites in Central and South
America showing sensitivity of between 98.5% and 99.6% and specificity between
94.8% and 99.9%, thus indicating that the test is a good alternative to standard
laboratory testing methods. Our Chagas disease test, Chagas STAT-PAK™, was
deployed this year to screen every child in Bolivia under the age of 14 in
rural
areas. Intervention efforts with low cost generic drugs have been shown to
cure
young children better than those with latent and recurring infections afflicting
those beyond early ages.
Other
Products Under Development
We
are
also developing rapid tests for other infectious diseases, particularly rapid
tests for human and veterinary tuberculosis.
Tuberculosis
(“TB”) is the leading killer of people who have AIDS, yet there is no rapid test
for TB as there is for HIV. If successful, our TB product development efforts
will leverage the marketing and distribution capability which we have been
using
for our HIV products. We had our initial human TB product evaluated last year
along side several other rapid tests that were evaluated by an organization
affiliated with the World Health Organization. Although our test was among
the
best performing tests, more work is still required. Current efforts on a next
generation rapid TB test are focused on incorporating the Dual Path Platform
with different and/or additional patented antigens that we have identified
and
that we would license in order to produce higher sensitivity levels,
particularly in HIV-TB co-infected patients. Given the variations both in TB
strains and latency presented in different geographic regions, there are
questions as to what the performance standards should be and whether certain
tests may in fact be appropriate for use only in certain regions.
1
www.businessfightsaids.org/site/pp.asp?c=gwKXJfNVJtF&b=1008825 - Policy
Documents/Facilitating Access to Testing
2
www.theglobalfund.org/en
6
Non-Human
Primate Tuberculosis Test and other Veterinary Tuberculosis
Tests
Tuberculosis
is also a problem in a number of animal species either because of potential
transmission to humans or from humans to animals (i.e., zoonotic disease),
costs
in lost agricultural productivity or because of the potential negative impact
on
the cost of the animal species themselves. For example, nonhuman primates used
in research or in zoos are quite costly, and whole colonies can be lost if
transmission is not effectively controlled through routine and accurate
diagnosis. Bovine (cattle) TB can be transmitted from livestock or deer to
humans and to other animals both domestic and wild. Under rules established
by
the Animal and Plant Health Inspection Service (“APHIS”), a state can lose the
right to move cattle across state lines if TB is detected in two or more herds,
and such prohibitions, have recently occurred in Minnesota, Texas, New
Mexico and Michigan. TB control of meat at slaughterhouses is dependent upon
visual inspection. We believe that a more accurate and rapid test could
conceivably complement or supplant these visual inspections.
We
have
already completed development of a rapid lateral-flow test for the detection
of
TB in Non-Human Primates (PrimaTB STAT-PAK™), and we have a similar test near
completion for multiple host species, including cattle (BovidTB STAT-PAK™), deer
both captive and wild species (CervidTB STAT-PAK™), camelids (CamelidTB
STAT-PAK™), elephant (ElephantTB STAT-PAK™) and other exotic wildlife. The tests
can use serum, plasma, whole blood or “meat juice,” are simple and easy to use,
have up to an 18 month shelf life at room temperature (RT) storage, and samples
provide definitive results within 20 minutes, permitting easy use of the assay
for wild species as a true capture, test and cull assay.
We
amended the product license application to the USDA for approval of our PrimaTB
STAT-PAK (the detection of active tuberculosis in non-human primates) on July
6,
2006, and the application was accepted by the USDA on August 29, 2006. Clinical
trials to validate reproducibility were successfully completed in December
of
2006. At the same time, we have been working toward the establishment license
with the USDA, which is required along with the first product license requiring
an inspection by USDA officials. The inspection of our facility and quality
system was completed on February 27, 2007. We anticipate approval of the Prima
TB STAT-PAK during the second quarter of 2007.
The
next
USDA submissions will be for ElephantTB STAT-PAK and CervidTB STAT-PAK.
Distribution
Channels&
Marketing Strategy
Our
marketing strategy is to:
| · |
Support,
review and assess the marketing and distribution efforts of our rapid
HIV
tests by Inverness Medical Innovations, Inc. Inverness and Chembio’s
marketing and regulatory teams have been working together since October
2006 after we signed the agreements and we are very encouraged by
the
commitment they are making to maximize the success of these products
in
the United States market. We believe that their highly professional
cadre
of technical field support staff together with the strong distribution
partners they support in the hospital, public health and physician
office
markets will combine to provide a marketing organization that will
be a
key asset.
|
| · |
Expand
our international sales effort and strategic partnerships in the
developed
and 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 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
several other markets. These efforts will most likely include obtaining
CE
Marks for our rapid HIV tests. In order to achieve this we will need
to
become ISO 13.485 certified, which we expect to complete during the
second
quarter of 2007.
|
| · |
Pursue
potential over-the-counter marketing opportunities in the United
States
and internationally for our HIV tests. We will analyze whether to
focus
our efforts for this market on an oral fluid HIV test product, which
we
are currently developing with our DPP™
technology.
|
7
| · |
Launch
our initial veterinary TB product, PrimaTB STAT PAK™, within our growing
line of veterinary TB tests. We anticipate USDA approval of our initial
product, a nonhuman primate TB test, in the second quarter of 2007.
During
2007 we expect to obtain revenues from certain other veterinary TB
products, at very favorable
margins.
|
Strategic
Alliances
Strategic
alliances are a key element in our business strategy.
Inverness
Medical Innovations, Inc.
- As
described in more detail below in Management’s Discussion and Analysis, on
September 29, 2006, we executed several agreements by and among the Company,
Inverness Medical Innovations, Inc. and StatSure Diagnostic Systems, Inc.
Pursuant to these agreements, Inverness became our marketing partner for our
two
FDA approved rapid HIV tests in the United States and for one of the products
in
the non-United States markets. We are the exclusive manufacturer of the
products. The marketing of the products in the US was begun by Inverness in
February 2007. The agreements contain margin sharing formulae that are designed
to provide Inverness and Chembio with reasonable profit margins after deduction
for certain costs of the products.
Clinton
Foundation HIV/AIDS Initiative
- In
January 2006 we entered into an agreement with the William J. Clinton
Foundation’s HIV/AIDS Initiative (“CHAI”) to be recommended by CHAI to receive
the procurements from CHAI partner countries (more than 50 countries in the
developing world and also including China, Brazil and India) that choose to
access CHAI’s suppliers products and their preferred pricing in exchange for
their sharing information with CHAI and permitting CHAI to fill gaps that will
improve and scale up the country’s health care delivery systems. We are
one
of
four companies worldwide (and the only United States-based manufacturer)
to
be
recommended by CHAI for sales of rapid HIV tests. While CHAI is not a procurer
of the tests per se, it is a 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 - We
are
committed to securing alliances and technology-transfer agreements with
government agencies and commercial entities. For example, we 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 the initial
three-year period which has just now been completed, we were to transfer our
proprietary technology related to HIV 1/2 STAT-PAK to Bio-Manguinhos in exchange
for commitments to purchase at least one million rapid tests. The purchase
commitment has been met, though we expect additional procurements prior to
the
completion of the technology transfer agreement, currently anticipated to occur
in 2007. Thereafter, Bio-Manguinhos will have the right to produce its own
rapid
tests and we will receive royalties for ten years.
Competition
The
diagnostics industry is a multi-billion dollar international industry and is
intensely competitive. Many of our competitors are substantially larger and
have
greater financial, research, manufacturing, and marketing resources.
Industry
competition in general is based on the following:
| · |
Scientific
and technological capability;
|
| · |
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, Chagas
disease and tuberculosis (both human and veterinary), are very strong.
8
Our
ability to develop and market other products is in large measure dependent
on
our having additional resources and/or collaborative relationships. Some of
our
product development efforts have been funded on a project or milestone basis.
We
believe that our proprietary know-how in lateral flow technology has been
instrumental in our obtaining the collaborations we have and that we continue
to
pursue. Our patent protection that we now have with our Dual Path Platform™
should enhance our ability to develop collaborative relationships and to license
out the technology.
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 a rapid test for HIV. (See the
“Governmental Regulation” section for definition of pre-marketing approval). For
this reason, during 2004 and 2005 we hired employees and consultants that
collectively have that experience. We believe this has been critical in our
progress toward obtaining these approvals during the last year and in ensuring
that we manufacture our products in accordance with FDA, USDA and other
regulatory requirements.
Our
access to capital is much less than that of several of our competitors, and
this
is a competitive disadvantage. We believe however that our access to capital
may
increase since we have obtained FDA approval of our rapid HIV tests and now
have
our Dual Path Platform (DPP™) patent. This access should continue to improve as
we grow our revenues, obtain additional regulatory approvals, and as new
development and licensing opportunities ensue for DPP™ (See Management’s
Discussion and Analysis of Financial Condition and Results Of Operations -
Overview).
To
date,
we believe we have been competitive in the industry in attracting and retaining
qualified personnel. Because of the greater financial resources of many of
our
competitors, we may not be able to compete effectively for the same individuals
to the extent that a competitor uses its substantial resources to attract any
such individuals.
We
have
been able to obtain patent protection by entering into licensing arrangements
for reagents and lateral flow technologies. The very recent issuance, in March
2007, by the United States Patent & Trademark Office of our Dual Path
Platform patent gives us our first patent protection on a rapid test platform,
which we believe enhances our competitive position.
Competitive
factors specifically related to our HIV tests are product quality, price and
ease of use as well as distribution. Product quality for a rapid HIV 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 distribution model
positions us to compete effectively and win a meaningful share of this expanding
market.
The
leading products in the international rapid HIV test market are UniGold®,
produced by Trinity Biotech in Ireland, and Determine®, produced by Inverness in
Tokyo. Until June 2005, the Determine business was owned by Abbot Diagnostics
(Abbott) before it was sold to Inverness. In connection with this transaction,
Abbott retained the distribution rights to the Determine product for 32 months.
The Determine and UniGold products are the market leaders in many of the
developing world markets, often as the screening and confirmatory tests,
respectively. Inverness’ Orgenics subsidiary in Israel also has a rapid HIV
test, Double Check Gold, and this is one of the three other products recommended
by CHAI; the other two companies whose products were selected by CHAI are based
in India and China, respectively, and they have not yet established apparent
marketing efforts outside their countries, although they are qualified by the
World Health Organization. In the developed world, particularly the United
States, our competitors are Orasure Technologies with OraQuick®, and Trinity
with its UniGold® product, both of which are FDA-approved, CLIA-waived products.
Although we do not believe Inverness plans to submit either the Determine or
the
Orgenics product to the FDA, our agreements with Inverness provide that in
the
event one of those submissions are made, (or in any case if Inverness markets
a
competitive product in the United States), we have the right to terminate our
agreement with Inverness or make Inverness’ marketing rights non-exclusive. In
either case, we can retain a license under the Inverness lateral flow patents
to
market the products under a Chembio brand and/or through third party
distribution partners.
We
are
targeting the developing world markets that are being funded by PEPFAR and
The
Global Fund where Determine and UniGold are the established tests. However,
neither 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 successfully building its brand and market share in the United States
market. Its non-United States sales of its rapid HIV test are not significant,
and we believe its product is neither suitable nor cost competitive to
participate in the international market. Orasure has been successful in bringing
attention to the need and availability of rapid HIV testing in the 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.
9
The
shelf
life of our HIV products’ is 24 months, which is double that of UniGold and four
times that of Orasure’s product. Our products have been approved by the FDA for
finger-stick whole blood, venous whole blood, serum and plasma. We believe
that
our products are extremely convenient and easier to use than OraQuick on
finger-stick whole blood samples.
We
believe that having high level executives in the field in East and West Africa
that are engaged with public health officials, NGOs and other organizations
provides us with a competitive advantage in those markets. To the best of our
knowledge, none of our competitors has actually done a technology transfer
such
as what we have done in Brazil which we can now replicate in other markets
of
our choosing.
Even
though our rapid tuberculosis test for humans and animals is still under
development, we believe we are in a leadership position as it relates to these
products. We are not aware of any rapid whole blood test that has the
sensitivity and specificity levels necessary to replace or complement the
current sputum smear microscopy method being employed in the high incidence
tuberculosis countries; and this is what we believe our rapid tuberculosis
test,
when fully developed and evaluated, will be able to do. We are also not aware
of
any rapid whole blood test to detect active pulmonary tuberculosis in non-human
primates and/or other animals for which we are 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). All of our new product development activities involve
employment of our Dual Path Platform technology for which we were recently
awarded a patent. We believe that this platform enables us to pursue many new
product development and licensing opportunities, and we are currently developing
a strategy for doing this. Several studies that we have completed in-house
in
2007 further confirm that this platform can provide improved features that
include higher sensitivity, earlier detection, use of multiple sample types
including oral fluid, and improved ability to detect multiple analytes in one
test device. Our studies thus far have primarily been based upon serological,
antibody detection tests for infectious diseases. We are beginning to now
conduct studies to establish whether these same or other advantages can be
realized in the detection of antigens.
HIV
We
have
completed initial design of an oral fluid HIV antibody detection test on our
Dual Path Platform in accordance with our agreement with Inverness, and
Inverness has notified us that it would like to enter into negotiations
concerning marketing rights to this product as provided in our
agreement. In February we commenced the ninety day negotiation period
for this marketing opportunity as provided in our agreement. We are
considering developing other specialty products for HIV that would incorporate
DPP™
and
that would be developed in collaboration with contract partners, such as an
HIV
confirmatory test.
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 serology test was developed pursuant to Phase I and II
Small Business Innovative Research grants from the National Institute of Health
from 1998 until 2002, and our current test, TB STAT-PAK II, was completed in
2003. This test was evaluated by the World Health Organization in 2005 alongside
more than fifteen other tests from various manufacturers, and although it was
among the best performers, its sensitivity and specificity were not high enough
as compared to the benchmarks employed to result in a recommendation by the
World Health Organization to switch from the current methodologies (i.e., Acid
Fast staining smears) to our test or to any of the other tests in this
evaluation. This result was particularly true when the test was used on
co-infected HIV/TB populations in sub-Saharan Africa, where millions are
infected with both diseases.
In
addition to our research and development efforts for tuberculosis tests for
humans, we have developed a test, PrimaTB STAT-PAK, for detecting active
pulmonary tuberculosis in non-human primates (monkeys). We hope to obtain a
licensure of this product during the first or second quarter of 2007. We are
also engaged in collaborations related to the detection of active pulmonary
tuberculosis in other animals such as cattle, deer, camels, elephants and other
exotic species. We plan on leveraging our current technology for licensure
of
these additional species TB tests. We do not anticipate any material revenues
from these efforts before mid to late 2007.
10
Syphilis
In
November 2006, we entered into a Cooperative Research & Development
agreement with the CDC pursuant to which we hope to complete development of
a multi-analyte test on our Dual Path Platform that could be used as a screen
and confirmatory test within the same device. The CDC is providing access to
its
own patented reagents, sera samples and expertise as part of this
agreement.
During
2006 and 2005, $1,401,473 and $1,364,898, respectively, was spent on research
and development activities. A significant portion of these expenditures have
been on our HIV and human and non-human primate tuberculosis product development
and related regulatory approval efforts.
Employees
At
December 31, 2006, we employed 107 people, including 92 full-time employees.
Effective May 2004, we entered into an
employment
agreement
with
Javan
Esfandiari, Director of Research and Development. Effective May 2006, we entered
into an employment agreement with Lawrence Siebert, President and
Chairman.
Governmental
Regulation
Our
existing and proposed diagnostic products are regulated by the United States
Food and Drug Administration (“FDA”), United States Department of Agriculture
(“USDA”), certain state and local agencies, and/or comparable regulatory bodies
in other countries. This regulation governs almost all aspects of development,
production and marketing, including product testing, authorizations to market,
labeling, promotion, manufacturing and record keeping. Our 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, we must
continue to comply with other FDA requirements applicable to marketed products,
e.g. CLIA regulations (for medical devices). Failure to comply with the FDA’s
requirements can lead to significant penalties, both before and after approval
or clearance.
Most
of
our 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.
11
The
Clinical Laboratory Improvement Act of 1988 (“CLIA”) prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the United States Department of Health
and
Human Services (via the FDA) applicable to the category of examination or
procedure performed. Although a certificate is not required for the Company,
we
consider the applicability of the requirements of CLIA in the design and
development of our 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 our 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.
We
are
also subject to regulations in foreign countries governing products, human
clinical trials and marketing, and may need to obtain approval or evaluations
by
international public health agencies, such as the World Health Organization,
in
order to sell diagnostic products in certain countries. Approval processes
vary
from country to country, and the length of time required for approval or to
obtain other clearances may in some cases be longer than that required for
United States governmental approvals. On the other hand, the fact that our
HIV
diagnostic tests are of value in the AIDS epidemic may lead to some government
process being expedited. The extent of potentially adverse governmental
regulation affecting the Company that might arise from future
legislative or administrative action cannot be predicted.
Prior
to
receiving FDA approval, our rapid HIV tests had been evaluated and approved
for
marketing in several foreign jurisdictions, including Brazil, Mexico, India
and
a number of other nations in the developing world. We completed clinical trials
for the SURE CHECK HIV (now also known as Inverness/Clearview Complete HIV
1/2)
and HIV 1/2 STAT-PAK (now marketed in the United States as Clearview 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. Our pre-market application was approved by
the
FDA on May 25, 2006, and we filed our CLIA waivers in July, 2006. A CLIA waiver
was granted by the FDA for HIV 1/2 STAT-PAK on November 20, 2006. We also have
our first veterinary tuberculosis rapid test under review by the USDA, and
had
our facility inspected by this agency on February 27, 2007.
Environmental
Laws
To
date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Subject
to our available financial resources, our intellectual property strategy is
to:
(1) build our owned intellectual property portfolio around our Dual Path
Platform technology; (2) pursue licenses, trade secrets and know-how within
the
area of lateral flow technology; and (3) develop and acquire proprietary
positions to reagents and new hardware platforms for the development and
manufacture of rapid diagnostic tests.
12
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. We possess know-how to develop tests for multiple conditions
using colored latex which is proprietary. Our buffer formulations enable
extremely long shelf lives of our rapid HIV tests and we believe that this
provides us with an important competitive advantage.
Lateral
Flow Technology and Reagent Licenses
Prior
to
the issuance of our United States patent covering our Dual Path Platform (DPP™),
we owned no issued patents covering lateral flow technology. Therefore we
obtained non-exclusive licenses from Inverness Medical Innovations, Inc. and
Abbott Laboratories with respect to their portfolios of single path lateral
flow
patents. Although we believe our DPP™ is outside of the scope of other lateral
flow patents that we are aware of, we consult with patent counsel, and seek
licenses and/or redesigns of products that we believe to be in our best
interests and those of our stockholders. Because of the costs and other
negative consequences of time-consuming patent litigation, we often attempt
to
obtain a license on reasonable terms. Nevertheless there is no assurance that
Abbott’s and/or Inverness’ lateral flow patents will not be challenged or that
other patents containing claims relevant to our products will be not be granted
and that licenses to such patents if any will be available on reasonable terms,
if any.
In
the
event that it is determined that a license is required and it is not possible
to
negotiate a license agreement under a necessary patent, we may be able to modify
the applicable product such that a license would not be necessary. However,
this
alternative could delay or limit our ability to sell these products in the
United States and/or other markets, which would adversely affect our results
of
operations, cash flows and business.
The DPP™ technology provides improved sensitivity as compared with conventional platforms in a number of preliminary studies using well characterized HIV, Tuberculosis and other samples. We anticipate signing new development projects based upon these new technologies in the near future that will provide new product applications and marketing opportunities. We have also filed patent applications relating to our veterinary tuberculosis rapid tests and improvements to the sample collection method in our “barrel” (SURE CHECK) device which is one of the formats which Inverness is marketing. On March 20, 2007 we were issued United States Patent #7,192,721 which covers the method and use of a specific combination of antigens on a lateral flow test for the detection of antibodies to tuberculosis in multiple non-primate animal species.
The
peptides used in our rapid HIV tests are patented by Adaltis Inc. and are
licensed to us under a 10-year non-exclusive license agreement dated August
30,
2002, which was recently amended to reduce the royalty rate. We also have
licensed the antigens used in our tuberculosis and Chagas disease tests. We
have
concluded license agreements related to intellectual property rights associated
with HIV- 1, and are negotiating the terms of a license agreement for HIV-2,
which we hope to close during 2007.
Our
Business Prior to the Merger
We
were
incorporated on May 14, 1999 in the state of Nevada under the name “Trading
Solutions.com, Inc.” We were originally organized to develop a trading school
designed to educate people interested in online investing. We offered courses
for beginners as well as experienced traders, consisting of theory sessions
linked closely with practical hands-on training. We offered individual training,
small group sessions and seminars focusing on online trading and various
computer-related subjects.
We
were
not successful with our online trading school, and on August 18, 2001, we
entered into an exchange agreement with Springland Beverages, Inc., an Ontario,
Canada corporation. Pursuant to the agreement, we exchanged 15,542,500 shares
of
common stock for all the issued and outstanding shares of Springland Beverages,
Inc., making Springland our wholly-owned subsidiary. Concurrent with the
agreement, there was a change in control and we changed our business plan to
focus on developing and marketing soft drinks. Springland Beverages, Inc. was
not able to implement its business plan and failed to achieve profitable
operations. On March 28, 2003, we sold the subsidiary back to its president,
leaving us with no immediate potential revenue sources.
Since
the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved
in
developing, manufacturing, selling and distributing tests, including rapid
tests
beginning in 1995, for a number of diseases and for pregnancy.
13
The
Merger
On
May 5,
2004, Chembio Diagnostic Systems Inc. completed the merger through which it
became our wholly-owned subsidiary, and through which the management and
business of Chembio Diagnostic Systems Inc. became our management and business.
As part of this transaction, we changed our name to Chembio Diagnostics,
Inc.
Glossary
|
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human Immunodeficiency
Virus, HIV.
|
|
ANTIBODY
|
A
protein which is a natural part of the human immune system produced
by
specialized cells to neutralize antigens, including viruses and bacteria
that invade the body. Each antibody producing cell manufactures a
unique
antibody that is directed against, binds to and eliminates one, and
only
one, specific type of antigen.
|
|
ANTIGEN
|
Any
substance which, upon entering the body, stimulates the immune system
leading to the formation of antibodies. Among the more common antigens
are
bacteria, pollens, toxins, and viruses.
|
|
ARVs
|
Anti-Retroviral
Treatments for AIDS
|
|
CD-4
|
The
CD4+ T-lymphocyte is the primary target for HIV infection because
of the
affinity of the virus for the CD4 surface marker. Measures of CD4+
T-lymphocytes are used to guide clinical and therapeutic management
of
HIV-infected persons.
|
|
CDC
|
United
States Centers for Disease Control and Prevention
|
|
CHAGAS
DISEASE
|
Chagas
disease is an infection caused by the parasite Trypanosoma
cruzi.
Worldwide, it is estimated that 16 to 18 million people are infected
with
Chagas disease; of those infected, 50,000 will die each
year.
|
|
CHAI
|
Clinton
HIV/AIDS Initiative
|
|
CLIA
|
Clinical
Laboratory Improvement Act
|
|
DIAGNOSTIC
|
Pertaining
to the determination of the nature or cause of a disease or condition.
Also refers to reagents or procedures used in diagnosis to measure
proteins in a clinical sample.
|
|
EITF
|
Emerging
Issues Task Force
|
|
FASB
|
Financial
Accounting Standards Board
|
|
FDA
|
United
States Food and Drug Administration
|
|
FDIC
|
Federal
Deposit Insurance Corporation
|
|
HIV
|
Human
Immunodeficiency Virus. HIV (also called HIV-1), a retrovirus, causes
AIDS. A similar retrovirus, HIV-2, causes a variant disease, sometimes
referred to as West African AIDS. HIV infection leads to the destruction
of the immune system.
|
|
IgG
|
IgG
or Immunoglobulin are proteins found in human blood. This protein
is
called an “antibody” and is an important part of the body’s defense
against disease. When the body is attacked by harmful bacteria or
viruses,
antibodies help fight these invaders.
|
|
MOH
|
Ministry
of Health
|
|
MOU
|
Memoranda
of Understanding
|
|
NGO
|
Non-Governmental
Organization
|
|
OTC
|
Over-the-Counter
|
|
PEPFAR
|
The
President’s Emergency Plan for AIDS Relief
|
|
PMA
|
Pre-Marketing
Approval
|
|
PROTOCOL
|
A
procedure pursuant to which an immunodiagnostic test is performed
on a
particular specimen in order to obtain the desired
reaction.
|
|
REAGENT
|
A
chemical added to a sample under investigation in order to cause
a
chemical or biological reaction which will enable measurement or
identification of a target substance.
|
|
RETROVIRUS
|
A
type of virus which contains the enzyme Reverse Transcriptase and
is
capable of transforming infected cells to produce diseases in the
host
such as AIDS.
|
|
Ryan
White CARE Act
|
The
Ryan White Comprehensive AIDS Resources Emergency (CARE) Act is Federal
legislation that addresses the unmet health needs of persons living
with
HIV disease by funding primary health care and support services.
The CARE
Act was named after Ryan White, an Indiana teenager whose courageous
struggle with HIV/AIDS and against AIDS-related discrimination helped
educate the nation.
|
|
SAB
|
Staff
Accounting Bulletin
|
|
SENSITIVITY
|
Refers
to the ability of an assay to detect and measure small quantities
of a
substance of interest. The greater the sensitivity, the smaller the
quantity of the substance of interest the assay can detect. Also
refers to
the likelihood of detecting the antigen when present.
|
|
SFAS
|
Statement
of Financial Accounting Standards
|
|
SPECIFICITY
|
The
ability of an assay to distinguish between similar materials. The
greater
the specificity, the better an assay is at identifying a substance
in the
presence of substances of similar makeup.
|
|
SPUTUM
|
Expectorated
matter; saliva mixed with discharges from the respiratory
passages
|
|
TB
|
Tuberculosis
(TB) is a disease caused by bacteria called Mycobacterium tuberculosis.
The bacteria usually attack the lungs. But, TB bacteria can attack
any
part of the body such as the kidney, spine, and brain. If not treated
properly, TB disease can be fatal. TB is spread through the air from
one
person to another. The bacteria are put into the air when a person
with
active TB disease of the lungs or throat coughs or sneezes. People
nearby
may breathe in these bacteria and become infected.
|
|
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
|
14
|
ITEM
2.
|
DESCRIPTION
OF PROPERTY
|
Our
administrative offices and research facilities are located in Medford, New
York.
We lease approximately 15,600
square feet of industrial space for $9,671 per month. The space is utilized
for
R&D (approximately 1,000 square feet), offices (approximately 5,100 square
feet) and production (approximately 9,500 square feet). The lease term expires
on April 30, 2007, and we have an option to renew for an additional two years.
Additional space may be required as we expand our research and development
activities. We do not foresee any significant difficulties in obtaining any
required additional facilities.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From
time
to time, we may be involved in litigation relating to claims arising out of
our
operations in the normal course of business. We know of no material, existing
or
pending legal proceedings against us, nor are we involved as a plaintiff in
any
material proceeding or pending litigation. There are no proceedings in which
any
of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or
has a
material interest that is adverse to our interest.
Settlement
with StatSure Diagnostic Systems, Inc.
(
formerly Saliva Diagnostic Systems, Inc.)
On
September 29, 2006, the Company and StatSure Diagnostic Systems, Inc.
(“StatSure) entered into a Settlement Agreement pursuant to which all matters
in
their litigation regarding StatSure’ barrel patent and other matters were
settled. In addition the parties entered into the Joint HIV Barrel Product
Commercialization Agreement, which provides that the parties will equally share
in the profits relating to all “HIV Barrel Products” after reimbursement to the
Company of our manufacturing and related costs, as defined, and that they will
act jointly in the HIV barrel field. The settlement combines each company’s HIV
barrel intellectual property, including an exclusive manufacturing license
from
StatSure to the Company of its barrel patent for all HIV applications, thereby
ensuring our exclusive right to manufacture.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
NONE.
15
PART
II
|
ITEM
5.
|
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 table
below
sets forth the high and low bid prices per share of our common stock. These
prices represent inter-dealer quotations without retail markup, markdown, or
commission and may not necessarily represent actual transactions. We completed
a
1 for 17 reverse stock split on March 12, 2004, and all of the prices in
this table have been adjusted to reflect this split.
|
Fiscal
Year 2006
|
High
Bid
|
Low
Bid
|
|
First
Quarter
|
$0.75
|
$0.33
|
|
Second
Quarter
|
$1.15
|
$0.65
|
|
Third
Quarter
|
$0.85
|
$0.68
|
|
Fourth
Quarter
|
$0.92
|
$0.63
|
|
|
||
|
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
|
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.
16
Holders
As
of
January
4, 2007, there were approximately 815 record owners of our common
stock.
Dividends
We
have never
paid cash dividends on our common stock and we have 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
each of
our series A, series B and series C preferred stock generally prohibit us from
making any distribution with respect to any equity securities that by their
terms do not rank senior to the applicable series A, series B or series C
preferred stock.
Recent
Sales Of Unregistered Securities; Use Of Proceeds From Registered Securities
On
November 30, 2006, pursuant to the terms of a consulting contract with The
Investor Relations Group (“IRG”), we issued IRG 8,334 shares of common stock and
warrants to purchase 8,334 shares of common stock. The conversion price for
these warrants is $.70 per share and the warrants expire on November 30,
2010. We relied on Section 4(2) of the Securities Act of 1933 as the basis
for our exemption from registration of these issuances. The investor in the
issuance was an accredited investor of the Company.
On
December 1, 2006, we issued to Bio Business Science and Development, LTDA,
warrants to purchase 41,417 shares of common stock. The exercise price of
these warrants is $0.81 per share. We relied on Section 4(2) of the
Securities Act of 1933 as the basis for our exemption from registration of
this
issuance. The investor in the issuance was an accredited investor of the
Company.
On
December 27, 2006, Avi Pelossof exercised warrants to purchase 100,000
shares of common stock. The exercise price was $0.60 per share and we received
$60,000 in cash for this exercise. We relied on Section 4(2) of the
Securities Act of 1933 as the basis for our exemption from registration of
this
issuance. The investor in this issuance was an accredited investor of the
Company.
|
ITEM
6.
|
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.
17
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 our actual results,
performance, or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Specifically, 1) our ability to obtain necessary regulatory
approvals for our products; and 2) our ability to increase revenues and
operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continues” or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
Overview
The
following management discussion and analysis relates to the business of the
Company and its subsidiaries, which develop,
manufacture, and market rapid diagnostic tests that detect infectious diseases.
Our main products presently commercially available are three rapid tests for
the
detection of HIV antibodies in whole blood, serum and plasma samples, two of
which were approved by the FDA in 2006; the third is sold for export only.
These
products all employ single path lateral flow technology. We also have a rapid
test for Chagas disease (a parasitic disease endemic in Latin America) as well
as a line of rapid tests for tuberculosis, including tests for tuberculosis
in
animals for which USDA approval is pending. Our products are sold to medical
laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail establishments.
Our products are sold either under our STAT PAK® or SURE CHECK ® registered
trademarks or the private labels of our marketing partners, such as is the
case
with the Clearview® label owned by Inverness Medical Innovations, Inc., which is
our exclusive marketing partner for our rapid HIV test products in the United
States.
Recent
Events
On
March
30, 2006, we sold $1 million of additional Series B Preferred Stock to a Series
B Preferred shareholder pursuant to provisions of the January 2005 Series B
9%
Preferred Stock financing agreements. Such provisions were exclusive to said
shareholder.
On
May
30, 2006, we received approval of our Pre-Market Applications (“PMAs”) from the
FDA for our SURE CHECK(R) HIV 1/2 and HIV 1/2 STAT-PAK(TM) rapid tests. The
approved PMAs allow us to market our rapid HIV tests to clinical laboratories
and hospitals in the United States. FDA approval also allows us to further
expand our international marketing efforts into countries that require
regulatory approval in the manufacturer’s country of domicile.
New
labeling for these products to be sold under the Inverness Clearview labels
were
submitted and approved by the FDA during the first quarter of 2007, thereby
allowing Inverness to begin marketing these products in the United States,
which
has also occurred during the first quarter of 2007.
On
June
29, 2006, we borrowed $1,300,000 from a group of four institutional investors
as
a bridge financing arrangement. The loan was repaid in part on September 29,
2006 and the balance converted on October 5, 2006 into Series C Preferred Stock.
The loan was secured by a lien on our assets.
On
September 29, 2006 and October 5, 2006, we completed the Series C Preferred
Stock Offering for $8,150,000. A portion of the proceeds were used to repay
the
loan borrowed on June 29, 2006.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006
AS COMPARED WITH THE YEAR ENDED DECEMBER 31, 2005
Revenues:
Revenues
are comprised of $6.294 million in net product sales and $.208 million in grants
and development income for the year ended December 31, 2006 as compared with
$3.360 million in net product sales, $.250 million in license revenue and $.331
million in grants and development income for the year ended December 31, 2005.
The increase in net product sales is attributable to increased sales of our
HIV
product of $2.034 million and of our Chagas product of $1.147 million which
were
partially offset by decreased sales of our pregnancy test kit of $.116 million
and decreases in other product sales aggregating $.131 million. The decrease
in
license revenue of $.250 million was due to a technology transfer agreement
that
occurred in 2005 and was not recurring. The decrease in grant and development
income of $.123 million was due to grants received in 2005 that weren’t
continued or awarded in 2006. We are expecting new grants for 2007
that will maintain 2006 levels.
18
Net
product sales for 2006 increased 87% compared to 2005. HIV net product sales
increased 85% in 2006 compared to 2005. We believe that sales of our HIV
products will continue to increase in 2007 both as a result of the international
marketing strategies that were implemented in 2006 and from the sales through
our marketing partner Inverness Medical to the United States market as a result
of approval from the United States Food and Drug Administration (FDA). We also
received our first significant order for our Chagas test (Chagas is a disease
which is primarily found in Latin America), in the amount of $1.2 million which
it shipped in 2006, a $1.1 million dollar increase over 2005. These sales are
not expected to continue at this level in 2007.
Net
product sales for the three months ended December 31, 2006
increased 93% to $2.624 million compared to the same period in 2005. HIV product
sales increased 101% to $2.464 million for the three months ended December
31,
2006 compared to the same period in 2005.
Gross
Margin:
Gross
margin on net product sales for the year ended December 31, 2006 was 28.7%,
as
compared to 22.3% for the year ended December 31, 2005. 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.
The
gross
margin on net product sales for the three months ended December 31, 2006
declined to 32.2% from 38.1% in the comparable 2005 period. This was due in
part
to the incremental costs of producing a large 990,000 unit order for the HIV
barrel product for Mexico, more than half of which was shipped during the fourth
quarter of 2006. Incremental costs included increased labor costs due to a
second shift and overtime, increased overhead costs for factory supervision,
and
increased material costs related to acceptance of test components manufactured
in-house as well as those purchased from third parties. In addition, product
mix
also contributed to the decline in gross margin percentage for the fourth
quarter of 2006 as compared with the fourth quarter of 2005.
Research
and Development:
Research
and development expenses for
the
year ended December 31, 2006 were
$1,402,000 compared with $1,365,000 for
the
year ended December 31, 2005.
This
category includes costs incurred for regulatory approvals, product evaluations
and registrations. Expenses for Clinical & Regulatory Affairs, totaled
$323,000 for
the
year ended December 31, 2006,
a
decrease of $88,000 compared to the
year
ended December 31, 2005.
This
category also includes costs for clinical studies which decreased by $78,000
and
a reduction in outside regulatory consultants of $28,000 in 2006 compared to
2005, which were partially offset by an increase in salaries of $14,000. The
costs related to the clinical trials and consulting in 2005 were related to
the
evaluation of our HIV tests in preparation and follow up of our FDA
Pre-Marketing Approval (“PMA”) application submitted in February of 2005.
Expenses other than Clinical & Regulatory increased $124,000 in 2006
compared to 2005 and were related to increased salaries and wage-related costs
of $107,000 for new hires and bonuses in the R&D group, and for increases in
employee benefits (including stock option expenses per SFAS No. 123R
“Share-Based Payment” (“SFAS 123R”) 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) of $40,000, increase in temporary labor of $34,000 offset by
a
decrease in travel and entertainment of $14,000, and decreased grant payments
to
a university of $54,000.
Subject
to cash availability, we currently plan to increase our spending on research
and
development in 2007 because we believe such spending will result in the
development of new and innovative products that are based on the DPP™
technology.
We
have
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
We
have
filed an application with the United States Department of Agriculture (USDA)
to
license our rapid assay, PrimaTB STAT-PAK™. A final set of clinical
reproducibility trials was successfully completed during the fourth quarter
of
2006 and the facility inspection, which is the final step to USDA licensure,
has
been completed. Subject to a satisfactory outcome of the facility inspection,
we
anticipate that commercialization will begin in the second quarter of 2007,
though there is no assurance that this commercialization will successfully
occur.
19
Rapid
Test for the detection of antibodies to active pulmonary tuberculosis in
multiple host species
We
have
completed development and are in final validation stage on a series of rapid
lateral-flow assays for the detection of veterinary TB in multiple host species
including; cattle, cervids, badgers, camels, elephants, and exotic wildlife
species. The family name for the technology is VetTB STAT-PAK™. We anticipate
commercialization of these products to start in the second quarter of 2007
for
at least the ElephantTB STAT-PAK to be followed by veterinary tests for cervids
(CervidTB STAT-PAK), cattle (BovidTB STAT-PAK) and camelids (CamelidTB
STAT-PAK), although there are no assurances that this commercialization will
be
successful.
Dual
Path Platform (DPP™)
During
the fourth quarter of 2006 and 2007 year-to-date, significant additional
progress was made in developing prototypes of the Dual Path Platform, including
a new HIV test in this format and incorporating an oral fluid collection system
that would be used with this DPP HIV product. Generally, we have already seen
a
great amount of interest in this platform as a result of our initial business
development efforts for collaborative and licensing opportunities for this
technology; this interest existed prior to the issuance of the DPP™ patent
because it represents a way to participate in the lateral flow rapid test market
that may not have been otherwise available to certain companies and because
of
its performance features, which we are increasingly able to demonstrate. Now
that the patent has been issued, we intend to more vigorously pursue discussions
with several parties and also develop a strategic plan for the long term
development of this technology. We believe we can extend this technology to
many
applications not only within the infectious disease field, but to many other
fields as well.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense increased $1,930,000 to $5,195,000 in the
year ended December 31, 2006 compared with 2005. This increase was attributable
to increased staff and bonuses in the accounting, administration and sales
and
marketing departments of $505,000, increase in employee stock option expenses
(per SFAS 123R) of $132,000 and a decrease relating to recruiting expenses
of
$104,000. Increased sales resulted in an increase in royalties, advertising
and
related materials of $48,000 and commissions of $159,000 as well as increased
consulting costs of $109,000. In addition there was an increase of $355,000
in
costs regarding investor relations, and $114,000 increased expenses related
to
our board of directors (includes option costs per 123R), increases in travel,
entertainment and show expenses of $126,000, increased depreciation expense
(related to ERP system and leasehold improvements) of $89,000, increase in
other
expenses of $40,000 and increased legal and accounting expenses of $363,000
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 of $20,000 related to Sarbanes-Oxley
compliance.
As
our
sales of rapid HIV test products increase, we expect 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.
In September 2006, we entered into agreements with Inverness,
which
provide a license to the Company to market our lateral flow devices for which
we
pay a royalty of either 5% or 8.5% of our net sales of the applicable product,
depending on the market to which the sales are made.
Other
Income and Expense:
Interest
expense increased by $371,000 for the year ended December 31, 2006 compared
with
the year ended December 31, 2005. This was primarily attributable to the
valuation of the bridge warrants (we borrowed $1.3 million in June of 2006
at a
rate of 2% for 90 days plus warrants exercisable at $.70). Some of this debt
was
converted into the Series C Offering which allowed for a discount of 12.5%,
this
resulted in a loss on the extinguishment of $87,000. Interest income for the
year ended December 31, 2006 decreased $10,000. In addition, during 2006, we
received a marketing grant from New York State of $25,000.
20
LIQUIDITY
AND CAPITAL RESOURCES
We
had a
working capital surplus of $5,113,000 at December 31, 2006 and a working capital
surplus of $650,000 at December 31, 2005. On September 29, 2006 and October
5,
2006, we completed the Series C Preferred Stock Offering for $8,150,000. On
June
29, 2006, we borrowed $1,300,000 which was partially repaid in cash
(approximately $700,000) from the Series C Preferred Stock Offering proceeds,
and the remainder (approximately $600,000) was repaid through conversion to
the
Series C Preferred Stock offering, as described in the Recent Events section
above and more fully in Note 1 of the consolidated financial statements. On
March 30, 2006, we completed a transaction related to the Series B Preferred
Stock Offering under which we raised $1,000,000 (before costs) in the form
of 9%
Convertible Series B Preferred Stock and associated warrants (“Series B
Offering”). The proceeds from the Series C Offering, the June 29, 2006 bridge
loan and the Series B Offering have been and are being used primarily for sales
and marketing, research and development, intellectual property, and also for
working capital, investor relations and capital expenditures.
We
believe are resources are sufficient to fund our needs through the end of 2007
and into early 2008. Our liquidity and cash requirements will depend on
several factors. These factors include (1) the level of revenue growth; (2)
the
extent to which, if any, that revenue growth improves operating cash flows;
(3)
our investments in research and development, facilities, marketing, regulatory
approvals, and other investments 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 additional capital.
The
following table lists the future payments required on our debt and any other
contractual obligations as of December 31, 2006:
|
OBLIGATIONS
|
Total
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
Greater
than 5 Years
|
|||||||||||
|
Long
Term Debt(1)
|
$
|
93,160
|
$
|
93,160
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Capital
Leases (2)
|
51,498
|
44,417
|
7,081
|
-
|
-
|
|||||||||||
|
Operating
Leases
|
38,683
|
38,683
|
-
|
-
|
-
|
|||||||||||
|
Other
Long Term Obligations(3)
|
707,500
|
442,500
|
177,500
|
25,000
|
62,500
|
|||||||||||
|
Total
Obligations
|
$
|
890,841
|
$
|
618,760
|
$
|
184,581
|
$
|
25,000
|
$
|
62,500
|
||||||
|
(1)
|
This
includes the balance of accrued
interest.
|
|
(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 Recent Events above.
On
September 29, 2006, we executed several agreements by and among the Company,
Inverness Medical Innovations, Inc. (“Inverness”) and StatSure Diagnostic
Systems, Inc. (“StatSure”). Pursuant to these agreements, Inverness is
marketing our FDA approved rapid HIV tests, we have a nonexclusive license
to
Inverness’ lateral flow patents, and the Company and StatSure settled their
patent litigation. The distribution agreements contain gross margin sharing
formulae among Inverness, the Company and StatSure. In addition, we have the
exclusive right and duty to manufacture the products marketed by Inverness
under
all the agreements, and we have the right to subcontract manufacturing, but
not
sublicense or subcontract our rights or obligations.
First,
we
executed an HIV Barrel License, Marketing and Distribution Agreement among
the
Company, Inverness and StatSure. This agreement covers our FDA-approved SURE
CHECK® HIV 1/2 (“SURE CHECK”), a lateral flow rapid HIV test employing a
proprietary barrel system that is an integrated single-use rapid HIV antibody
detection screening test. Some terms of the agreement are:
| · |
Inverness
will market the SURE CHECK product under Inverness brands globally
[subject only to certain existing international agreements that each
of
the Company and StatSure may keep in place for up to one year];
|
21
| · |
Inverness
will exclusively market SURE CHECK as well as any new HIV products
in the
“barrel field” that are developed, and may not compete with any products
in the “barrel field” as defined in the agreement worldwide
;
|
| · |
The
Company and StatSure have each granted Inverness exclusive rights
to their
intellectual property in the HIV barrel field;
|
| · |
Inverness
has a first right to negotiate agreements to market and distribute
any of
our new HIV antibody detection tests, including products that may
incorporate our patent-pending Dual Path Platform (DPP(TM));
and
|
| · |
As
described above, the SURE CHECK HIV 1/2 product has been re-labeled
Clearview Complete HIV 1/2 and Inverness has commenced marketing
of this
product. CLIA waiver for this product is still
pending.
|
In
addition, we executed an HIV Cassette License, Marketing and Distribution
Agreement with Inverness. This agreement covers our FDA-approved HIV 1/2
STAT-PAK(TM) lateral flow rapid HIV test employing a cassette system that is
a
single-use rapid HIV antibody detection screening test. Some of the terms of
the
agreement are:
| · |
Inverness
will market this product in the United States market only, and we
have a
non-exclusive license under the Inverness lateral flow patents to
continue
to market the product under our brand in the rest of the world;
|
| · |
Inverness
may bring a competitive HIV cassette product to the United States
market,
but in that event we can expand our lateral flow license for this
product
to the United States and have other options under the
agreement;
|
| · |
We
received a non-exclusive license under the Inverness lateral flow
patents
for our HIV 1/2 STAT-PAK cassette for marketing outside the United
States; and
|
| · |
As
described above, the HIV 1/2 STAT-PAK product has been re-labeled
Clearview HIV 1/2 STAT-PAK and Inverness has commenced marketing
of this
product. CLIA waiver for this product has been
granted.
|
The
Company and Inverness also executed a Non-Exclusive License, Marketing and
Distribution Agreement, which covers our other lateral flow rapid tests,
including but not limited to our HIV 1/2 STAT-PAK(TM) Dipstick Some of the
terms
of this agreement are:
| · |
We
received a non-exclusive license under the Inverness lateral flow
patents
for our HIV 1/2 STAT-PAK Dipstick for marketing outside the United
States;
|
| · |
We
received a worldwide non-exclusive license to manufacture and market
a
number of other Company-branded products under the Inverness lateral
flow
patents, including all of our rapid tests for human and veterinary
and
tuberculosis, Chagas disease, and tests for other defined emerging
and
neglected diseases;
|
| · |
Inverness
has the right to market each of these products (except the HIV 1/2
STAT
PAK Dipstick) under an Inverness brand pursuant to an agreed-upon
pricing
and margin sharing formula similar to the other agreements;
and
|
| · |
The
Company and StatSure also entered into a Settlement Agreement pursuant
to
which all matters in their litigation regarding StatSure’s barrel patent
and other matters were settled. Under the terms of this agreement,
the
parties will equally share in the profits relating to HIV barrel
products
after reimbursement to the Company of our manufacturing and related
costs,
as defined, and the parties will act jointly in the HIV barrel field.
The
settlement combines each company’s HIV barrel intellectual property,
including an exclusive manufacturing license from StatSure to the
Company
of its barrel patent for all HIV applications, thereby ensuring our
exclusive right to manufacture, as well as Inverness’ right to market
though the marketing license that StatSure granted Inverness under
the
three way agreement. In addition, pursuant to this Agreement, StatSure
and
the Company will share equally the net sales to Inverness of HIV
barrel
products after these deductions.
|
22
In
July
2006, we submitted to the FDA CLIA (“Clinical Laboratory Improvement Act”)
waiver applications for our HIV 1/2 STAT-PAK® and SURE CHECK® HIV 1/2 products.
These waivers are essential in order to market FDA approved products to the
physician office laboratory and public health segments of the United States
market. A CLIA waiver was granted by the FDA for HIV 1/2 STAT PAK (now Clearview
HIV 1/2 STAT-PAK) in November of 2006. The CLIA waiver application concerning
the HIV barrel product formerly submitted to the FDA as SURE CHECK HIV 1/2
and
now approved as Clearview Complete HIV 1/2 is still pending at the FDA.
There
have been many
developments recently regarding the
market for HIV testing in the United States. For example, the United States
Centers for Disease Control recently issued final revised recommendations
advocating routine HIV testing for all Americans between the ages of 13 and
64,
a White House 2007 budget request for $90 million to test an additional three
million Americans using rapid HIV tests is being negotiated by Senate and House
conference committees, and the FDA adopted guidelines recommended by its Blood
Products Advisory Committee that set forth the conditions under which rapid
HIV
tests could be approved for direct over-the-counter sales to United States
consumers. All of these developments bode well for the expansion of the United
States rapid HIV test market. However, there are still many obstacles and
uncertainties which must be overcome before these developments become a reality
that
will
result in realizable opportunities for the Company, and there is no assurance
that any of these developments will be realized.
During
2005, we established offices in Nigeria and Tanzania, and we believe these
offices will be significant in our continuing efforts to become part of the
national testing protocols in many countries in Africa. Our STAT-PAK is
designated as the confirmatory test in all of the national rapid HIV testing
protocols in the Republic of Uganda, and in February of 2006 STAT-PAK was
designated in four of the eight parallel testing algorithms (two tests used
on
each patient) adopted by the Nigerian Ministry of Health in its Interim National
Testing Algorithm. We have made some progress towards having our HIV products
designated in other countries where we have focused our efforts, though this
progress is more uncertain and slower than we anticipated it would be. We have
registered our products and have arrangements with distribution partners in
certain of these countries and we are in negotiations for similar arrangements
in other countries. We believe that our strategy of establishing offices in
these challenging markets is a very effective way to obtain sustainable and
supportable business.
In
2006,
we were 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, we have agreed to offer our HIV STAT-PAK Dipstick, our lowest cost
rapid HIV test product, at a reduced price in the expectation that we will
receive significant order volume not otherwise obtainable. If these order
volumes are not realized, we have the right to terminate the agreement or
renegotiate pricing. We are the only United States-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, we are now actively engaged with CHAI in developing sales
opportunities in many of these countries. Although in some of these countries
we
have already made substantive sales efforts, there are many more where this
is
not the case. To date we have not derived any tangible results from our being
selected by the Clinton HIV/AIDS Initiative, though these efforts continue.
There is no commitment or assurance that either our direct efforts to establish
additional distributors and/or local assembly, or our activities through CHAI
will materialize into meaningful sales.
Our
technology transfer and supply agreement in Brazil is moving forward. We shipped
$1,515,000
of
rapid
HIV test components to this customer in the year
ended December 31, 2006, a 28% increase over the same period in 2005.
In
November 2006, we received an order for 990,000 units of our Sure Check product
from our distributor in Mexico, a division of Bio-Rad Laboratories, Inc. This
distribution agreement is the one exception to our otherwise global exclusive
agreement with Inverness as it relates to this product. Approximately half
of
this order was shipped during the fourth quarter of 2006, and the balance was
shipped during the first quarter of 2007. Absent other arrangements, this
exception to Inverness’ global exclusivity will be eliminated on September 29,
2007.
We
also
received an order for $1.2 million, which we shipped in 2006, to supply our
Chagas disease rapid test. We have shipped this order in full. This procurement
was made by the Pan American Health Organization, headquartered in Washington
D.C., which is affiliated with the World Health Organization. The procurement
was used to implement a nationwide Chagas screening program for all children
under the age of 10 in endemic regions of Bolivia. We are actively looking
at
developing additional business opportunities for this product in Bolivia, and
other markets in Latin America that are impacted by this disease.
23
We
have
hired a senior diagnostics marketing executive to focus on our Tuberculosis
products, both for veterinary and human TB. Our non-human primate Tuberculosis
product is currently under review by the United States Department of Agriculture
(USDA), and we hope to receive USDA approval during
the second quarter of 2007
for our
first product, PrimaTB STAT-PAK™ subject only now to a satisfactory facility
inspection by the USDA which has been scheduled. We plan to submit additional
veterinary Tuberculosis products to the USDA, including a cattle Tuberculosis
test, subject to having the necessary performance data.
Critical
Accounting Policies and Estimates
The
preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, research and development costs, valuation of
inventory, valuation of long-lived assets and income taxes. These policies,
and
the related procedures, are described in detail below.
Revenue
Recognition -
We
sell
our products directly through our sales force and through distributors. Revenue
from direct sales of our product is recognized upon shipment to the
customer. Income from research grants are recognized when earned. Sales are
recorded net of discounts, rebates and returns.
Research
& Development Costs -
Research
and development activities consist primarily of new product development,
continuing engineering for existing products, regulatory and clinical trial
costs. Costs related to research and development efforts on existing or
potential products are expensed as incurred.
Valuation
of Inventories -
Inventories
are stated at the lower of cost or market, using the first-in, first-out method
(FIFO) to determine cost. Our policy is to periodically evaluate the market
value of the inventory and the stage of product life cycle, and record a reserve
for any inventory considered slow moving or obsolete. For example, each
additional 1% of obsolete inventory would reduce such inventory by approximately
$11,000.
Allowance
for doubtful accounts -
Our
policy is to review our accounts receivable on a periodic basis, no less than
monthly. On a quarterly basis an analysis is made of the adequacy of our
allowance for doubtful accounts, and adjustments are made accordingly. The
current allowance is approximately 3.09% of accounts receivable. For example,
each additional 1% of accounts receivable that becomes uncollectible would
reduce such balance of accounts receivable by approximately
$13,500.
Income
Taxes
-
Income
taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” SFAS
No. 109 requires the asset and liability method of accounting for deferred
income taxes. Deferred tax assets and liabilities are determined based on
the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period
are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. For example, if we do not become profitable, we may be
unable
to utilize our deferred tax asset, which approximates $7,183,000 and $6,128,000
at December 31, 2006 and 2005, respectively.
SFAS
109
also requires that a valuation allowance be established when it is more likely
than not that all or a portion of a deferred tax asset will not be realized.
A
review of all available positive and negative evidence needs to be considered,
including a company’s current and past performance, the market environment in
which the company operates, length of carryback and carryforward periods and
existing contracts that will result in future profits.
Forming
a
conclusion that a valuation allowance is not needed is difficult when there
is
negative objective evidence such as cumulative losses in recent years.
Cumulative losses weigh heavily in the overall assessment. As a result, we
determined that it was appropriate to establish a valuation allowance for the
full amount of our deferred tax assets.
24
The
above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction
is
specifically dictated by accounting principles, generally accepted in the United
States of America, with no need for management’s judgment in their application.
There are also areas in which management’s judgment in selecting any viable
alternative would not produce a materially different result. See our audited
financial statements and notes thereto which contain accounting policies and
other disclosures required by accounting principles, generally accepted in
the
United States of America.
|
ITEM
7.
|
FINANCIAL
STATEMENTS
|
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.
|
ITEM
8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
Not
applicable.
|
ITEM
8A.
|
CONTROLS
AND PROCEDURES
|
As
of the
end of the period covered by this report, we conducted an evaluation under
the
supervision and with the participation of the principal executive officer and
principal financial officer, of our 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 our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in reports that we file or submit 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
our internal controls over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
|
ITEM
8B.
|
OTHER
INFORMATION
|
Not
applicable.
PART
III
|
ITEM
9.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(A) OF THE EXCHANGE ACT
|
Directors
and Executive Officers
Lawrence
A. Siebert (50),
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.
25
Richard
J. Larkin (50),
Chief
Financial Officer. Mr. Larkin was appointed as Chief Financial Officer of
Chembio Diagnostics, Inc. upon consummation of the merger. Mr. Larkin oversees
our financial activities and information systems. Mr. Larkin has been the Chief
Financial Officer of Chembio Diagnostic Systems Inc. since September 2003.
Prior
to joining Chembio Diagnostic Systems Inc., Mr. Larkin served as CFO at Visual
Technology Group from May 2000 to September 2003, and also led their consultancy
program that provided hands-on expertise in all aspects of financial service,
including the initial assessment of client financial reporting requirements
within an Enterprise
Resource Planning (Manufacturing) environment through training and
implementation. Prior to joining VTG, he served as CFO at Protex International
Corporation from May 1987 to January 2000. Mr. Larkin holds a BBA in Accounting
from Dowling College and is a member of the American Institute of Certified
Public Accountants.
Javan
Esfandiari (40),
Director
of Research and Development. Mr. Esfandiari joined Chembio Diagnostic Systems,
Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner of Sinovus
Biotech AB where he served as Director of Research and Development concerning
lateral flow technology until Chembio Diagnostic Systems Inc. acquired Sinovus
Biotech AB in 2000. From 1993 to 1997, Mr. Esfandiari was Director of Research
and Development with On-Site Biotech/National Veterinary Institute, Uppsala,
Sweden, which was working in collaboration with Sinovus Biotech AB on
development of veterinary lateral flow technology. Mr. Esfandiari received
his
B.Sc. in Clinical Chemistry and his M. Sc. in Molecular Biology from Lund
University, Sweden. He has published articles in various veterinary journals
and
has co-authored articles on tuberculosis serology with Dr.
Lyashchenko.
Richard
Bruce (52),
Vice
President, Operations. Mr. Bruce was hired in April 2000 as Director of
Operations. He is responsible for manufacturing, maintenance, inventory,
shipping, receiving, and warehouse operations. Prior to joining Chembio
Diagnostic Systems Inc., he held director level positions at Wyeth Laboratories
from 1984 to 1993. From 1993 to 1998, he held various management positions
in
the Operations department at bioMérieux Inc. 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 (55), 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 (44), VP
of
Regulatory Affairs, QA and QC. Mr. Ippolito joined Chembio in June 2005. He
has
over twenty years experience with in vitro diagnostics for infectious diseases,
protein therapeutics, vaccine development, Process Development, Regulatory
Affairs and Quality Management. Over the years, Mr. Ippolito has held Vice
President level positions at Biospecific Technologies, Corp. from 2000 - 2005,
Director level positions in Quality Assurance, Quality Control, Process
Development and Regulatory Affairs at United Biomedical, Inc. from 1987 - 2000.
Mr. Ippolito is the Course Director for “drug development process” and “FDA
Regulatory Process” for the BioScience Certificate Program at the New York State
University of Stony Brook, a program he has been a part of since its inception
in 2003.
Alan
Carus, CPA (68),
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.
26
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our directors, executive officers and beneficial owners of more than
10% of our 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. We believe that during the year
ended December 31, 2006, each person who was an officer, director and beneficial
owner of more than 10% of our common stock complied with all Section 16(a)
filing requirements, except the following filings were filed late: (i)
Form
4
for Lawrence A. Siebert filed on January 10, 2006; (ii) Form 4 for Gary Meller
filed on April 6, 2006; (iii) Form 4 for Gerald A. Eppner filed on April 8,
2006; (iv) Form 4 filed for Avi Pelossof on April 26, 2006; (v) Form 4 for
Lawrence A. Siebert filed on July 20, 2006; (vi) Form 4 for Avi Pelossof filed
on July 20, 2006; (vii) Form 4 for Richard Larkin filed on July 20, 2006: and
(viii) Form 4 for Lawrence A. Siebert filed on August 24, 2006.
Code
of Ethics
We
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, controller, and
persons performing similar functions. A copy of our code of ethics is filed
as
Exhibit 14.1 to this Form 10-KSB.
Identification
of Audit Committee; Audit Committee Financial Expert
Our
board
of directors has established an audit committee. Alan Carus, and Dr. Gary Meller
each serve on the audit committee, with Mr. Carus serving as chairman. Our
board
of directors has determined that Alan Carus is an audit committee financial
expert.
|
ITEM
10.
|
EXECUTIVE
COMPENSATION
|
The
following table summarizes all compensation recorded by the Company in the
latest completed fiscal year for our principal executive officer, our two most
highly compensated executive officers other than our principal executive officer
whose annual compensation exceeded $100,000, and up to two additional
individuals for whom disclosure would have been made in this table but for
the
fact that the individual was not serving as an executive officer of our company
at December 31, 2006.
|
Name
and Principal
Position
|
Year
|
Salary
($)1
|
Bonus
($)2
|
Option
Awards ($)3
|
All
Other Compensation
|
Total
($)
|
|||||||||||||
|
Lawrence
A. Siebert, CEO and Director4
|
2006
|
$
|
207,115
|
$
|
20,000
|
$
|
21,017
|
$
|
7,200
|
$
|
255,332
|
||||||||
|
Richard
J. Larkin, CFO
|
2006
|
$
|
140,385
|
$
|
15,000
|
$
|
27,300
|
-
|
$
|
182,685
|
|||||||||
|
Avi
Pelossof, Vice President of Sales and Marketing5
|
2006
|
$
|
156,538
|
$
|
12,000
|
$
|
51,081
|
$
|
6,120
|
$
|
225,739
|
||||||||
|
Javan
Esfandiari, Director of Research and Development
|
2006
|
$
|
150,385
|
$
|
12,000
|
$
|
41,390
|
$
|
4,800
|
$
|
208,575
|
||||||||
|
Les
Stutzman - Vice President of Marketing
|
2006
|
$
|
116,539
|
$
|
11,500
|
$
|
12,009
|
$
|
20,0756
|
$
|
160,123
|
||||||||
1 Salary
is
total base salary.
2 Any
bonus
earned was paid solely on a discretionary basis, and not pursuant to
any bonus
plan.
3
The
valuations of these options reflect the compensation costs of each option
award
over the requisite service period in accordance with FAS123R.
4
Mr.
Siebert also serves as a director on the Company’s board of directors. Mr.
Siebert does not receive any compensation for this director role.
5
Mr.
Pelossof voluntarily resigned from the Company on December 6, 2006, effective
January 31, 2007.
6 This
amount represents the rental payments the Company makes for the apartment
Mr.
Stutzman rents when he visits the Company.
27
Employment
Agreements
Mr.
Siebert.
On June
15, 2006, Mr. Siebert and the Company entered into an employment agreement,
effective May 10, 2006, which terminates on May 10, 2008. Pursuant to the
employment agreement, Mr. Siebert serves as the President and Chief Executive
Officer of the Company and is entitled to receive a base compensation of
$240,000 per year, subject to review by the board of directors of the Company
at
the end of the first twelve months. Mr. Siebert also shall be eligible for
a
bonus of up to 50% of his salary, consisting of (i) a bonus of up to 25% of
his
salary that is at the complete discretion and determination of the board of
directors, and (ii) a bonus of up to an additional 25% of his salary that will
be determined based upon revenue and earnings performance criteria established
each year by the board of directors. Mr. Siebert is eligible to participate
in
any profit sharing, stock option, retirement plan, medical and/or
hospitalization plan, and/or other benefit plans except for disability and
life
insurance that the Company may from time to time place in effect for the
Company’s executives during the term of Mr. Siebert’s employment agreement. If
Mr. Siebert’s employment agreement is terminated by the Company without cause,
or if Mr. Siebert terminates his employment agreement for a reasonable basis,
including within 12 months of a change in control, the Company is required
to
pay as severance Mr. Siebert’s salary for six months. Mr. Siebert has agreed for
a period of two years after the termination of his employment with the Company
not to induce customers, agents, or other sources of distribution of the
Company’s business under contract or doing business with the Company to
terminate, reduce, alter, or divert business with or from the
Company.
Mr.
Pelossof.
On May
5, 2004, Mr. Pelossof and the Company entered into an employment agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant to the
employment agreement, Mr. Pelossof serves as the Vice President of Sales,
Marketing and Business Development of the Company. On June 15, 2006, the
board of directors amended this agreement, and increased Mr. Pelossof’s
salary from a base compensation of $120,000 per year, to a base salary of
$170,000 per year. Mr. Pelossof is also eligible for a bonus of up to 25% of
his
salary, consisting of (i) a bonus of up to 12.5% of his salary that is at the
complete discretion and determination of the board of directors, and (ii) a
bonus of up to an additional 12.5% of his salary that will be determined based
upon revenue and earnings performance criteria established each year by the
board of directors. Mr. Pelossof is eligible to participate in any profit
sharing, stock option, retirement plan, medical and/or hospitalization plan,
and/or other benefit plans except for disability and life insurance that the
Company may from time to time place in effect for the Company’s executives
during the term of Mr. Pelossof’s employment agreement. If Mr. Pelossof’s
employment agreement is terminated by the Company without cause, or if Mr.
Pelossof terminates his employment agreement for a reasonable basis, including
within 12 months of a change in control, the Company is required to pay as
severance Mr. Pelossof’s salary for six months. Mr. Pelossof has agreed for a
period of two years after the termination of his employment with the Company
not
to induce customers, agents, or other sources of distribution of the Company’s
business under contract or doing business with the Company to terminate, reduce,
alter, or divert business with or from the Company. Mr. Pelossof voluntarily
resigned from the effective January 31, 2007.
Mr.
Esfandiari.
On May
5, 2004, Mr. Esfandiari and the Company entered into an employment agreement,
effective May 10, 2004, which terminates on May 10, 2007. Pursuant to the
employment agreement, Mr. Esfandiari serves as the Director of Research &
Development for the Company. On June 15, 2006, the board of directors amended
this agreement, and increased Mr. Esfandiari’s salary from a base compensation
of $115,000 per year, subject to periodic review by the board of directors
of
the Company, to a base salary of $160,000 per year. Mr. Esfandiari is also
eligible for a bonus of up to 25% of his salary, consisting of (i) a bonus
of up
to 12.5% of his salary that is at the complete discretion and determination
of
the board of directors, and (ii) a bonus of up to an additional 12.5% of his
salary that will be determined based upon revenue and earnings performance
criteria established each year by the board of directors. Mr. Esfandiari is
eligible to participate in any profit sharing, stock option, retirement plan,
medical and/or hospitalization plan, and/or other benefit plans except for
disability and life insurance that the Company may from time to time place
in
effect for the Company’s executives during the term of Mr. Esfandiari’s
employment agreement. If Mr. Esfandiari’s employment agreement is terminated by
the Company without cause, or if Mr. Esfandiari terminates his employment
agreement for a reasonable basis, including within 12 months of a change in
control, the Company is required to pay as severance Mr. Esfandiari’s salary for
six months. Mr. Esfandiari has agreed for a period of two years after the
termination of his employment with the Company not to induce customers, agents,
or other sources of distribution of the Company’s business under contract or
doing business with the Company to terminate, reduce, alter, or divert business
with or from the Company.
Neither
Mr. Larkin nor Mr. Stutzman has an employment contract with the
Company.
28
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2006
|
Name
|
Number
of Securities Underlying Unexercised Options Exercisable
(#)
|
Number
of Securities Underlying Unexercised Options Unexercisable
(#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
|
|
Lawrence
A. Siebert
|
50,0002
|
0.75
|
11/19/2007
|
4/17/2006
|
|
|
|
10,0002
|
0.75
|
12/31/2008
|
4/17/2006
|
|
|
|
10,0002
|
0.75
|
5/4/2011
|
4/17/2006
|
|
|
|
50,0002
|
0.75
|
5/28/2011
|
4/17/2006
|
|
|
|
50,0002
|
0.75
|
5/28/2011
|
1/1/2007
|
|
|
|
50,0003
|
0.75
|
5/4/2011
|
5/5/2004
|
|
|
Richard
J. Larkin
|
25,0002
|
0.75
|
5/17/2010
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/17/2010
|
4/17/2006
|
|
|
|
18,7501
|
0.62
|
3/24/2011
|
3/24/2006
|
|
|
|
18,7501
|
0.62
|
3/24/2011
|
1/1/2007
|
|
|
|
50,0003
|
0.45
|
9/15/2010
|
5/5/2004
|
|
|
Avi
Pelossof
|
40,0002
|
0.75
|
11/19/2007
|
4/17/2006
|
|
|
|
10,0002
|
0.75
|
12/31/2008
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/17/2010
|
4/17/2006
|
|
|
|
|
25,0002
|
0.75
|
5/17/2010
|
1/1/2007
|
|
|
25,0001
|
0.62
|
3/24/2011
|
3/24/2006
|
|
|
|
25,0001
|
0.62
|
3/24/2011
|
1/1/2007
|
|
|
|
10,0002
|
0.75
|
5/4/2011
|
4/17/2006
|
|
|
|
27,5002
|
0.75
|
5/27/2011
|
4/17/2006
|
|
|
|
50,0002
|
0.75
|
5/27/2011
|
1/1/2007
|
|
|
|
22,5002
|
0.75
|
5/27/2011
|
1/1/2007
|
|
|
|
40,0003
|
0.75
|
5/4/2011
|
5/5/2004
|
|
|
Javan
Esfandiari
|
30,0002
|
0.75
|
3/31/2008
|
4/17/2006
|
|
|
|
5,0002
|
0.75
|
12/31/2008
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/17/2010
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/17/2010
|
1/1/2007
|
|
|
|
18,7501
|
0.62
|
3/24/2011
|
3/24/2006
|
|
|
|
18,7501
|
0.62
|
3/24/2011
|
1/1/2007
|
|
|
|
5,0002
|
0.75
|
5/4/2011
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/28/2011
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/28/2011
|
4/17/2006
|
|
|
|
25,0002
|
0.75
|
5/28/2011
|
5/28/2007
|
|
|
|
30,0003
|
0.75
|
5/4/2011
|
5/5/2004
|
|
|
Les
Stutzman
|
15,0001
|
0.62
|
3/24/2011
|
3/24/2006
|
|
|
|
10,0003
|
0.57
|
9/19/2010
|
9/19/2006
|
|
|
|
10,0003
|
0.57
|
9/19/2010
|
9/19/2007
|
1 All
options issued with a $.62 exercise price were issued during 2006 as part
of the
Company’s 1999 Option Plan. Pursuant to this plan, the Company granted 244,000
options to all employees.
2
All options issued with a $.75 exercise price and an April 17, 2006 vesting
date
were issued on April 17, 2006 as part of the Company’s 1999 Option Plan.
Pursuant to this plan, the Company granted 244,000 options to all employees.
On
April 17, 2006, the Company’s Compensation Committee approved the cancellation
of each employee stock
option
award issued under the 1999 Equity Incentive Plan where the exercise price
was
greater than $0.75 per share of the Company’s common stock, and the issuance of
a new stock option award under the 1999 Equity Incentive Plan, for the same
number of shares of the Company’s common stock, with an exercise price of $0.75
per share of the Company’s common stock for each cancelled stock option award.
The market price of the common stock of the Company on April 17, 2006 was
$0.72
per share. In total, stock option awards to acquire 795,000 shares of Company
common stock were cancelled, and stock option awards to acquire 795,000 shares
of Company common stock were issued. Other than the change in the exercise
price, all of the terms and conditions in each newly issued stock option
award
are identical to the cancelled stock option award it replaces, with the
following exceptions: (i) Lawrence A. Siebert’s stock option award for 50,000
shares of the Company’s common stock, exercisable on May 28, 2006 and
terminating on May 28, 2011 was replaced with a stock option award for 50,000
shares of the Company’s common stock, exercisable on January 1, 2007 and
terminating on May 28, 2011;(ii) Avi Pelossof’s stock option awards for 72,500
shares of the Company’s common stock, exercisable on May 28, 2005 and on May 28,
2006 and both terminating on May 28, 2011 was replaced with a stock option
award
for 72,500 shares of the Company’s common stock, exercisable on January 1, 2007
and terminating on May 28, 2011.
3 All
other
options shown were issued prior to 2006 as part of the Company’s 1999 Option
Plan.
29
|
Name
|
Fees
Earned or Paid in Cash
($)
1
|
Stock
Awards
($)
2
|
Option
Awards
($)
3
|
Total
($)
|
|||||||||
|
Alan
Carus
|
$
|
40,000
|
$
|
10,650
|
$
|
14,663
|
$
|
65,313
|
|||||
|
Gerald
Eppner4
|
37,500
|
-
|
16,504
|
54,004
|
|||||||||
|
Gary
Meller
|
34,750
|
-
|
16,504
|
51,254
|
|||||||||
1 Fees
earned or paid in cash represents a yearly fee and fees for meeting expenses:
(a) Mr. Carus received an $18,000 annual fee as a member of the board
of
directors, a $2,500 annual fee as audit committee chairman and $19,500
in
meeting fees paid during 2006; (b) Mr. Eppner received an $18,000 annual
fee as
a member of the board of directors, and $19,500 in meeting fees paid
during
2006; (c) Mr. Meller received an $18,000 annual fee as a member of the
board of
directors, and $16,750 in meeting fees.
2 Alan
Carus was awarded 15,000 shares of common stock as compensation for services
as
the audit committee chairman. The shares were awarded on July 18, 2006
and 5,000
of these shares vested immediately, 5000 vest on July 1, 2007, and 5,000
vest on
July 1, 2008. This stock was valued based on the market closing price
on the
date of the grant at $10,650.
3 Each
outside member of the board of directors is is issued options granting
the
holder the right to purchase 36,000 shares of the company’s common stock with an
exercise price equal to the market price on the date of the grant as
part of the
director’s annual compensation. One-third of these 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 fair value of options at the date of grant was estimated
using the Black-Scholes option pricing model.
4 Mr.
Eppner resigned from our Board of Directors on January 30,
2007.
Director
Compensation
All
non-employee directors are paid an $18,000 annual retainer, semi-annually,
and
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 chairman is paid an annual
retainer of $2,500, paid semi-annually. In addition, the non-employee directors
are paid $1,000 in cash for each board of directors’ meeting attended, and paid
$500 in cash for each telephonic board of directors meeting. The non-employee
directors who are members of a committee of the board of directors are paid
$500
in cash for each committee meeting attended, or $750 in cash for each committee
meeting attended if that non-employee director is the committee chairman. In
addition, in December 2005, each of the three non-employee directors was granted
options to purchase 15,000 shares of our common stock at an exercise price
equal
to the market price of the underlying common stock on the date of grant.
30
|
ITEM
11.
|
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 March
19, 2007.
|
Name
and Address of Beneficial Owner
|
Number
of Shares Beneficially Owned
|
Percent
of Class
|
|
Lawrence
Siebert (2)
3661
Horseblock Road
Medford,
NY 11763
|
2,141,919
|
17.68%
|
|
Javan
Esfandiari (3)
3661
Horseblock Road
Medford,
NY 11763
|
229,580
|
1.92%
|
|
Richard
J. Larkin (4)
3661
Horseblock Road
Medford,
NY 11763
|
145,261
|
1.22%
|
|
Alan
Carus (5)
3661
Horseblock Road
Medford,
NY 11763
|
90,000
|
0.76%
|
|
Les
Stutzman (1)
3661
Horseblock Road
Medford,
NY 11763
|
25,000
|
0.21%
|
|
Gary
Meller (6)
3661
Horseblock Road
Medford,
NY 11763
|
87,000
|
0.73%
|
|
All
officers and directors as a group(7)
|
2,718,760
|
21.49%
|
|
Mark
Baum (8)
580
Second Street, Suite 102
Encinitas,
CA 92024
|
1,408,597
|
11.18%
|
|
Avi
Pelossof (9)
3661
Horseblock Road
Medford,
NY 11763
|
650,113
|
5.41%
|
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the Securities
Exchange Act of 1934, as amended, and generally includes voting or investment
power with respect to securities. Except as subject to community property laws,
where applicable, the person named above has sole voting and investment power
with respect to all shares of our common stock shown as beneficially owned
by
him.
The
beneficial ownership percent in the table is calculated with respect to the
number of outstanding shares (11,642,540)
of our common stock outstanding as of January 12, 2007. Each stockholder's
ownership is calculated as the number of shares of common stock owned plus
the
number of shares of common stock into which any preferred stock, warrants,
options or other convertible securities owned by that stockholder can be
converted within 60 days. In addition to the 11,642,540 shares of common stock
outstanding, our outstanding series A, B and C preferred stock is convertible
into a total of approximately 17.9 million shares of preferred stock, and there
are warrants to purchase approximately 16.7 million shares of common stock
outstanding. This table does not include convertible securities which, due
to
contractual restrictions, are not exercisable within 60 days of the date of
this
prospectus. Specifically, at no time may a holder of shares of series A, series
B or series C preferred stock convert shares of the series A, series B or series
C 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. As
a
result of this provision, holders of preferred stock that is convertible into
common stock and holders of warrants to purchase common stock who, with 61
days’
advance notice, can convert those securities into more than 5% of our
outstanding stock are not required to be listed in this table.
31
The
term
“named executive officer” refers to our principal executive officer, our two
most highly compensated executive officers other than the principal executive
officer who were serving as executive officers at the end of 2006, and two
additional individuals for whom disclosure would have been provided but for
the
fact that the individuals were not serving as executive officers of the Company
at the end of 2006.
None
of
the preferred shares can be converted into common stock and none of the warrants
can be exercised if the conversion or exercise would result in the holder owning
more than 4.99% of our outstanding common stock unless the holder provides
the
Company with 61 days advance written notice.
|
(1)
|
Includes
25,000 shares issuable upon exercise of options exercisable within
60
days.
|
|
(2)
|
Includes
220,000 shares issuable upon exercise of options exercisable within
60
days and 140,697 warrants. 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 they can be exercised only upon 61 days prior notice and
therefore
are not exercisable within 60 days.
|
|
(3)
|
Includes
207,500 shares issuable upon exercise of options exercisable within
60
days and 2,007 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
|
|
(4)
|
Includes
137,500 shares issuable upon exercise of options exercisable within
60
days and 260 shares issuable upon exercise of warrants. Does not
include
30,236 shares issuable upon conversion of series A preferred stock
and
25,196 shares issuable upon exercise of warrants because they can
be
exercised only upon 61 days prior notice and therefore are not exercisable
within 60 days.
|
|
(5)
|
Includes
51,000 shares issuable upon exercise of options exercisable within
60
days. Does not include 36,000 shares issuable upon exercise of options
that are not exercisable within the next 60
days.
|
|
(6)
|
Includes
51,000 shares issuable upon exercise of options exercisable within
60
days. Does not include 36,000 shares issuable upon exercise of options
that are not exercisable within the next 60
days.
|
|
(7)
|
Includes
footnotes (1)-(6)
|
|
(8)
|
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 they can
be
exercised only upon 61 days prior notice and therefore are not exercisable
within 60 days.
|
|
(9)
|
Includes
300,000 shares issuable upon exercise of options exercisable within
60
days and 22,555 shares issuable upon exercise of warrants. Does not
include 10,078 shares issuable upon conversion of series A preferred
stock
and 12,095 shares issuable upon exercise of warrants because they
can be
exercised only upon 61 days prior notice and therefore are not exercisable
within 60 days. Mr. Pelossof voluntarily resigned from the Company
on
December 6, 2006, effective January 31,
2007.
|
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
|
1,529,750
|
$0.696
|
1,355,250
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
1,529,750
|
$0.696
|
1,355,250
|
32
|
ITEM
12.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Mark
L.
Baum, our former president prior to the merger and a former
director of the Company, entered into a nine-month employment agreement with
the
Company, 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 the Company 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 the
Company. On March 18, 2005, as compensation for Mr. Baum’s service on the board
of directors of Chembio the Company, the exercise price of Mr. Baum’s warrant to
acquire 425,000 shares of common stock at $.90 per share was reduced to $.75
per
share. Mr. Baum received no other compensation for his services on the board
of
directors.
Lawrence
A. Siebert, the president and chairman of the board of directors of the Company
beginning at the time of and after the merger, and the president and chairman
of
Chembio Diagnostic Systems Inc. since May 2002, held two promissory notes issued
by Chembio Diagnostic Systems Inc. One note was issued on August 1, 1999 in
the
original principal amount of $338,125, bearing interest at a rate of 11% per
annum. The other was issued on April 25, 2001 in the original principal amount
of $795,937, bearing interest at a rate of 12% per annum. Mr. Siebert converted
the entire outstanding principal amount of the 11% note and $561,875 principal
amount of the 12% note into 30 shares of the Company series A preferred stock,
together with warrants to acquire 1,800,000 shares of common stock at $.90
per
share, pursuant to the Company private placement of our series A preferred
stock
on May 5, 2004. The shares of series A preferred stock held by Mr. Siebert
are convertible into 1,547,100 shares of the Company's common stock. The
remaining debt of $234,062 held by Mr. Siebert was exchanged on December 29,
2004 into 7.80208 shares of the Company's series A preferred stock, together
with warrants to acquire 468,125 shares of common stock at $.90 per share,
pursuant to the terms of the Company's private placement of our series A
preferred stock on May 5, 2004. As
of
December 31, 2006, $65,287.39 of accrued interest on the debt is also due to
Mr.
Siebert, but is not accruing interest.
The
accrued interest will be paid out according to the terms of the Company's
private placement of its series B preferred stock on January 28, 2005. Mr.
Siebert also invested $50,000 in our series B preferred stock private placement
pursuant to which he received 1 share of series B preferred stock convertible
into 81,967 shares of common stock and a warrant to purchase 77,868 shares
of
common stock.
Mr.
Siebert also invested $18,700 in Chembio Diagnostic Systems Inc. pursuant to
a
private placement of convertible notes on March 22, 2004. Mr. Siebert
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .942 shares of the Company's series A
preferred stock, together with warrants to acquire 56,520 shares of common
stock
at $.90 per share, pursuant to the Company’s private placement of our series A
preferred stock on May 5, 2004. In November of 2004 as payment of dividends
on the series A preferred he received 61,884 shares of common stock. Mr. Siebert
exercised a warrant to purchase 66,869 shares of common stock on December 30,
2004 at a price of $0.45 per share. These shares were gifted by Mr. Siebert
to a
third party. In May of 2005 as payment of dividends on the series A preferred
he
received 72,234 shares of common stock. In July of 2005 as payment of dividends
on the series B preferred he received .03871 shares of series B preferred stock.
In November of 2005 as payment of dividends on the series A preferred he
received 77,488 shares of common stock. In January of 2006 as payment of
dividends on the series B preferred he received .04674 shares of series B
preferred stock. In June of 2006 as payment of dividends on the series A
preferred and series B preferred, Mr. Siebert received 22,714 shares of common
stock. In July and August of 2006 as payment of dividends on the series B
preferred, Mr. Siebert received 3,295 shares of common stock. In November of
2006 as payment of dividends on the series A preferred he received 55,860 shares
of common stock. In
January 2007 as payment of dividends on the series B preferred, Mr. Siebert
received 3,292 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 totaled $182,181 and was
repaid in the fourth quarter of 2006.
33
Richard
J. Larkin, the Chief Financial Officer of the Company, invested $10,000 in
Chembio Diagnostic Systems Inc. pursuant to the March 22, 2004 private
placement of convertible notes. Mr. Larkin converted the entire principal amount
of the note that he received, together with accrued interest thereon, into
.504
shares of the Company’s series A preferred stock, together with warrants to
acquire 30,240 shares of common stock at $.90 per share, pursuant to the
Company’s private placement of our series A preferred stock on May 5, 2004.
In November of 2004 as payment of dividends on the series A preferred he
received 1,007 shares of common stock. In May of 2005 as payment of dividends
on
the series A preferred he received 999 shares of common stock. In November
of
2005 as payment of dividends on the series A preferred he received 1,007 shares
of common stock. In May of 2006 as payment of dividends on the series A
preferred he received 1007 shares of common stock. In June of 2006 as payment
of
dividends on the series A preferred Mr. Larkin received 265 shares of common
stock. In November of 2006 as payment of dividends on the series A preferred
he
received 726 shares of common stock.
Avi
Pelossof, vice president of sales and marketing of the Company, from
May
5, 2004 to January 31, 2007, invested $4,000 in the Company pursuant to the
March 22, 2004 private placement of convertible notes. Mr. Pelossof
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .202 shares of the Company’s series A
preferred stock, together with warrants to acquire 22,555 shares of common
stock
at $.90 per share, pursuant to the Company’s private placement of our series A
preferred stock on May 5, 2004. In November of 2004 as payment of dividends
on the series A preferred he received 403 shares of common stock. In May of
2005
as payment of dividends on the series A preferred he received 399 shares of
common stock. In November of 2005 as payment of dividends on the series A
preferred he received 403 shares of common stock. In May of 2006 as payment
of
dividends on the series A preferred he received 403 shares of common stock.
In
June of 2006 as payment of dividends on the series A preferred Mr. Pelossof
received 106 shares of common stock. In November of 2006 as payment of dividends
on the series A preferred he received 290 shares of common stock.
In
addition Mr. Pelossof exercised 100,000 options in December 2006 at $.60 per
share and another 50,000 options in January 2006 at $.75 per share.
Dr.
Gary
Meller, a non-employee director of the Company, currently serves as a limited
partner and a member of the Advisory Board of Crestview Capital Master LLC,
referred
to herein as Crestview, which
was
the lead investor, investing $3 million,
in our
series B preferred stock private placement
in
January 2005, and which subsequently invested an additional $1 million in our
series B preferred in March 2006. Crestview also invested $2 million
in our
series C preferred stock private placement.
in
September 2006.
As
referred to above, in
January
2005, for
a
purchase price of $3 million, we
issued
Crestview 60 shares of our series B preferred stock, and warrants to purchase
4,672,130 shares
of our
common stock at a warrant exercise price of $.61 per share. In July 2005, we
issued Crestview dividends on these series B preferred shares in the form of
2.32274 additional series B preferred shares.
In
March
2006, for
a
purchase price of $1 million, we
issued
Crestview 20 shares of series B preferred shares with warrants to purchase
1,557,377 shares of common stock
at a
warrant exercise price of $.61 per share. These shares were issued in connection
with the our January 2005 private placement as described herein.
Subsequently, in July 2006, we issued dividends on all of Crestview’s shares in
the form of 220,301 shares of common stock. In September 2006, for
a
purchase price of $2 million, we
issued
40 shares of series C preferred shares to Crestview together
with
warrants to purchase 625,000 shares of common stock
at an
exercise price of $1.00 per share.
In
January 2007, because of comments from the staff of the SEC concerning the
registration statement of which this prospectus is a part, Crestview agreed
to
reduce the number of its shares of common stock covered by this prospectus
to
2,000,000. Crestview also agreed to waive any penalties that we would
otherwise owe Crestview because of the failure to register all of Crestview’s
shares in the current registration statement. In return, we have agreed that,
upon request by Crestview, we will file one or more registration statements
with
the SEC in order to register the resale of other shares beneficially owned
by
Crestview. The cost of any such registration statements shall be borne by
us.
The
series B preferred shares owned by Crestview are convertible into a total of
6,747,748 shares of common stock, and the series C preferred shares owned by
Crestview are convertible into a total of 2,500,000 shares of common
stock.
34
Crestview
invested $2,000,000 in our series C preferred stock private placement on
September 29, 2006. We also received an investment of $2,000,000 on that date
from Inverness. A certificate of designation for the series C preferred was
filed with the Secretary of State of Nevada reflecting the agreed upon
conversion price of $.85. The series C preferred stock private placement for
an
aggregate of $8,150,000 (including the $2,000,000 invested by each of Crestview
and Inverness) was completed on October 5, 2006. During the period between
September 29, 2006 and October 5, 2006, we requested the assistance of Crestview
and others in identifying to us prospective investors. A representative of
Crestview informed Mr. Siebert on October 3, 2006 of a conversation he had
earlier that day with a fund manager that the fund would be interested in
investing a substantial amount in the offering, but only at a conversion price
of no more than $.80.
At
a
board of directors meeting on October 4, 2006, Mr. Siebert expressed his
recommendation that the board approve lowering the conversion price to $.80
in
order to be able to obtain the additional funds. The board discussed the bridge
financing of $1,300,000 in promissory notes which had been completed in June
2006, the noteholders who expected to convert their notes into the series C
preferred stock, and the restrictions on future equity sales by us in the bridge
financing purchase agreement that necessitated finalizing promptly the series
C
preferred stock offering. After discussion to approve the funding, the motion
was approved unanimously, with the exception of Gerald Eppner1
who
abstained. Mr. Eppner stated that he understood the benefits of the economics
of
the transaction and our need to proceed so quickly, but that he did not wish
to
vote in favor.
At
a
board meeting held on October 11, 2006, the board members discussed the series
C
preferred stock private placement. Mr. Eppner stated in his view that it would
be desirable to review the sequence of events in this transaction to assure
proper guidelines for corporate governance and to determine if disclosure or
other issues needed to be considered. At a board meeting held on October 26,
2006, it was discussed that a subcommittee of the audit committee, whose members
would be Mr. Eppner and Alan Carus, would review certain issues related to
the
series C preferred stock private placement.
The
first
meeting of the audit committee to review the series C preferred stock offering
was held on October 27, 2006. The audit committee decided it would review the
role of Crestview in the series C preferred stock offering, Crestview’s status
as a possible control person, the role of Gary Meller in the offering and his
relationship with Crestview, and whether the audit committee should recommend
new corporate governance procedures to be implemented or any action to be taken
by the board of directors. The audit committee utilized legal counsel to assist
in its review. The audit committee held seven meetings during the period from
October 27, 2006 to January 10, 2007. Messrs. Carus and Eppner attended all
of
the meetings. Mr. Carus concluded that: (i) he was satisfied with the review,
and (ii) although with fewer time constraints, there could have been more
deliberation regarding the change in the conversion price, he believed there
was
no inappropriate conduct, that the Company had not suffered any damage and
that
the matter should be closed. Mr. Eppner stated his concerns that: (i) Crestview
is an affiliate of the Company, (ii) there was no participation by the Company
in the reduction in the conversion price from $.85 to $.80, (iii) although
he
agreed with Mr. Carus that the $.80 price may have been acceptable to the
Company, it was not as good as a higher price, (iv) Mr. Siebert should not
have
allowed this to happen, and that because he did, it was evidence of control
by
Crestview, and (v) disclosure of the review of the audit committee should be
made in a registration statement that was to be filed shortly
thereafter.
1 Mr.
Eppner resigned from the board of directors on January 30,
2007.
Director
Independence
Our
common stock trades on the OTC Bulletin Board. As such, we are not currently
subject to corporate governance standards of listed companies, which require,
among other things, that the majority of the board of directors be
independent.
Since
we
are not currently subject to corporate governance standards relating to the
independence of our directors, we choose to define an “independent” director in
accordance with the NASDAQ Global Market's requirements for independent
directors (NASDAQ Marketplace Rule 4200). We do not currently have an
independent director under the above definition. We do not list that definition
on our Internet website.
35
|
ITEM
13.
|
EXHIBITS
|
Number Description
|
3.1
|
Articles
of Incorporation, as amended. (3)
|
|
3.2
|
Bylaws.
(1)
|
|
3.3
|
Amendment
No. 1 to Bylaws dated May 3, 2004.
(2)
|
|
4.1
|
Certificate
of Designation of the Relative Rights and Preferences of the series
A
convertible preferred stock of the Registrant.
(2)
|
|
4.2
|
Registration
Rights Agreement, dated as of May 5, 2004, by and among the Registrant
and
the Purchasers listed therein. (2)
|
|
4.3
|
Lock-Up
Agreement, dated as of May 5, 2004, by and among the Registrant and
the
shareholders of the Registrant listed therein.
(2)
|
|
4.4
|
Form
of Common Stock Warrant issued pursuant to the Stock and Warrant
Purchase
Agreement. (2)
|
|
4.5
|
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.
(2)
|
|
4.6
|
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.
(2)
|
|
4.7
|
Form
of Warrant issued to Placement Agents pursuant to the Series A Convertible
Stock Private Placement. (7)
|
|
4.8
|
Certificate
of Designation of Preferences, Rights, and Limitations of Series
B 9%
Convertible Preferred Stock of the Registrant.
(9)
|
|
4.9
|
Form
of Common Stock Warrant issued to Midtown Partners & Co., LLC.
(9)
|
|
4.10
|
Form
of Common Stock Warrant issued pursuant to the Securities Purchase
Agreement. (9)
|
|
4.11
|
Registration
Rights Agreement, dated as of January 26, 2005, by and among the
Registrant and the purchasers listed therein.
(9)
|
|
4.12
|
Form
of Warrant, dated June 29, 2006, issued pursuant to Company and purchasers
of the Company’s Secured Debentures.
(4)
|
|
4.13
|
Registration
Rights Agreement, dated June 29, 2006.
(4)
|
|
4.14
|
Certificate
of Designation of Preferences, Rights and Limitations of Series C
7%
Convertible Preferred Stock of the Registrant.
(6)
|
|
4.15
|
Registration
Rights Agreement, dated as of September 29, 2006, by and among the
Registrant and the Purchasers listed therein.
(6)
|
|
4.16
|
Form
of Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated September 29, 2006
(6)
|
|
10.1
|
Employment
Agreement dated June 15, 2006 w/ Lawrence A. Siebert.
(5)
|
|
10.2
|
Employment
Agreement dated May 5, 2004 w/ Avi Pelossof.
(8)
|
|
10.3
|
Employment
Agreement dated May 5, 2004 w/ Javan Esfandiari.
(8)
|
|
10.4
|
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.
(2)
|
|
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. (9)
|
|
10.6
|
Amendment
No. 1 to Securities Purchase Agreement, dated as of January 28, 2005
by
and among the Registrant and the purchasers listed therein.
(10)
|
|
10.7
|
Equity
Exchange Agreement, dated as of January 28, 2005, by and between
the
Registrant and Kurzman Partners, LP.
(10)
|
|
10.8
|
Security
Purchase Agreement, dated June 29, 2006, among the Company and purchasers
of the Company’s Secured Debentures.
(4)
|
10.9
Form
of
Secured Debenture, dated June 29, 2006. (4)
36
10.10
Security
Agreement, dated June 29, 2006, among the Company, Chembio Diagnostic Systems,
Inc., and purchasers of the Company’s Secured Debentures. (4)
|
10.11
|
Subsidiary
Guarantee, dated June 29, 2006, made by Chembio Diagnostic Systems,
Inc.,
in favor of Purchasers of the Company’s Secured Debentures.
(4)
|
|
10.12
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
September 29, 2006, by and among the Registrant and the Purchasers
listed
therein. (6)
|
|
10.13
|
Letter
of Amendment to Securities Purchase Agreements dated as of September
29,
2006 by and among the Registrant and the Purchasers listed therein.
(6)
|
|
10.14
|
HIV
Barrel License, Marketing and Distribution Agreement, dated as of
September 29, 2006, by and among the Registrant, Inverness and StatSure.
(6)
|
|
10.15
|
HIV
Cassette License, Marketing and Distribution Agreement, dated as
of
September 29, 2006, between the Registrant and Inverness.
(6)
|
|
10.16
|
Non-Exclusive
License, Marketing and Distribution Agreement, dated as of September
29,
2006, between the Registrant and Inverness.
(6)
|
|
10.17
|
Joint
HIV Barrel Product Commercialization Agreement, dated as of September
29,
2006, between the Registrant and StatSure.
(6)
|
|
10.18
|
Settlement
Agreement, dated September 29, 2006, between the Registrant and StatSure.
(6)
|
|
10.19
|
Contract
for Transfer of Technology and Materials with Bio-Manguinhos.
(7)
|
|
10.20
|
License
and Supply Agreement dated as of August 30, 2002 by and between Chembio
Diagnostic Systems Inc. and Adaltis Inc.
(8)
|
|
14.1
|
Ethics
Policy (11)
|
|
21
|
List
of Subsidiaries.
|
|
23.1
|
Consent
of Lazar Levine & Felix LLP, Independent
Accountants.
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
_____________________
(1)
Incorporated by reference to the Registrant’s registration statement on Form
SB-2 filed with the Commission on August 23, 1999.
(2)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Commission on May 14, 2004.
(3)
Incorporated by reference to the Registrant’s annual report on Form 10-KSB filed
with the Commission on March 31, 2005.
(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Commission on July 3, 2006.
(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Commission on June 21, 2006.
(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Commission on October 5, 2006.
(7)
Incorporated by reference to the Registrant’s registration statement on Form
SB-2/A filed with the Commission on August 4, 2004.
(8)
Incorporated by reference to the Registrant’s registration statement on Form
SB-2 filed with the Commission on June 7, 2004. Avi Pelossof’s and Javan
Esfandiari’s Employment Agreements were amended by board consent on June 15,
2006.
(9)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Commission on January 31, 2005.
(10)
Incorporated by reference to the Registrant’s registration statement on Form
SB-2 filed with the Commission on March 28, 2005.
(11)
Incorporated by reference to the Registrant’s annual report on Form 10-KSB filed
with the Commission on March 30, 2006.
37
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Audit
Fees
For
the
years ended December 31, 2006
and
December 31, 2005, Lazar Levine & Felix LLP, our principal accountants,
billed the Company $72,000 and $99,000, respectively, for fees for the audit
of
our annual financial statements and review of financial statements included
in
our Forms 10-QSB and 10-KSB.
Audit-Related
Fees
For
the
years ended December 31, 2006
and
December 31, 2005, Lazar Levine & Felix LLP, did not provide us with any
assurances or related services reasonably related to the performance of the
audit or review of our financial statements that are not reported above under
“Audit Fees.”
Tax
Fees
For
the
years ended December 31, 2006
and
December 31, 2005, Lazar Levine & Felix LLP billed the Company $3,130 and
$9,100, respectively, for professional services for tax compliance, tax advice,
and tax planning.
All
Other Fees
For
the
years ended December 31, 2006
and
December 31, 2005, Lazar Levine & Felix LLP billed the Company $30,200 and
$17,700 for fees associated with the preparation and filing of our 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.
38
SIGNATURES
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 28, 2007 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
28, 2007
|
|
/s/
Richard J. Larkin
Richard
J. Larkin
|
Chief
Financial Officer (Principal Financial & Accounting
Officer)
|
March
28, 2007
|
|
/s/
Alan Carus
Alan
Carus
|
Director
|
March
28, 2007
|
|
/s/
Gary Meller
Dr.
Gary Meller
|
Director
|
March
28, 2007
|
39
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
Index
to Consolidated Financial Statements
—INDEX—
|
|
Page(s)
|
|
Report
of Registered Independent Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
Balance
Sheets
December
31, 2006 and 2005
|
F-3
|
|
|
|
|
Statements
of Operations
Years
ended December 31, 2006 and 2005
|
F-4
|
|
|
|
|
Statements
of Changes in Stockholders’ Equity (Deficit)
|
|
|
Year
ended December 31, 2005
|
F-5
|
|
Statements
Of Changes in Stockholders’ Equity (Deficit)
|
F-6
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
Statements
of Cash Flows
Years
ended December 31, 2006 and 2005
|
F-7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-23
|
F-1
REPORT
OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
To
The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiaries
Medford,
New York
We
have
audited the consolidated balance sheets of Chembio Diagnostics, Inc. and
Subsidiaries (the “Company”) as of December 31, 2006 and 2005 and the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the two years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated
results of its operations and its cash flows for the two years in the period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.
LAZAR
LEVINE & FELIX LLP
/s/
LAZAR LEVINE & FELIX LLP
New
York,
New York
March
28,
2007
F-2
|
CHEMBIO
DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
AS
OF DECEMBER 31,
|
|||||||
|
|
|
|
|||||
|
-
ASSETS -
|
|||||||
|
|
2006
|
2005
|
|||||
|
CURRENT
ASSETS:
|
|
|
|||||
|
Cash
|
$
|
4,290,386
|
$
|
232,148
|
|||
|
Accounts
receivable, net of allowance for doubtful accounts of $42,967 and
$20,488
for 2006 and 2005, respectively
|
1,350,240
|
1,255,073
|
|||||
|
Inventories
|
1,108,950
|
687,983
|
|||||
|
Prepaid
expenses and other current assets
|
204,092
|
292,989
|
|||||
|
TOTAL
CURRENT ASSETS
|
6,953,668
|
2,468,193
|
|||||
|
|
|||||||
|
FIXED
ASSETS, net of accumulated depreciation
|
603,603
|
438,632
|
|||||
|
|
|||||||
|
OTHER
ASSETS
|
349,306
|
109,581
|
|||||
|
|
|||||||
|
$
|
7,906,577
|
$
|
3,016,406
|
||||
|
|
|||||||
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
-
|
|||||||
|
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
1,709,939
|
$
|
1,477,925
|
|||
|
Current
portion of accrued interest payable
|
93,160
|
120,000
|
|||||
|
Current
portion of obligations under capital leases
|
37,336
|
38,368
|
|||||
|
Payable
to related party
|
-
|
182,181
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
1,840,435
|
1,818,474
|
|||||
|
|
|||||||
|
OTHER
LIABILITIES:
|
|||||||
|
Obligations
under capital leases, net of current portion
|
7,081
|
44,417
|
|||||
|
Accrued
interest, net of current portion
|
-
|
100,812
|
|||||
|
Series
C redemption put
|
449,677
|
-
|
|||||
|
TOTAL
LIABILITIES
|
2,297,193
|
1,963,703
|
|||||
|
|
|||||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
|
|||||||
|
PREFERRED
STOCK
|
|||||||
|
Series
C 7% Convertible - $.01 par value: 165 shares issued and outstanding.
Liquidation preference-$8,397,583
|
6,549,191
|
-
|
|||||
|
|
|||||||
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|||||||
|
Preferred
Stock - 10,000,000 shares authorized:
|
|||||||
|
Series
A 8% Convertible - $.01 par value: 149.92119 and 158.68099 shares
issued
and outstanding for 2006 and 2005, respectively. Liquidation preference
$4,557,604 and $4,822,957 for 2006 and 2005, respectively.
|
2,504,313
|
2,628,879
|
|||||
|
Series
B 9% Convertible - $.01 par value: 113.93591 and 102.19760 shares
issued
and outstanding for 2006 and 2005, respectively. Liquidation
preference-$5,958,848 and $5,341,896 for 2006 and 2005,
respectively
|
3,555,786
|
3,173,239
|
|||||
|
Common
stock - $.01 par value; 100,000,000 shares authorized 11,296,961
and
8,491,429 shares issued and outstanding for 2006 and 2005,
respectively.
|
112,970
|
84,914
|
|||||
|
Additional
paid-in capital
|
19,960,618
|
14,034,099
|
|||||
|
Accumulated
deficit
|
(27,073,494
|
)
|
(18,868,428
|
)
|
|||
|
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
(939,807
|
)
|
1,052,703
|
||||
|
|
|||||||
|
$
|
7,906,577
|
$
|
3,016,406
|
||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|||||||
F-3
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
FOR
THE YEARS ENDED
|
|||||||
|
December
31, 2006
|
December
31, 2005
|
||||||
|
REVENUES:
|
|||||||
|
Net
sales
|
$ |
6,294,012
|
$ |
3,359,532
|
|||
|
License
revenue
|
-
|
250,000
|
|||||
|
Research
grants and development income
|
208,468
|
331,198
|
|||||
|
TOTAL
REVENUES
|
6,502,480
|
3,940,730
|
|||||
|
Cost
of sales
|
4,485,912
|
2,608,584
|
|||||
|
GROSS
PROFIT
|
2,016,568
|
1,332,146
|
|||||
|
OVERHEAD
COSTS:
|
|||||||
|
Selling,
general and administrative expenses
|
5,195,289
|
3,265,235
|
|||||
|
Research
and development expenses
|
1,401,472
|
1,364,898
|
|||||
|
6,596,761
|
4,630,133
|
||||||
|
LOSS
FROM OPERATIONS
|
(4,580,193
|
)
|
(3,297,987
|
)
|
|||
|
OTHER
INCOME (EXPENSES):
|
|||||||
|
Settlement
of accounts payable
|
-
|
21,867
|
|||||
|
Other
income
|
25,000
|
-
|
|||||
|
Interest
income
|
29,532
|
39,803
|
|||||
|
Interest
expense
|
(386,895
|
) |
(15,683
|
)
|
|||
|
Loss
on extinguishment of debt
|
(87,464
|
) |
-
|
||||
|
Gain
on disposal of fixed assets
|
5,000
|
-
|
|||||
|
LOSS
BEFORE INCOME TAXES
|
(4,995,020
|
)
|
(3,252,000
|
)
|
|||
|
Income
taxes
|
-
|
-
|
|||||
|
NET
LOSS
|
(4,995,020
|
)
|
(3,252,000
|
)
|
|||
|
Dividends
payable in stock to preferred stockholders
|
1,022,897
|
818,321
|
|||||
|
Dividend
accreted to preferred stock for associated costs and a beneficial
conversion feature
|
2,187,149
|
2,698,701
|
|||||
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ |
(8,205,066
|
) | $ |
(6,769,022
|
)
|
|
|
Basic
and diluted loss per share
|
$ |
(0.80
|
)
|
$ |
(0.88
|
)
|
|
|
Weighted
number of shares outstanding, basic and
diluted
|
10,293,168
|
7,705,782
|
|||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|||||||
F-4
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT 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 consolidated financial
statements.
|
||||||||||||||||||||||||||||
F-5
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
||||||||||||||||||||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31, 2006
|
||||||||||||||||||||||||||||
|
|
|
Series
A Preferred Stock
|
Series
B Preferred Stock
|
Common
Stock
|
|
Additional
paid in capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|||||||||||||||
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Balance
at December 31, 2005
|
|
|
158.68099
|
|
$
|
2,628,879
|
|
|
102.19760
|
|
$
|
3,173,239
|
|
|
8,491,429
|
|
$
|
84,914
|
|
$
|
14,034,099
|
|
$
|
(18,868,428
|
)
|
$
|
1,052,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
-
|
|
|
-
|
|
|
20.0000
|
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
|
(112,750
|
)
|
|
-
|
|
|
887,250
|
|
|
For
fees
|
|
|
-
|
|
|
-
|
|
|
2.0000
|
|
|
100,000
|
|
|
-
|
|
|
-
|
|
|
(100,000
|
)
|
|
-
|
|
|
-
|
|
|
For
dividends
|
|
|
-
|
|
|
-
|
|
|
1.79797
|
|
|
89,899
|
|
|
-
|
|
|
-
|
|
|
(89,899
|
)
|
|
-
|
|
|
-
|
|
|
Allocation
of fair value to warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(481,470
|
)
|
|
-
|
|
|
-
|
|
|
1,880,185
|
|
|
-
|
|
|
1,398,715
|
|
|
Allocation
of value of beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(463,434
|
)
|
|
-
|
|
|
-
|
|
|
2,187,149
|
|
|
-
|
|
|
1,723,715
|
|
|
Accretion
of preferred dividend
|
|
|
-
|
|
|
366,563
|
|
|
-
|
|
|
508,751
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,022,897
|
)
|
|
(147,583
|
)
|
|
Accretion
of beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
463,434
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,187,149
|
)
|
|
(1,723,715
|
)
|
|
Payment
of dividends
|
|
|
-
|
|
|
(369,123
|
)
|
|
-
|
|
|
(473,982
|
)
|
|
959,608
|
|
|
9,596
|
|
|
633,284
|
|
|
-
|
|
|
(200,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
converted from preferred
|
|
|
(8.75980
|
)
|
|
(122,006
|
)
|
|
(12.05966
|
)
|
|
(360,651
|
)
|
|
1,426,483
|
|
|
14,265
|
|
|
468,392
|
|
|
-
|
|
|
|
|
|
For
services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
178,750
|
|
|
1,788
|
|
|
137,890
|
|
|
-
|
|
|
139,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants/Advisory
Board
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
137,022
|
|
|
-
|
|
|
137,022
|
|
|
Prior
CEO warrant
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
34,000
|
|
|
-
|
|
|
34,000
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
240,691
|
|
|
2,407
|
|
|
143,914
|
|
|
-
|
|
|
146,321
|
|
|
Issued
for bridge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
328,341
|
|
|
-
|
|
|
328,341
|
|
|
Option
valuation per 123R
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
278,991
|
|
|
-
|
|
|
278,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,995,020
|
)
|
|
(4,995,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
149.92119
|
|
$
|
2,504,313
|
|
|
113.93591
|
|
$
|
3,555,786
|
|
|
11,296,961
|
|
$
|
112,970
|
|
$
|
19,960,618
|
|
$
|
(27,073,494
|
)
|
$
|
(939,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||||||||||||||||||
F-6
|
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|
FOR
THE YEARS ENDED:
|
|||||
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
||
|
Net
loss
|
|
$
|
(4,995,020
|
)
|
$
|
(3,252,000
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
209,541
|
|
|
98,508
|
|
|
Provision
for doubtful accounts
|
|
|
22,479
|
|
|
4,120
|
|
|
Expenses
related to shares, options and warrants issued for
services
|
|
|
565,668
|
|
|
77,606
|
|
|
Expenses
related to warrants issued with bridge financing
|
|
|
328,341
|
|
|
-
|
|
|
Expenses
related to conversion of bridge into Series C Preferred Stock
|
|
|
99,469
|
|
|
-
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(117,645
|
)
|
|
(1,094,137
|
)
|
|
Restricted
cash
|
|
|
-
|
|
|
250,000
|
|
|
Inventory
|
|
|
(420,967
|
)
|
|
(149,336
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
256,039
|
|
|
212,939
|
|
|
Other
|
|
|
(150,828
|
)
|
|
(153,060
|
)
|
|
Net
cash used in operating activities
|
|
|
(4,202,923
|
)
|
|
(4,005,360
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(374,513
|
)
|
|
(348,741
|
)
|
|
Net
cash used in investing activities
|
|
|
(374,513
|
)
|
|
(348,741
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Sale
of Series C Preferred Stock and associated warrants, net of cash
cost of
financing of $110,000
|
|
|
7,440,285
|
|
|
-
|
|
|
Sale
of Series B Preferred Stock and associated warrants, net of cash
cost of
financing for the periods ended 2006 and 2005 of $2,750 and $321,639,
respectively
|
|
|
997,250
|
|
|
4,725,861
|
|
|
Payment
of obligations to related party
|
|
|
(182,181
|
)
|
|
-
|
|
|
Payment
of capital lease obligation
|
|
|
(38,368
|
)
|
|
(42,511
|
)
|
|
Payment
of accrued interest
|
|
|
(127,652
|
)
|
|
(112,138
|
)
|
|
Proceeds
from bridge/working capital loan
|
|
|
1,300,000
|
|
|
161,917
|
|
|
Payment
of bridge/working capital loan
|
|
|
(699,755
|
)
|
|
(206,917
|
)
|
|
Payment
of dividends
|
|
|
(200,226
|
)
|
|
-
|
|
|
Proceeds
from exercise of warrants
|
|
|
146,321
|
|
|
25,200
|
|
|
Net
cash provided by financing activities
|
|
|
8,635,674
|
|
|
4,551,412
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
4,058,238
|
|
|
197,311
|
|
|
Cash
- beginning of the period
|
|
|
232,148
|
|
|
34,837
|
|
|
|
|
|
|
|
|
|
|
|
CASH
- end of the period
|
|
$
|
4,290,386
|
|
$
|
232,148
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
173,438
|
|
$
|
124,805
|
|
|
Cash
paid during the period for corporate taxes
|
|
|
2,269
|
|
|
3,763
|
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Warrants
issued as payment for fees
|
|
$
|
-
|
|
$
|
388,631
|
|
|
Value
of warrants issued allocated to additional paid in capital
|
|
|
1,880,185
|
|
|
|
|
|
Accreted
beneficial conversion to preferred stock
|
|
|
2,187,149
|
|
|
2,698,701
|
|
|
Bridge
debt and associated interest converted to Series C Preferred
Stock
|
|
|
699,714
|
|
|
-
|
|
|
Series
B Preferred issued as payment for financing fees
|
|
|
100,000
|
|
|
249,000
|
|
|
Preferred
stock converted to common stock
|
|
|
482,657
|
|
|
|
|
|
Series
A Preferred and associated warrants exchanged for Series B Preferred
and
associated warrants
|
|
|
-
|
|
|
20,000
|
|
|
Accreted
Dividend to Preferred Stock
|
|
|
1,022,897
|
|
|
818,321
|
|
|
Preferred
B issued as payment of dividend
|
|
|
89,899
|
|
|
203,493
|
|
|
Common
Stock issued as payment of dividend
|
|
|
642,879
|
|
|
378,398
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
|||||||
F-7
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
|
NOTE
|
1
|
—
|
Description
of Business:
|
Chembio
Diagnostics, Inc. (the Company) and its subsidiaries develop, manufacture,
and
market rapid diagnostic tests that detect infectious diseases. The
Company’s
main
products presently commercially available are three rapid tests for the
detection of HIV antibodies in whole blood, serum and plasma samples, two of
which were approved by the FDA in 2006; the third is sold for export only.
These
products all employ single path lateral flow technology. The Company also has
a
rapid test for Chagas disease (a parasitic disease endemic in Latin America)
as
well as a line of rapid tests for tuberculosis, including tests for tuberculosis
in animals for which USDA approval is pending. The Company’s products are sold
to medical laboratories and hospitals, governmental and public health entities,
non-governmental organizations, medical professionals and retail establishments.
Chembio’s products are sold either under its STAT PAK® or SURE CHECK ®
registered trademarks or the private labels of our marketing partners, such
as
is the case with the Clearview® label owned by Inverness Medical Innovations,
Inc., which is the Company’s exclusive marketing partner for its rapid HIV test
products in the United States.
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”). For financial reporting purposes, the acquisition was treated as a
recapitalization of Chembio Diagnostics, Inc. with CDS, as the acquiror. 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.
Series
C Financing
On
September 29, 2006 and October 5, 2006, the Company completed a private
placement of 7% Series C Convertible Preferred Stock and associated warrants
for
$8,250,000. The purchase price per unit (one share plus associated warrants)
was
$50,000 and a total of 165 shares and warrants to purchase 2,578,125 shares
of
Common Stock were issued in the transaction.
In
connection with this private placement, we employed Midtown Partners & Co.,
LLC to serve as the placement agent with respect to investors who invested
$1,000,000 in this offering. As compensation for services rendered to the
Company, we agreed to (i) pay Midtown a cash fee equal to 5% of the amount
of
cash proceeds the Company received from the investors Midtown solicited, and
(ii) issue to Midtown warrants to purchase 62,500 shares of our common stock.
The warrants issued to Midtown are exercisable for a period of five years from
their issuance and have an exercise price of $1.00 per share.
|
NOTE
|
2
|
—
|
SIGNIFICANT
ACCOUNTING POLICIES:
|
| (a) |
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the Company, and
its
three wholly owned subsidiaries. All intercompany transactions and balances
have
been eliminated in consolidation.
| (b) |
Inventories:
|
Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out method.
F-8
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
| (c) |
Fixed
Assets:
|
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.
| (d) |
Use
of Estimates:
|
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.
| (e) |
Income
Taxes:
|
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:
|
Effective
January 1, 2006, the Company’s Plan is accounted for in accordance with the
recognition and measurement provisions of Statement of Financial Accounting
Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"),
which replaces FAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations. FAS 123(R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 107 ("SAB 107"),
which
provides the Staff's views regarding the interaction between SFAS No. 123(R)
and
certain SEC rules and regulations and provides interpretations with respect
to
the valuation of share-based payments for public companies. See footnote 5
for
further details.
| (h) |
Statements
of Cash Flows:
|
For
purposes of the statements of cash flows the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
| (i) |
Revenue
Recognition:
|
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.
F-9
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
| (j) |
Concentrations
of Credit Risk:
|
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments and trade receivables.
The Company places its temporary cash instruments with well-known financial
institutions and, at times, may maintain balances in excess of the $100,000
FDIC
Insurance limit. The Company monitors the credit ratings of the financial
institutions to mitigate this risk. 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.
| (k) |
Fair
Value of Financial
Instruments:
|
Fair
values of cash, accounts receivable, prepaid expenses and other current assets
and accounts payable reflected in these consolidated financial statements
approximate carrying value as these are short-term in nature.
| (l) |
Recent
Accounting Pronouncements Affecting the Company:
|
SEC
Staff Accounting Bulletin 108 (“SAB 108”), Considering the Effects of Prior Year
Misstatements when Qualifying Misstatements in Current Year Financial
Statements
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 was issued in
order
to eliminate the diversity of practice surrounding how public companies quantify
financial statement misstatements.
In
SAB
108, the SEC staff established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatements
on
each of the company's financial statements and the related financial statement
disclosures. This model is commonly referred to as a "dual approach" because
it
requires quantification of errors under both the iron curtain and the roll-over
methods.
SAB
108
permits existing public companies to initially apply its provisions either
by
(i) restating prior financial statements as if the "dual approach" had always
been used or (ii) recording the cumulative effect of initially applying the
"dual approach" as adjustments to the carrying values of assets and liabilities
as of January 1, 2006 with an offsetting adjustment recorded to the opening
balance of retained earnings.
Statement
of Financial Accounting Standard 155, Accounting for Certain Hybrid Financial
Instruments (“SFAS No. 155”)
In
February 2006, the FASB amended SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”, with the
issuance of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”.
SFAS No. 155 resolves issues addressed in the earlier standards and is effective
for all financial instruments acquired or issued after the beginning of an
entity’s first fiscal year that begins after September 15, 2006.
Statement
of Financial Accounting Standard 157, Fair Value Measurements (“SFAS
157”)
In
September 2006, the Financial Accounting Standard Board issued a standard that
provides enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. The standard does not expand
the use of fair value in any new circumstances.
F-10
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has
not yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year.
Financial
Accounting Standards Board (FASB) No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”)
In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109 (FIN 48), which provides
clarification related to the process associated with accounting for uncertain
tax positions recognized in consolidated financial statements. FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken, or expected to be taken, in a tax
return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. We are required to adopt FIN 48 on
January 1, 2007, although early adoption is permitted. We are currently
evaluating the impact of adopting FIN 48 on our consolidated financial
statements.
FSP
FAS 123(R )-5, Amendment of FASB Staff Position FAS 123(R)-1
FSP
FAS
123(R )-5 was issued in October 2006. The FSP provides that instruments that
were originally issued as employee compensation and then modified, and that
modification is made to the terms of the instrument solely to reflect an equity
restructuring that occurs when the holders are no longer employees, no change
in
the recognition or the measurement (due to a change in classification) of those
instruments will result if both of the following conditions are met: (a). There
is no increase in fair value of the award (or the ratio of intrinsic value
to
the exercise price of the award is preserved, that is, the holder is made
whole), or the antidilution provision is not added to the terms of the award
in
contemplation of an equity restructuring; and (b). All holders of the same
class
of equity instruments (for example, stock options) are treated in the same
manner. The provisions in this FSP shall be applied in the first reporting
period beginning after the date the FSP is posted to the FASB website. We will
adopt this FSP from its effective date. We currently do not believe that its
adoption will have any impact on our financial statements.
| (m) |
Preferred
Stock:
|
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 applied; accordingly, the Series A and Series B Preferred were
reclassified to permanent equity at December 31, 2005.
The
Company’s Series C Preferred Stock contains provisions whereby, under certain
conditions outside of the control of management, the holders could require
redemption; accordingly, it is currently classified outside of permanent equity.
| (n) |
Earnings
Per Share
|
The
following weighted average shares were used for the computation of basic and
diluted earnings per share:
|
|
|
For
the years ended
|
|
||||
|
|
|
December
31, 2006
|
|
|
December
31, 2005
|
|
|
|
Basic
|
|
|
10,293,168
|
|
|
7,705,782
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,293,168
|
|
|
7,705,782
|
|
F-11
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
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, 2006 and 2005 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, 2006
|
|
|
December
31, 2005
|
|
|
|
Stock
Options
|
|
|
1,674,375
|
|
|
1,430,375
|
|
|
Warrants
|
|
|
26,162,704
|
|
|
21,327,972
|
|
|
Preferred
Stock
|
|
|
27,147,535
|
|
|
16,311,602
|
|
|
NOTE
|
3
|
—
|
Geographic
Information:
|
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for the way that business enterprises report information
about operating segments in financial statements and requires that those
enterprises report selected information. It also establishes standards for
related disclosures about product and services, geographic areas, and major
customers.
The
Company produces only one group of similar products known collectively as “rapid
medical tests”. As per the provisions of SFAS 131, management believes that it
operates in a single business segment. Net sales by geographic area are as
follows:
|
|
For
the years ended
|
||||||
|
|
|
December
31, 2006
|
|
|
December
31, 2005
|
|
|
|
Africa
|
|
$
|
1,552,043
|
|
$
|
802,925
|
|
|
Asia
|
|
|
245,838
|
|
|
124,467
|
|
|
Australia
|
|
|
4,405
|
|
|
10,585
|
|
|
Europe
|
|
|
92,248
|
|
|
125,135
|
|
|
Middle
East
|
|
|
194,767
|
|
|
55,652
|
|
|
North
America
|
|
|
1,384,933
|
|
|
503,456
|
|
|
South
America
|
|
|
2,819,778
|
|
|
1,737,312
|
|
|
|
|
$
|
6,294,012
|
|
$
|
3,359,532
|
|
|
NOTE
|
4
|
—
|
Accounts
payable and accrued
liabilities:
|
Accounts
payable and accrued liabilities
as of
December 31:
|
|
|
|
2006
|
|
|
2005
|
|
|
Accounts
payable - suppliers
|
|
$
|
679,990
|
|
$
|
550,247
|
|
|
Accrued
commissions
|
|
|
91,920
|
|
|
171,587
|
|
|
Accrued
royalties
|
|
|
461,048
|
|
|
381,510
|
|
|
Accrued
payroll and other taxes
|
|
|
87,637
|
|
|
63,146
|
|
|
Accrued
vacation
|
|
|
214,858
|
|
|
145,566
|
|
|
Accrued
legal and accounting
|
|
|
7,000
|
|
|
50,024
|
|
|
Accrued
expenses - other
|
|
|
167,486
|
|
|
115,845
|
|
|
TOTAL
|
|
$
|
1,709,939
|
|
$
|
1,477,925
|
|
F-12
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
|
NOTE
|
5
|
—
|
EMPLOYEE
STOCK OPTION PLAN:
|
As
part
of the merger, the Company adopted the 1999 Stock Option Plan (the “Plan”) of
CDS covering 1,500,000 shares of Common Stock. Under the terms of 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.
Effective
January 1, 2006, the Company’s Plan is accounted for in accordance with the
recognition and measurement provisions of Statement of Financial Accounting
Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"),
which replaces FAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations. FAS 123(R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 107 ("SAB 107"),
which
provides the Staff's views regarding the interaction between SFAS No. 123(R)
and
certain SEC rules and regulations and provides interpretations with respect
to
the valuation of share-based payments for public companies.
Prior
to
January 1, 2006, the Company accounted for similar transactions in accordance
with APB No. 25 which employed the intrinsic value method of measuring
compensation cost. Accordingly, compensation expense was not recognized for
fixed stock options if the exercise price of the option equaled or exceeded
the
fair value of the underlying stock at the grant date.
While
FAS
No. 123 encouraged recognition of the fair value of all stock-based awards
on
the date of grant as expense over the vesting period, companies were permitted
to continue to apply the intrinsic value-based method of accounting prescribed
by APB No. 25 and disclose certain pro-forma amounts as if the fair value
approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting
for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied with
these disclosure requirements for all applicable periods prior to January 1,
2006.
In
adopting FAS 123(R), the Company applied the modified prospective approach
to
transition. Under the modified prospective approach, the provisions of FAS
123(R) are to be applied to new awards and to awards modified, repurchased,
or
cancelled after the required effective date. Additionally, compensation cost
for
the portion of awards for which the requisite service has not been rendered
that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As
a
result of the adoption of FAS 123(R), the Company's results for the year ended
December 31, 2006 include share-based compensation expense totaling
approximately $279,000. Such amounts have been included in the Consolidated
Statements of Operations within cost of goods sold ($28,000), research and
development ($68,000) and selling, general and administrative expenses
($183,000). No income tax benefit has been recognized in the income statement
for share-based compensation arrangements due to the history of operating
losses.
F-13
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
Stock
option compensation expense in the year ended December 31, 2006 represents
the
estimated fair value of options outstanding which are being amortized on a
straight-line basis over the requisite vesting period of the entire award.
The
weighted average estimated fair value of stock options granted in the years
ended December 31, 2006 and 2005 was $.53 and $.50, respectively. The fair
value
of options at the date of grant was estimated using the Black-Scholes option
pricing model. During 2006, the Company took into consideration guidance under
SFAS 123(R) and SAB 107 when reviewing and updating assumptions. The expected
volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is determined using the simplified
method as permitted by SAB 107, as the Company has no history of employee
exercise of options to-date.
The
assumptions made in calculating the fair values of options are as follows:
|
|
|
Years
Ended
|
|||||
|
|
|
|
December
31, 2006
|
|
|
December
31, 2005
|
|
|
Expected
term (in years)
|
|
|
4
to 5
|
|
|
5
|
|
|
Expected
volatility
|
|
|
116.20%
to 118.16%
|
|
|
95.56%
to 114.94%
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
0%
|
|
|
|
Risk-free
interest rate
|
|
|
4.39%
to 4.92%
|
|
|
3.72%
to 4.36%
|
|
The
following table addresses the additional disclosure requirements of 123(R)
in
the period of adoption. The table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of FAS No. 123
had been applied to all outstanding and unvested awards in the prior year
comparable period.
|
|
|
|
For
the year ended
|
|
|
|
|
|
December
31, 2005
|
|
|
Net
loss attributable to common stockholders, as reported
|
|
$
|
(6,769,022
|
)
|
|
Add:
Stock-based compensation included in reported net loss
|
|
|
-
|
|
|
Deduct:
Total stock based compensation expense determined under the fair
value
based method for all awards (no tax effect)
|
|
|
(180,195
|
)
|
|
Pro
forma net loss attributable to common stockholders
|
|
$
|
(6,949,217
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
Basic
and diluted loss per share - as reported
|
|
$
|
(0.88
|
)
|
|
Basic
and diluted loss per share - pro forma
|
|
$
|
(0.90
|
)
|
The
Company granted 831,250 new options under the Plan during the year ended
December 31, 2006 at an exercise price of $0.75 per share. The Company granted
316,000 new options under the Plan during year ended December 31, 2006 at
exercise
prices ranging from $0.55 per share to $0.62 per share.
F-14
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
The
following table provides stock options activity for the years ended December
31,
2005 and 2006:
|
Stock
Options
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at January 1, 2005
|
|
|
1,105,000
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
Granted
|
|
|
481,500
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(300,750
|
)
|
$
|
1.75
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,285,750
|
|
$
|
1.20
|
|
|
4.49
years
|
|
|
-
|
|
|
Granted
|
|
|
1,147,250
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(795,250
|
)
|
$
|
1.56
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100,000
|
)
|
$
|
0.60
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(8,000
|
)
|
$
|
0.75
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,529,750
|
|
$
|
0.70
|
|
|
3.60
years
|
|
|
204,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
1,099,250
|
|
$
|
0.64
|
|
|
3.44
years
|
|
|
150,956
|
|
On
April
17, 2006 the Compensation Committee of the Company’s Board of Directors approved
the cancellation of all employee options where the exercise price was greater
than $.75 per share (an aggregate of 795,250 options) and issued new options
at
an exercise price of $.75 per share with the same vesting schedule and
expiration dates (except for 122,500 new options that were issued with a vesting
date of January 1, 2007 which is later than the vesting date of the options
they
replaced). The expense related to this modification in the second quarter of
2006 was $58,000.
|
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, 2006 the stock price was higher than the revised
exercise price; therefore there was an adjustment to compensation as required
of
$34,000.
Such
warrants remain unexercised as of December 31, 2006.
F-15
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
The
Company has a liability to its President on December 31, 2006 for $65,000 of
accrued interest on prior debt that is not accruing additional interest. The
accrued interest is being repaid according to the terms related to the Series
B
offering, $91,822 was repaid in 2006. In addition, the Company had a liability
to its President for funds advanced by him to it or paid directly by him to
vendors on its behalf of $182,000 (non-interest bearing and payable on demand)
which was repaid in October of 2006.
|
NOTE
|
7
|
—
|
INVENTORIES:
|
Inventories
consist of at December 31:
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw
Materials
|
|
$
|
629,967
|
|
$
|
425,758
|
|
|
Work
in Process
|
|
|
257,208
|
|
|
86,001
|
|
|
Finished
Goods
|
|
|
221,775
|
|
|
176,224
|
|
|
|
|
$
|
1,108,950
|
|
$
|
687,983
|
|
|
NOTE
|
8
|
—
|
FIXED
ASSETS:
|
Fixed
assets consist of at December 31:
|
|
|
|
2006
|
|
|
2005
|
|
|
Machinery
and equipment
|
|
$
|
604,668
|
|
$
|
604,243
|
|
|
Furniture
and fixtures
|
|
|
139,624
|
|
|
126,277
|
|
|
Computer
and telephone equipment
|
|
|
259,078
|
|
|
94,283
|
|
|
Leasehold
improvements
|
|
|
226,415
|
|
|
131,157
|
|
|
Tooling
|
|
|
41,900
|
|
|
41,900
|
|
|
|
|
|
1,271,685
|
|
|
997,860
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(668,082
|
)
|
|
(559,228
|
)
|
|
|
|
$
|
603,603
|
|
$
|
438,632
|
|
Included
in the above fixed assets is $52,631, net of accumulated depreciation of
$105,610, of assets held under capital leases as of December 31, 2006.
Depreciation for the 2006 and 2005 years aggregated $209,541 and $98,508,
respectively.
|
NOTE
|
9
|
—
|
LONG-TERM
DEBT:
|
In
connection with the Series B offering interest payable on certain debt was
agreed to be paid over
33
months in installments of $10,000 per month and a final payment of $3,160 in
the
34th
month.
These
payments are subordinate to the redemption rights of the Series B preferred
stockholders. No additional interest accrues on this payable. The accrued
interest repaid was $127,652 and $112,348 in the year ended 2006 and 2005,
respectively. The balance remaining unpaid was $93,160 and $220,812 as of
December 31, 2006 and 2005, respectively.
On
June
29, 2006, the Company borrowed $1,300,000 from a group of four institutional
investors as a bridge financing arrangement. The loan was repaid in part on
September 29, 2006 and the balance converted on October 5, 2006 into Series
C
Preferred Stock. The loan was secured by a lien on the assets of the
Company.
F-16
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
|
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, 2006 were as follows:
Year
ending December 31,
|
2007
|
$
|
40,113
|
||
|
2008
|
7,260
|
|||
|
|
47,373
|
|||
|
Less:
imputed interest
|
(2,956
|
)
|
||
|
Present
value of future minimum lease payments
|
44,417
|
|||
|
Less:
current maturities
|
(37,336
|
)
|
||
|
|
$
|
7,081
|
These
leases have interest rates ranging from 8% - 15%.
|
NOTE
|
11
|
—
|
RESEARCH
GRANTS AND DEVELOPMENT
CONTRACTS:
|
In
2006
and 2005, the Company received research grants and development contracts in
the
amounts of $208,468 and $331,198, respectively. The decrease in grant and
development income was due to grants received in 2005 that weren’t continued or
awarded in 2006.
|
NOTE
|
12
|
—
|
INCOME
TAXES:
|
No
provision for Federal income taxes was required for the years ended December
31,
2006 or 2005, due to the Company’s operating losses. At December 31, 2006 and
2005, the Company has unused net operating loss carry-forwards of approximately
$16,900,000 and $12,000,000, respectively which expire at various dates through
2026. 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 $350,000 and $294,000 for the years ended December 31, 2006
and
2005, respectively which expire at various dates through
2026.
As
of
December 31, 2006 and 2005, the deferred tax assets related to the
aforementioned carry-forwards have been fully offset by valuation allowances,
since significant utilization of such amounts is not presently expected in
the
foreseeable future.
Deferred
tax assets and valuation allowances consist of:
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
||
|
Net
operating loss carry-forwards
|
|
$
|
6,800,000
|
|
$
|
5,800,000
|
|
|
Research
and development credit
|
|
|
350,000
|
|
|
288,000
|
|
|
Other
|
|
|
33,000
|
|
|
40,000
|
|
|
Gross
deferred tax assets
|
|
|
7,183,000
|
|
|
6,128,000
|
|
|
Valuation
allowances
|
|
|
(7,183,000
|
)
|
|
(6,128,000
|
)
|
|
Net
deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
F-17
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
NOTE
13—STOCKHOLDERS’ EQUITY:
(a) Common
Stock
During
the year ended December 31, 2006 the Company issued 163,750 shares, respectively
of its’ Common Stock to a consultant as compensation. The number of shares
issued was a fixed number set forth in the consultant’s contract, with specific
issue dates and without regard to the market price of the stock on the date
of
issuance. For accounting purposes, the shares were valued based on the closing
market price on dates of issuance from $0.55 to $0.91 per share and the related
compensation expense for the year ended December 31, 2006 was $129,029.
In
July
2006, the Company issued to a member of the Board of Directors 15,000 shares
of
common stock as additional compensation for services as the audit committee
chair. This stock was valued based on the market closing price on the date
of
the grant and $10,650 was charged to expense.
During
the year ended December 31, 2006 Series A Preferred shareholders converted
8.75980 shares into 437,989 shares of Common Stock and Series B Preferred
shareholders converted 12.05966 shares into 988,494 shares of Common Stock.
During
the year ended December 31, 2006 the Company issued 140,691 shares of its Common
Stock upon the exercise of warrants and received cash of $86,321.
During
the year ended December 31, 2006 the Company issued 100,000 shares of its Common
Stock upon the exercise of options and received cash of $60,000.
In
the
year ended December 31, 2006 the Company issued 543,168 shares of its Common
Stock as payment of dividends on its Series A Preferred Stock and 416,440 shares
of its Common Stock as payment of dividends on its Series B Preferred Stock,
These shares were valued using a 10 day volume weighted average price for the
ten trading days immediately preceding the issue date.
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 1,713,114 shares of Common Stock issued in connection
with
the March 2006 Series B offering were assigned a value of $481,470. These
warrants have an exercise price of $0.61 per share and a five year life.
Warrants
to purchase 520,000 shares of Common Stock were issued in connection with the
bridge loan and were assigned a value of $328,341. These warrants have an
exercise price of $0.75 per share and a five year life.
Warrants
to purchase 2,578,125 shares of Common Stock were issued in connection with
the
completed Series C Offering and were assigned a value of $1,398,715. These
warrants have an exercise price of $1.00 per share and a five year life.
F-18
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
During
the year ended December 31, 2006, the Company issued warrants to purchase
241,684 shares of Common Stock at exercise prices from $0.55 to $0.883 per
share
to a sales agent as payment for commissions (value $61,700) and commissions
accrued at year end 2005 (value $24,000) and to consultants as compensation
for
2006 ($51,324). These warrants have a five year life.
All
of
the above warrants were valued using a Black-Scholes option
pricing model based on assumptions for expected volatilities from 116.2% to
118.16%, expected lives of 5 years and expected risk free interest rates from
4.39% to 5.13%.
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) Series
A 8% Convertible Preferred Stock:
The
Series A Preferred Stock was issued in 2004 at a face value of $30,000 per
share
and came with detachable warrants. The recorded amount of the preferred shares
was calculated using a fair value allocation between the preferred shares and
detachable warrants. Some key features include:
Dividends:
Holders of series A preferred stock are entitled to an 8% per annum dividend
per
share. The dividend accrues and is payable semi-annually either in cash, in
shares of series A preferred stock or in shares of common stock. In June 2006,
the Series A Preferred Stock was amended to provide, among other amendments
that
dividends in Preferred or Common Stock would be based on a 10 day volume
weighted average market price at the time of the dividend. Accrued but unpaid
dividends are also payable upon the conversion or redemption of the shares
of
series A preferred stock and upon our liquidation, dissolution or winding up.
In
the
event the Company elects to pay any dividend in shares of common stock or in
shares of series A preferred stock, so long as Vicis Capital Master Fund owns
any shares of series A preferred stock, Vicis Capital Master Fund will receive
such dividend in cash unless it otherwise notifies the Company no later than
five (5) trading days prior to the date of the applicable dividend payment.
Such
payment to Vicis Capital Master Fund will not affect the Company’s election to
make the applicable dividend payment in stock so long as the only holder
receiving the dividend payment in cash is Vicis Capital Master Fund.
To date
all dividends have been paid in Common Shares, except $60,000 which was paid
in
cash to Vicis
Capital Master Fund.
Conversion:
Series A preferred stock is convertible, at the option of the holders, into
shares of Common Stock at a conversion price of $0.60 per share. Based on its
original purchase price of $30,000 per share, each share of Series A Preferred
Stock is convertible into 50,000 shares of Common Stock.
F-19
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
Redemption:
The
holders have the right, under certain conditions, to require redemption of
all
or a portion of such holder’s shares of Series A Preferred Stock. As of December
31, 2006 and 2005 such conditions no longer applied; accordingly, no accretion
is being made to bring the value up to its redemption value. The liquidation
preference is $30,000 per share plus accrued and unpaid dividends, presently
$400 per share, an aggregate for all such shares of $4,557,604. As of December
31, 2005, the unpaid dividends were $394 per share, an aggregate for all such
shares of $4,822,957. Accrued but unpaid dividends of $55,971 and $62,528 are
included in the preferred stock carrying value as at December 31, 2006 and
2005,
respectively.
(d) Series
B 9% Convertible Preferred Stock:
The
Series B Preferred Stock was issued in January 2005 at a face value of $50,000
per share with detachable warrants. The recorded amount of the preferred shares
was calculated using a fair value allocation between the preferred shares and
detachable warrants. On
March
30, 2006, the Company sold $1 million of additional Series B Preferred Stock
to
a Series B Preferred shareholder pursuant to provisions of the January 2005
Series B 9% Preferred Stock financing agreements. Such provisions were exclusive
to said shareholder. Approximately $140,000 of these proceeds was used to pay
cash dividends which were accrued as of December 31, 2005. The
recorded amount of the preferred shares was calculated using a fair value
allocation between the preferred shares and detachable warrants. Some key
features of the Series B Preferred Stock are as follows:
Dividends:
The 9% Series B Preferred Stock accrues dividends at 9% per annum, payable
semi-annually. Dividends are payable in Series B Preferred Stock, Common Stock
or in cash. In June 2006, the Series B Preferred Stock was amended to provide,
among other amendments that the dividend could be paid in Common Stock (in
addition to Preferred Stock or cash) and that dividends in Preferred or Common
Stock would be based on a 10 day volume weighted average market price at the
time of the dividend. The majority investor in the Series B financing has the
option as it pertains to its dividend payment to choose cash or Preferred or
Common shares. The Company has the option to choose cash or Preferred or Common
shares as to the balance of the dividends. To date all dividends have been
paid
in Preferred or Common Shares, except $140,226 which was paid in cash at the
option of the majority investor.
In
the
event any dividend is issued,
any
holder of the majority of the outstanding series B preferred stock at the
dividend payment date, may elect whether to receive dividends on series B
preferred stock in cash, in common stock or in shares of series B preferred
stock in its sole discretion.
Conversion:
The Series B Preferred Stock is convertible, at the option of the holders,
into
shares of Common Stock at a conversion price of $.61 per share. Based on the
original purchase price of $50,000 per share, each share of Series B Stock
is
convertible into 81,967 shares of Common Stock.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series B Preferred Stock.
As
of
December 31, 2006 and 2005 such conditions no longer applied;
accordingly, no accretion is being made to bring the value up to its redemption
value. The liquidation preference is $50,000 per share plus accrued and unpaid
dividends, presently $2,300 per share, an aggregate for all such shares of
$5,958,848. As
of
December 31, 2005, the unpaid dividends were $2,270 per share, an aggregate
for
all such shares of $5,341,896. Accrued
but unpaid dividends of $262,053 and $232,016 are included in the preferred
stock carrying value as at December 31, 2006 and 2005, respectively. The 2006
accrued but unpaid dividend was paid on January 2, 2007 by the issuance of
345,579 shares of Common Stock.
F-20
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments”, the
Company evaluated the Series B Preferred Stock transaction that occurred in
January 2005 and found that there was an associated beneficial conversion
feature totaling $2,437,035; the preferred stock was further discounted by
this
amount. The beneficial conversion amount was then accreted back to the preferred
stock in accordance with the conversion provision which allowed for 100% to
be
converted immediately. The Company also evaluated the Series B Preferred Stock
transaction that occurred on March 30, 2006, see above, and found that there
was
an associated beneficial conversion feature totaling $463,434; the preferred
stock was further discounted by this amount. The beneficial conversion amount
was then accreted back to the preferred stock in accordance with the conversion
provision which allowed for 100% to be converted immediately.
(e) Series
C 7% Convertible Preferred Stock:
On
September 29, 2006 and October 5, 2006, the Company sold $8.25 million of Series
C Preferred Stock (see note 1) pursuant to provisions of the September 29,
2006
as amended on October 5, 2006 Series C 7% Preferred Stock financing agreements.
In addition the Company issued 2,578,125 warrants to the investors. See note
13(b) for information on the warrants. A summary of the significant terms as
amended on October 5, 2006 are as follows:
Dividends.
Holders of series C preferred stock are entitled to a 7% per annum
dividend per share. The dividend accrues and is payable semi-annually in cash
or
in shares of common stock, at our option. Accrued but unpaid dividends are
also
payable upon the conversion or redemption of the shares of series C preferred
stock and upon a liquidation event.
Conversion.
The series C preferred stock is convertible, at the option of the holders,
into shares of our common stock at a conversion price of $.80 per share. Based
on the original purchase price of $50,000 per share, each share of series C
preferred stock is convertible into 62,500 shares of our common stock.
Redemption:
The holders have the right, under certain conditions, to require redemption
of
all or a portion of such holder’s shares of Series C Preferred Stock. The
redemption value is the greater of (i) 130% of the stated value or $65,000
and
(ii) the product of (a) daily volume weighted average price of the Company’s
common stock and (b) a quotient of $65,000 divided by the then existing
conversion price, plus accrued and unpaid dividends and all liquidated damages.
Liquidation
preference: The liquidation preference is $50,000 per share plus accrued and
unpaid dividends and all liquidated damages. The
liquidation preference is $50,000 per share plus accrued and unpaid dividends,
presently $894.44 per share, an aggregate for all such shares of $8,397,583.
Accrued but unpaid dividends of $147,583 are included in the preferred stock
carrying value as at December 31, 2006.
The
Company has accounted for the Series C Offering pursuant to the provisions
of
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and EITF 00-19: “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock” (“EITF 00-19”). The Company has allocated the value received between the
preferred stock and the related warrants. The allocated value for the preferred
stock and the related warrants were $6,851,285 and $1,398,715, respectively.
Further, the Company has determined that the redemption feature in the Series
C
Preferred Stock needs to be bifurcated and has valued the same at $449,677.
The
warrant value and the value of the redemption feature is treated as a discount
and the preferred stock is reflected net of this discount. Due to the contingent
redemption feature, the Series C Preferred Stock is reflected as temporary
equity. The Series C Preferred Stock is not currently redeemable and there
is no
likelihood that it will become redeemable; accordingly, no accretion is being
made to bring the carrying value up to its redemption value. The liability
for
the value of the redemption feature will be “marked to market” in future
accounting periods until such time as the redemption is exercised or the feature
meets the criteria for equity classification. See footnote 13(b) for the
valuation of warrants.
F-21
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
In
addition, as per EITF 00-27 “Application of Issue 98-5 to Certain Convertible
Instruments”, the Company evaluated the Series C Preferred Stock transaction
that occurred in September 2006 and found that there were associated beneficial
conversion features totaling $1,723,715; the preferred stock was further
discounted by this amount. The beneficial conversion amount related to the
valuation of the preferred stock was then accreted back to the preferred stock
in accordance with the conversion provision which allowed for 100% to be
converted immediately. The accretion was reflected as dividend
expense.
|
NOTE
|
14
|
—
|
COMMITMENTS
AND CONTINGENCIES:
|
Employment
Contracts:
The
Company has contracts with two
key
employees. The contracts call for salaries presently aggregating $400,000 per
year. One contract expires in May of 2007 and one contract expires in May of
2008.
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, 2006 and
2005 and accordingly no expense has been recorded.
Obligations
Under Operating Leases:
The
Company leases office and manufacturing facilities. The current lease expires
on
April 30, 2007. The following is a schedule of future minimum rental
commitments:
Year
ending December 31,
|
2007
|
47,823
|
|
$47,823
|
The
Company has an option to renew the lease for an additional two year term. The
Company intends to exercise this option and therefore the additional minimal
commitments would be $68,641 for 2007 (total $116,464 with above), $104,677
for
2008 and $35,178 for 2009.
Rent
expense aggregated $100,500 and $97,000 for the years ended December 31, 2006
and 2005, respectively.
F-22
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006 AND 2005
Economic
Dependency:
The
Company had sales to four customers each in excess of 10% of total sales in
the
year ended December 31, 2006. Sales to these customers aggregated approximately
$1,530,000, $1,223,000, $1,092,000 and $814,000, respectively. This
represents approximately 74% of total sales.
The
Company had sales to three customers each 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. This represents approximately
60% of total sales.
The
Company had purchases from one vendor in excess of 10% of total purchases for
the year ended December 31, 2006. Purchases from this vendor aggregated
approximately $244,000.
The
Company had no purchases from any vendor in excess of 10% of total purchases
for
the year ended December 31, 2005.
Governmental
Regulation:
All
of
the Company’s existing and proposed diagnostic products are regulated by the
United States Food and Drug Administration (FDA), United States Department
of
Agriculture, certain state and local agencies, and/or comparable regulatory
bodies in other countries. Most aspects of development, production, and
marketing, including product testing, authorizations to market, labeling,
promotion, manufacturing, and record keeping are subject to review. After
marketing approval has been granted, Chembio must continue to comply with
governmental regulations. Failure to comply with these regulations can result
in
significant penalties.
|
NOTE
|
15
|
—
|
LITIGATION:
|
On
September 29, 2006, the Company and StatSure Diagnostic Systems, Inc.
(“StatSure) entered into a Settlement Agreement pursuant to which all matters
in
their litigation regarding StatSure’ barrel patent and other matters were
settled. In addition the parties entered into the Joint HIV Barrel Product
Commercialization Agreement, which provides that the parties will equally share
in the profits relating to all HIV Barrel Products after reimbursement to the
Company of its manufacturing and related costs, as defined, and that they will
act jointly in the HIV barrel field. The settlement combines each company’s HIV
barrel intellectual property, including an exclusive manufacturing license
from
StatSure to the Company of its barrel patent for all HIV applications, thereby
ensuring the Company’s exclusive right to manufacture.
F-23