form10_k.htm
UNITED
STATES
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2009
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[ ]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to .
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Commission File No.
0-30379
CHEMBIO DIAGNOSTICS,
INC.
(Exact
name of registrant as specified in its charter)
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3661
Horseblock Road, Medford, NY
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code (631)
924-1135
Securities registered pursuant to
Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Securities
registered pursuant to section 12(g) of the Act:
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Common
Stock, $0.01 par value
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes __ No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the 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
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule-405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes __ No
__
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 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-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [
]
Accelerated filer [
]
Non-accelerated
filer [
]
Smaller reporting company [X]
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No _X_
As of the
last business day of the Company’s most recently completed second fiscal
quarter, the aggregate market value of voting and non-voting common equity held
by non-affiliates* was $3,550,000.
As of
March 3, 2010, the registrant had 61,989,901 common shares
outstanding.
* Without
asserting that any of the issuer’s directors or executive officers, or the
entities that own more than five percent of the outstanding shares of the
Registrant’s common stock, are affiliates, the shares of which they are
beneficial owners have not been included in shares held by non-affiliates solely
for this calculation.
TABLE OF CONTENTS
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Page
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PART
I
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ITEM
1.
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BUSINESS
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3
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ITEM
1A.
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RISK
FACTORS
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12
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ITEM
2.
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PROPERTIES
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17
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ITEM
3.
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LEGAL
PROCEEDINGS
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17
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PART
II
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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18
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ITEM
6.
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SELECTED
FINANCIAL DATA
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19
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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20
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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33
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
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33
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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34
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ITEM
9B.
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OTHER
INFORMATION
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34
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PART
III
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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35
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ITEM
11.
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EXECUTIVE
COMPENSATION
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37
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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41
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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43
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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44
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PART
IV
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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45
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SIGNATURES
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46
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PART
I
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, and Section 27A of the Securities Act of
1933. Any statements contained in this report that are not statements of
historical fact may be forward-looking statements. When we use the words
“intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,”
“plans,” “expects,” “believes,” “should,” “could,” “may,” “will” or the negative
of these terms or other comparable terminology, we are identifying
forward-looking statements. Forward-looking statements involve risks and
uncertainties, which may cause our actual results, performance or achievements
to be materially different from those expressed or implied by forward-looking
statements. These factors include our research and development activities,
distributor channels, compliance with regulatory impositions; and our capital
needs. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
Except
as may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not assume that
our silence over time means that actual events are bearing out as expressed or
implied in such forward-looking statements. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks, uncertainties and other factors that may affect
our business.
For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under “Part I, Item 1A,
Risk Factors.”
General
Chembio
Diagnostics, Inc. (referred to collectively with its subsidiary as the
“Company”) and its subsidiary develop, manufacture and market rapid
point-of-care diagnostic tests (POCTs) that detect infectious diseases. The
Company’s main products presently commercially available are four rapid tests
for the detection of HIV antibodies. Three of these products employ lateral flow
technology, can be used with all blood matrices as samples, and are manufactured
in a standard cassette format, a dipstick format, and a proprietary barrel
format. The tests employing the cassette and proprietary barrel formats were
approved by the FDA in 2006 and are distributed by Inverness Medical
Innovations, Inc. (“Inverness”) in the United States. Our
fourth rapid HIV test, which we more recently developed on our patented Dual
Path Platform (DPP®) technology, detects antibodies to HIV in oral fluid
samples, as well as all blood matrices.
On March
13, 2007, we were issued United States patent #7,189,522 for our Dual Path
Platform (DPP®) rapid test system. Additional patent protection for
DPP® has issued or is pending worldwide. We participate in the
point-of-care segment of the nearly $40 billion global in-vitro diagnostic
market. The global point-of-care segment of the IVD industry is estimated to be
$6-8 billion with an overall growth rate of 7% per annum. POCTs, by
providing prompt and early diagnosis, can reduce patient stays, lower overall
costs, improve therapeutic interventions and improve patient outcomes as a
result of prompt and early diagnosis. They can also prevent needless
hospital admissions, simplify testing procedures, avoid delays from central lab
batching, and eliminate the need for return visits. This is not to
say that every test should be done at the point-of-care. A careful
analysis needs to be performed when evaluating whether there is a need for a
rapid point-of-care test versus a laboratory test.
In the
areas of infectious and sexually transmitted diseases (such as Influenza and HIV
for example), the utility of a rapid point–of-care test has been well
established, and large markets have been established for these kinds of tests
globally. It is within these areas of infectious diseases and
sexually transmitted diseases, which tend to have the higher growth rates in the
point-of-care segment where we have focused and will continue to focus our
business, with an emphasis on the U.S. market.
PRODUCTS
Lateral
Flow Rapid HIV Tests
The major
component of our revenue growth in 2009 was increased sales of our lateral flow
rapid HIV tests and related components. 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 if samples
have to be sent out to a laboratory which can take at least several days to
process. The increased availability, greater efficacy and reduced
costs for anti-retroviral treatments (ARVs) for HIV is also having a tremendous
impact on the demand for testing, as the stigma associated with the disease is
lessened, and the ability to resume normal activities is substantially improved,
providing a positive message to those potentially infected. All four
of our rapid HIV tests are qualitative “yes/no” tests for the detection of
antibodies to HIV 1 & 2 with results available within approximately 15
minutes. The tests differ principally only in the method of sample
collection and test procedure, flexibility with different sample types, and cost
of manufacture. Prior to our agreement with Inverness and, more recently, the
development of our DPP® HIV 1/2 Screening Assay for use with oral fluid or blood
samples, our rapid HIV tests had been marketed under either our SURE CHECK® or
STAT-PAK® trademarks. Pursuant to our agreement with Inverness, the
SURE CHECK® product (which incorporates a proprietary barrel format) is now
being marketed by Inverness as Clearview® Complete HIV 1/2 and the cassette
format of our HIV 1/2 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. In addition, in 2009 we amended the agreement with
Inverness, which previously had global exclusivity for the barrel format
product, to a non-exclusive outside of North America.
Regulatory
Status: The FDA approved our Pre-Market Applications
(hereinafter “PMA”; see “Governmental Regulations” and Glossary) in April 2006
for our SURE CHECK HIV 1/2 (and also now Inverness’ Clearview® Complete HIV 1/2)
and for our HIV 1/2 STAT-PAK (now Inverness’ Clearview® HIV 1/2 STAT-PAK in the
United States only) products. A Clinical Laboratory Improvement Act
(“CLIA”) waiver was granted by the FDA for the HIV 1/2 STAT-PAK in November 2006
and for the two Inverness Clearview® brands in October
2007. CLIA waiver is required in order to market the products
for use in hospital emergency rooms, public health clinics and physicians’
offices, where the level of training is traditionally less than the training at
clinical laboratories and laboratories in hospitals. These settings
constitute the largest portion of the available market for our products. Our
third lateral flow rapid HIV test, HIV 1/2 STAT-PAK Dipstick and our DPP® oral
fluid HIV test, though not FDA approved, qualify under FDA export regulations to
sell, subject to any required approval by the importing country, to customers
outside the United States. The dipstick product is our most competitively priced
version of our three rapid HIV tests, and was designed primarily for
resource-constrained, donor-funded markets that have large test volume
needs. In addition, we have received approval from a number of
potential importing countries for our three lateral flow HIV tests.
.. All three of our lateral flow HIV tests have qualified for
procurement under the President’s Emergency Plan for AIDS Relief
(“PEPFAR”). In October 2009 we submitted supplemental documentation
that had been requested to our Notified Body in connection with our efforts to
obtain CE marking for the two FDA-approved rapid HIV test
products. In late January 2010 we were informed that additional data
was being requested, and we are determining the time and cost.
DPP®
HIV 1&2 Assay for Use with Oral Fluid (or Blood) Samples
We have
also completed development of and are now commercializing our DPP® HIV 1&2
Assay for use with oral fluid samples. Oral fluid testing is an
established alternative to blood testing for diagnostic tests, including HIV
tests. It provides a fast and easy method for sample collection,
enabling non-medical professionals to collect samples for testing. It
is also often patient preferred, providing a more comfortable
test. In certain public health clinics, staffs choose not to handle
blood specimens; thus, oral sample collection provides a viable
alternative. The DPP® HIV test, which is based on our patented DPP®
technology, also includes a patent-pending system comprised of an oral fluid
swab and sample buffer vial. This feature enables samples to be fully extracted
in buffer solution before application to the test device, and also allows the
extracted sample to be stored and retested. Internal and field
studies have shown sensitivity and specificity well in excess of FDA
requirements on oral fluid as well as all blood matrices.
Regulatory
Status: During 2008 Chembio conducted extensive internal panel
studies of this product and a limited field study that suggested outstanding
performance; two much larger field evaluations were completed in 2009 that will
supplement our pending U.S. clinical studies. During the second half of 2009 we
prepared a proposed clinical trial protocol and submitted it to the FDA in
support of our application for an Investigational Device Exemption (IDE) which
we submitted and was granted during the fourth quarter of 2009. This
approved protocol permits us to move forward with the clinical trials
performance data, along with other required product and manufacturing data, in
support of a Pre-Marketing Approval (PMA) application to the FDA. We anticipate
commencing and completing the clinical trials and submitting the PMA application
during 2010 and receiving approval of the PMA during 2011.
PARTNERS
INVOLVED IN MARKETING OUR HIV PRODUCTS
On
September 29, 2006 we executed marketing and license agreements with
Inverness. The marketing agreements (one for each of the two
FDA approved products) each provide Inverness with a 10-year exclusive right for
the marketing of our rapid HIV tests in the United States. The
agreements also grant us a license to Inverness’ lateral flow patents that may
be applicable to certain of our other products, including those that we had
under development at the time of the grant of the license. As part of
these agreements, we also settled litigation that had been ongoing with another
company, StatSure Diagnostics, Inc.(SDS), relating to the proprietary barrel
device that is incorporated into our Sure Check® HIV 1/2 product, which
is also marketed exclusively as Inverness Clearview® Complete HIV 1/2
in the United States, Europe and Asia. SDS is a party to the marketing agreement
with Inverness and Chembio that pertains to that product.
We are
beginning to register our DPP® oral fluid HIV test in selected markets receiving
funding from the U.S. President’s Emergency Plan for AIDS Relief (PEPFAR).
PEPFAR recently approved our product as qualified for procurement pursuant to
the USAID waiver procedure (for use with oral fluid or blood
samples). Also, as described above, our DPP® oral fluid HIV test is
one of three products pending regulatory approval in Brazil pursuant to OEM
technology transfer, supply and license agreements we have in place with FIOCRUZ
as described below. We are considering various options for marketing
this product in the United States including a direct sales model for certain or
all market segments.
We have
appointed distributors and OEM partners internationally for our lateral flow HIV
tests. Our largest markets for our lateral flow HIV rapid tests
outside the United States are several countries in Africa, Brazil (OEM) and
Mexico. During 2009 we appointed Bio-Rad Laboratories, Inc. as our distributor
of our HIV 1/2 STAT-PAK® product in Mexico. We have distributors
interested in distributing our products in Europe once we receive the CE
Marking, for which there can be no assurance.
OTHER
LATERAL FLOW RAPID TESTS
We also
have commercially available lateral flow tests for Chagas Disease and a line of
tests for the detection of tuberculosis in humans and certain animal species.
These products represented approximately 1.5% of our product revenues during
2009. . The Company entered the rapid test market segment with lateral flow
technology and for many years, even before the development of our lateral flow
HIV tests, our revenues were almost entirely based on this technology, primarily
pregnancy tests. Because of the limited license we entered with
Inverness to manufacture and market only certain applications of lateral flow
technology, and also because we have now developed our own patent-protected
rapid point-of-care technology platform (DPP®) which we believe provides certain
advantages over lateral flow technologies, all of our other products and
products that we are developing utilize this patented platform.
OTHER
DPP® PRODUCTS
Chembio-Branded
DPP® Products
DPP® Syphilis Screen &
Confirm- DPP® Syphilis Screen & Confirm is a simple multiplex
point-of-care test that can detect both non-treponemal and treponemal antibodies
to syphilis from a whole blood sample within 20 minutes. Studies have
been performed at the CDC on a total of 459 banked specimens of
which 219 were characterized as positive and 240 as negative by RPR
(standard lab test for non-treponemal). Out of the 459 samples, 289
were characterized as positive and 170 characterized as negative by the TPPA
test (standard lab treponemal test). DPP® Syphilis Screen &
Confirm non-treponemal had a sensitivity of 90.5% and a specificity of 100%
compared to RPR and a sensitivity of 93% and a specificity of 92% compared to
TPPA. This assay offers several market advantages over the current
two-tier system of screening and confirmatory testing. This is the first assay
in the United States that would afford the opportunity for a single-visit
diagnosis and treatment. Retrospective studies
have been performed at Chembio and CDC during 2008 and 2009. A
multi-phase field study sponsored by the WHO and with participation by CDC is
ongoing. Interference and cross-reactivity studies have been
completed at an external laboratory. FDA regulatory clearance for this test is
available through a 510(K) submission. The FDA has approved our
proposed protocol (IDE) for the prospective clinical trials that will be part of
this. We plan to commence the regulatory activities for FDA clearance
during the second quarter of 2010 and anticipate that clearance will be granted
in the first quarter of 2011.
OEM
DPP® Products
Oswaldo
Cruz Foundation OEM DPP® Agreements
During
2008 we signed four agreements with the Oswaldo Cruz Foundation (FIOCRUZ) in
Brazil relating to products based on our DPP® technology for Leptospirosis,
Canine Leishmaniasis, screening for HIV 1/2 with oral fluid samples, and a
5-band multiplex point-of-care confirmation test for HIV
1&2. These products will initially be manufactured by Chembio but
will be distributed by FIOCRUZ under its Bio-Manguinhos Division’s
label. These entities are affiliated with the Brazilian Ministry of
Health. We have completed development of three of these products
(Leishmaniasis and the HIV screening and confirmation tests), and we have
substantially completed development of the Leptospirosis test. The
leishmaniasis and confirmatory tests have been submitted for and are still
pending regulatory approval in Brazil; the HIV screening test regulatory
submission has not been made yet. We now expect that these products
will be approved by Brazilian regulatory authorities during the second quarter
of 2010. These agreements contemplate an eventual transfer of the manufacture of
the subject products to FIOCRUZ over stipulated periods of time subject to
Chembio first receiving orders for a minimum amount of products for manufacture
by Chembio; thereafter Chembio will receive royalty payments for a number of
years based on product sold by FIOCRUZ to the public health programs in
Brazil. In December 2009 Chembio received purchase orders from
FIOCRUZ for the three products for which development has been completed and that
are pending regulatory approval in the aggregate amount of approximately $2.4
million. The orders are of course in each case subject to the
attainment of regulatory approval for the relevant product, of which there can
be no assurance. In addition, upon attainment of regulatory approval
of these three products, Chembio will be due fees from FIOCRUZ stipulated in
these agreements in the aggregate amount of approximately
$900,000.
Our
Rapid Test Technologies
All of
our commercially available current products employ either in-licensed lateral
flow technology or our own patented Dual Path Platform (DPP®) technology and are
visually read. Certain of our new DPP® products will incorporate reader
technologies that can help record and report test results and reduce
subjectivity of results sometimes found with visually read tests. Both lateral
flow technology and DPP® allow the development of accurate, low cost,
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 potentially infected specimens), 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.
We can
also use hand held and desktop readers to objectively measure, quantify, record
and report test results. Certain of the products we have and/or are developing
incorporate some of these readers, and we are developing other products that may
be used with or will require use of a reader.
Target
Market
Rapid
HIV Tests
There are
approximately 53,000 new diagnoses of HIV infection in the United States each
year, according to the CDC. In time, most of these infections
progress to AIDS. The CDC estimates that approximately 1.1 million
individuals in the U.S. are living with HIV, with an estimated 250,000
Americans, or more than 25%, unaware that they are infected. It is
these 250,000 infected people that account for 54% of all new infections per
year. 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
if samples have to be sent out to a laboratory which can take at least several
days to process. Healthcare officials believe that by making more
people aware of their HIV status, it will reduce the number of HIV
transmissions.
Rapid HIV
testing in the United States has now developed into a 5-6 million test market.
This is from zero in 2003 when Orasure received FDA approval for the first rapid
HIV test. We believe that the US professional HIV rapid test market
(not including the OTC market) has the potential to increase to 15-18 million
tests over the next several years, which would represent about 50% of all HIV
tests done in the United States for clinical purposes. Assuming an
average price to the manufacturers of $10.00 per test, a total potential market
of $180 million U.S. market is inferred.
In 2006,
the outlook for HIV testing was given a big boost with the release by the CDC of
new guidelines for HIV testing. These new CDC recommendations now in place
provide that an HIV test should be given as a routine test like any other for
all patients between 13 and 64 years of age, regardless of risk, with an opt-out
screening option and focused testing procedural (pre and post test counseling)
guidelines. Adoption of the 2006 CDC recommendations by a number of
states has begun to have an impact.
In
addition, in December 2009 Medicare issued new rules that now require it to pay
for HIV tests for individuals covered by Medicare.
In the
United States, the need for rapid HIV tests has been developing first in the
public health and hospital emergency room and labor and delivery room segments,
and to some extent also in the physicians’ office
laboratories. Of the estimated 25-30 million HIV tests
performed in clinical settings in the United States, rapid HIV tests now account
for approximately 20-25% of this market, or approximately 6 million tests of
this total. We believe that the United States market share available
to rapid HIV tests will grow by approximately 15-20% per
annum.
In the
international market, PEPFAR, the large United States funded international AIDS
relief program focused on fifteen countries, was reauthorized in 2008 for up to
$48 billion for FY2009-2012 (up from $15 billion in
2004-2008). PEPFAR, The Global Fund and other global initiatives have
succeeded in making life-saving treatments available now to well in excess of
one million individuals. PEPFAR has a goal by 2013 of treating three million
infected individuals and averting 12 million new cases. To achieve these goals
more and more people are likely to get tested. As more effective
treatments become available at lower costs there is a clearer reason to be
tested. Other programs such as UNAIDS are significant participants in
the global effort to prevent further transmission and save the lives of those
already infected, as well as care for their families that are
impacted.
For oral
fluid testing we believe that in several markets there is a meaningful segment
of individuals who will be more inclined to be tested for HIV when offered a
non-invasive test. The most well-established market for oral fluid HIV testing
is the United States. There is also now an opportunity to participate in the
over-the-counter market for HIV tests. This opportunity received
important support by the FDA and CDC in November 2009. While initial
support from public health and regulatory officials was indicated in 2006, a
follow-up November 2009 meeting of the FDA Blood Products Advisory Committee on
this subject confirmed the support by public health and HIV positive community
advocates, and provided further clarity as to the regulatory pathway for such
market.
Syphilis
Rapid Test
Recent
data indicate that approximately 70,000-100,000 new cases of syphilis are
occurring annually in the U.S. The CDC's latest Sexually Transmitted Disease
study, released in November 2009, reported that: 1) although only 13,500 of new
syphilis cases were reported in 2008 (<20% of total amount of estimated new
cases), that is still an 18 percent increase from 2007, suggesting increased
numbers of new cases, 2) 63 percent of syphilis cases were among men who have
sex with men, and 3) syphilis rates among women increased 36 percent from 2007
to 2008.
Syphilis
can be treated with antibiotics, but untreated can cause pelvic inflammatory
disease, infertility, ectopic pregnancy and can infect
newborns. Treatment cannot be provided without a confirmed diagnosis
of an active, previously untreated case of syphilis.
Current
testing algorithms require two different tests (called non-treponemal and
treponemal markers), each requiring trained personnel in laboratory settings and
several days to receive back results, in order to confirm an active, previously
untreated case. This product is able to accurately detect the presence or
absence of each of these markers in one rapid point-of-care test device, thereby
enabling prescription of antibiotics at the point-of-care where there is the
presence of both markers.
Development
of the POC market for syphilis testing is expected to be comparable to the
development of the POC market for HIV testing, as there is a significant public
health value to being able to provide results at the
point-of-care. There are several ways to assess the market
opportunity for this unique rapid test, although we believe the U.S. rapid test
opportunity is a minimum of 3 million tests, which is approximately 20% of the
total number syphilis tests performed in the United States
today. Unlike HIV testing, where a positive result first requires a
confirmatory test, and even then further tests to measure viral load before
expensive treatment decisions are made, an individual with a confirmed active
case of syphilis can be prescribed antibiotics immediately.
Marketing
Strategy
Our
marketing strategy is to:
·
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Support,
review and assess the marketing and distribution efforts of our rapid HIV
tests by Inverness Medical Innovations, Inc. Inverness, which
is a leading marketer of point-of-care diagnostic products, has
significantly expanded its distribution footprint since we signed our
agreement with Inverness, and we believe that this will enhance
opportunities for Inverness to market our rapid HIV tests. In particular,
Inverness has been very active in acquiring point-of-care product lines
serving hospital emergency rooms and physicians’
offices.
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·
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Leverage
our DPP® intellectual property and regulated product development and
manufacturing experience to continue creating new collaborations where
Chembio can be the exclusive development and manufacturing partner
supporting leading marketing
organizations.
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·
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Establish
strong distribution relationships for our Chembio-branded products in the
U.S and abroad and establish a direct sales and marketing organization
that is focused in the public health market
segment.
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Competition
The
diagnostics industry is a multi-billion dollar international industry and is
intensely competitive. Many of our competitors are substantially
larger and have greater financial, research, manufacturing and marketing
resources.
Industry
competition in general is based on the following:
·
|
Scientific
and technological capability;
|
·
|
The
ability to develop and market products and
processes;
|
·
|
The
ability to obtain FDA or other required regulatory
approvals;
|
·
|
The
ability to manufacture products that meet applicable FDA requirements,
(i.e. FDA’s Quality System Regulations) (see Governmental Regulation
section);
|
·
|
The
ability to manufacture products
cost-effectively;
|
·
|
Access
to adequate capital;
|
·
|
The
ability to attract and retain qualified personnel;
and
|
·
|
The
availability of patent protection.
|
We
believe our scientific and technological capabilities and our proprietary
know-how relating to our in-licensed lateral flow technology rapid tests and to
our proprietary know-how related to our patented dual path platform technology,
particularly for the development and manufacture of tests for the detection of
antibodies to infectious diseases such as HIV, are very strong.
Our
ability to develop and market other products is in large measure dependent on
our having additional resources and/or collaborative
relationships. Some of our product development efforts have been
funded on a project or milestone basis. We believe that our
proprietary know-how in lateral flow technology and in our Dual Path Platform
(DPP®) technology has been instrumental in our obtaining the collaborations we
have and that we continue to pursue. We believe that the patent
protection that we have with our Dual Path Platform (DPP®) enhances our ability
to develop more profitable collaborative relationships and to license out the
technology.
Research
and Development
During
2009 and 2008, $2.9 million and $2.6 million, respectively, were spent on
research and development (including regulatory activities). These
expenses were in part underwritten by funding from R&D contracts and grants
of $1.3 million in 2009 and $.7 million in 2008. All of our new
product development activities involve employment of our Dual Path Platform
(DPP®) technology. These activities include completing
development of certain products and making significant progress toward the
development of additional products. Research and development and
regulatory activities are explained in detail in Part II Item 7.
Employees
At
December 31, 2009, we employed 104 people, including 103 full-time
employees. We have entered into employment contracts with our
President, Lawrence Siebert, and our Senior Vice President of Research and
Development, Javan Esfandiari. Due to the specific knowledge and
experience of these executives regarding the industry, technology and market,
the loss of the services of either one of them would likely have a material
adverse effect on the Company. The contract with Mr. Siebert,
provides that Mr. Siebert will serve as the Chief Executive Officer and
President of the Company for an additional three-year term through May 11,
2012. The contract with Mr. Esfandiari has a term of three years
ending March 2013. We have obtained a key man insurance policy
for Mr. Esfandiari.
Governmental
Regulation
The
manufacturing and marketing of the Company’s existing and proposed diagnostic
products are regulated by the United States Food and Drug Administration
(“FDA”), United States Department of Agriculture (“USDA”), certain state and
local agencies, and/or comparable regulatory bodies in other
countries. These regulations govern almost all aspects of
development, production and marketing, including product testing, authorizations
to market, labeling, promotion, manufacturing and record keeping. The
Company’s FDA and USDA regulated products require some form of action by each
agency before they can be marketed in the United States, and, after approval or
clearance, the Company must continue to comply with other FDA requirements
applicable to marketed products, e.g. Quality Systems (for medical
devices). Failure to comply with the FDA’s requirements can lead to
significant penalties, both before and after approval or clearance.
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. FDA clearance of our DPP® Syphilis Screen & Confirm
test will be by means of a 510(k) submission.
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-Marketing Application (“PMA”)
application before marketing can begin. PMA’s must demonstrate, among
other matters, that the medical device provides a reasonable assurance of safety
and effectiveness. A PMA application is typically a complex
submission, including the results of non-clinical and clinical
studies. Preparing a PMA application is a much more expensive,
detailed and time-consuming process as compared with a 510(K) pre-market
notification. The Company has approved PMAs for the two rapid HIV
tests now marketed by Inverness Medical as Clearview® Complete HIV 1-2 and
Clearview® HIV 1-2 STAT PAK®. FDA approval of our DPP® HIV screening assay for
use with oral fluid or blood samples will be pursued by means of a PMA
application.
The
Clinical Laboratory Improvement Act of 1988 (“CLIA”) prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the United States Department of Health and
Human Services (via the FDA) applicable to the category of examination or
procedure performed. Although a certificate is not required for the
Company, it considers the applicability of the requirements of CLIA in the
design and development of its products. The statutory definition of
“laboratory” is very broad, and many of our customers are considered
labs. A CLIA waiver will remove certain quality control and other
requirements that must be met for certain customers to use the Company’s
products and this is in fact critical to the marketability of a product into the
point-of-care diagnostics market. The Company has received a
CLIA waiver for each of the two rapid HIV tests now marketed by Inverness
Medical as Clearview® Complete HIV 1/2 and Clearview® HIV 1/2 STAT
PAK®. The CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK on
November 20, 2006 and for the Clearview® Complete HIV 1/2 on October 22,
2007.
In
addition, the FDA regulates the export of medical devices that have not been
approved for marketing in the United States. The Federal Food, Drug
and Cosmetic Act contains general requirements for any medical device that may
not be sold in the United States and is intended for
export. Specifically, a medical device intended for export is not
deemed to be adulterated or misbranded if the product: (1) complies with the
specifications of the foreign purchaser; (2) is not in conflict with the laws of
the country to which it is intended for export; (3) is prominently labeled on
the outside of the shipping package that it is intended for export; and (4) is
not sold or offered for sale in the United States. However, the
Federal Food, Drug and Cosmetic Act does permit the export of devices to any
country in the world, if the device complies with the laws of the importing
country and has valid marketing authorization in one of several “listed”
countries under the theory that these listed countries have sophisticated
mechanisms for the review of medical devices for safety and
effectiveness.
The
Company is also subject to regulations in foreign countries governing products,
human clinical trials and marketing, and may need to obtain approval or
evaluations by international public health agencies, such as the World Health
Organization, in order to sell diagnostic products in certain
countries. Approval processes vary from country to country, and the
length of time required for approval or to obtain other clearances may in some
cases be longer than that required for United States governmental approvals. On
the other hand, the fact that our HIV diagnostic tests are of value in the AIDS
epidemic may lead to some government process being expedited. The
extent of potentially adverse governmental regulation affecting Chembio that
might arise from future legislative or administrative action cannot be
predicted.
One or
more of the Company’s rapid HIV tests are also approved or pending approval for
marketing in several foreign jurisdictions, including but not limited to Brazil,
Mexico, and India, as well as a number of other nations in the developing
world.
Environmental
Laws
To date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Our
intellectual property strategy is to: (1) build our owned
intellectual property portfolio around our Dual Path Platform technology; (2)
pursue licenses, trade secrets and know-how within the area of rapid
point-of-care testing, and (3) develop and acquire proprietary positions to
reagents and new hardware platforms for the development and manufacture of rapid
diagnostic tests.
Trade
Secrets and Know-How
We
believe that we have developed a substantial body of trade secrets and know-how
relating to the development of lateral flow and DPP® based diagnostic tests,
including but not limited to the sourcing and optimization of materials for such
tests, and how to maximize sensitivity, speed-to-result, specificity, stability
and reproducibility. The Company possesses proprietary know-how to develop tests
for multiple conditions using colored latex. Our buffer formulations
enable extremely long shelf lives of our rapid HIV tests and we believe that
this provides us with an important competitive advantage.
Lateral
Flow Technology and Reagent Licenses
As part
of our agreements in 2006 with Inverness for the marketing of our HIV tests, we
were granted non-exclusive licenses to their lateral flow technology for certain
products manufactured and marketed by Chembio including but not limited to our
HIV tests. Although we believe our DPP® is outside of the scope of
lateral flow patents, we consult with patent counsel, and seek licenses and/or
redesigns of products that we believe to be in the best interests of the Company
and our stockholders. Because of the costs and other negative
consequences of time-consuming patent litigation, we often attempt to obtain a
license on reasonable terms. Nevertheless there is no assurance that
Inverness’ lateral flow patents will not be challenged or that other patents
containing claims relevant to the Company’s lateral flow or DPP® products will
be not be granted and that licenses to such patents, if any, will be available
on reasonable terms, if any. Inverness has aggressively
enforced its lateral flow intellectual property. Most recently in
2008 Inverness brought a patent infringement lawsuit against Orasure. The suit
was settled in late 2009 with a $3 million payment by Orasure to Inverness and
other considerations.
The DPP®
technology provides us with our own intellectual property and we believe it also
enables tests to be developed with improved sensitivity as compared with
comparable tests on lateral flow platforms. The Company has signed
and anticipates signing new development projects based upon the DPP® technology
that will provide new manufacturing and marketing opportunities. We
have several other patents issued or pending related to other point-of-care
technologies or applications thereof. The DPP® patent has been issued
in certain other jurisdictions and is being prosecuted in many
others.
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. In connection with their bankruptcy, during the third quarter
of 2009 we bought out all of our remaining obligations under that
agreement. We also have licensed the antigens used in other tests
including our Chagas, Tuberculosis and Leishmaniasis tests. In prior
years we concluded license agreements related to intellectual property rights
owned by the United States associated with HIV- 1, and during the first quarter
of 2008 we entered into a sub-license agreement for HIV-2 with Bio-Rad
Laboratories N.A., the exclusive licensee of the Pasteur Institute’s HIV-2
intellectual property estate.
Corporate
History
On May 5,
2004, we completed a merger with Chembio Diagnostic Systems Inc. through which
Chembio Diagnostics Systems Inc. became our wholly-owned subsidiary, and through
which the management and business of Chembio Diagnostic Systems Inc. became our
management and business. As part of this transaction, we changed our
name to Chembio Diagnostics, Inc. In 2003, we had sold our prior
business, and as a result, we had no specific business immediately prior to the
merger.
Since the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved in
developing, manufacturing, selling and distributing in-vitro diagnostic tests,
including rapid tests beginning in 1995, for a number of conditions in humans
and animals.
On March
12, 2004, we implemented a 1-for-17 reverse split of our common
stock. All references in this Form 10-K to shares of our common stock
have been adjusted to reflect this reverse split.
In
February 2010, Crestview Capital Master, L.L.C. ("Crestview Master), a Delaware
limited liability company that held 18,907,431 shares of Chembio's common stock,
spun off all these shares, constituting approximately 30.5% of Chembio's
outstanding shares, to its three equity holders. One of the three
equity holders of Crestview Master immediately spun off, to its approximately
126 equity holders, all of the 12,990,569 shares of Chembio stock that it
received in this distribution. As a result, as of February 24, 2010,
Crestview Master no longer owned any shares. The former direct and
indirect equity holders of Crestview Master owned all these shares, with none of
these individual stockholders having beneficial ownership of more than 5.61% of
the outstanding common stock of Chembio. Approximately 12,208,505 of
the shares distributed are free of restrictions and may be sold or otherwise
transferred immediately. An additional 2,560,822 of the distributed
shares are expected to become eligible for resale on March 24. The
other approximately 4,138,104 shares are expected to become eligible for resale
on May 25, 2010.
Glossary
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human
Immunodeficiency Virus, HIV.
|
ALGORITHM
(parallel or serial)
|
For
rapid HIV testing this refers both to method or protocol (in developing
countries to date) 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. A parallel algorithm
uses two screening tests from different manufacturers and a tie-breaker
test only if there is a discrepancy between the screening tests results. A
serial algorithm only uses a second confirmatory test if there is a
positive result from the screening test, meaning that the number of
confirmatory tests used is equal to the positivity rate in the testing
venue. A tie-breaker test resolves discrepancies between the screen and
the confirmatory test.
|
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
|
CLIA
waiver
|
Clinical
Laboratory Improvement Act designation that allows simple tests to be
performed in point-of-care settings such as doctors offices, walk-in
clinics and emergency rooms.
|
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
|
FAS
|
Financial
Accounting Standard
|
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 –FDA approval classification for a medical device that is not
substantially equivalent to a legally marketed device or is otherwise
required by statute to have an approved application. Rapid HIV
tests must have an approved PMA application before marketing of such a
product can begin.
|
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.
|
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.
|
SPECIFICITY
|
The
ability of an assay to distinguish between similar
materials. The greater the specificity, the better an assay is
at identifying a substance in the presence of substances of similar
makeup.
|
SPUTUM
|
Expectorated
matter; saliva mixed with discharges from the respiratory
passages
|
TB
|
Tuberculosis
(TB) is a disease caused by bacteria called Mycobacterium tuberculosis.
The bacteria usually attack the lungs. But, TB bacteria can attack any
part of the body such as the kidney, spine, and brain. If not treated
properly, TB disease can be fatal. TB is spread through the air
from one person to another. The bacteria are put into the air when a
person with active TB disease of the lungs or throat coughs or sneezes.
People nearby may breathe in these bacteria and become
infected.
|
UNAIDS
|
Joint
United Nations Program on HIV/AIDS
|
USAID
|
United
States Agency for International Development
|
USDA
|
U.S
Department of Agriculture
|
WHO
|
World
Health Organization
|
You
should carefully consider each of the following risk factors and all of the
other information provided in this Annual Report. The risks described
below are those we currently believe may materially affect us. An
investment in our Common Stock involves a high degree of risk, and should be
considered only by persons who can afford the loss of their entire
investment.
Risks
related to our industry, business and strategy
Because
we may not be able to obtain necessary regulatory approvals for some of our
products, we may not generate revenues in the amounts we expect, or in the
amounts necessary to continue our business.
All of
our proposed and existing products are subject to regulation in the U.S. by the
U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or
other domestic and international governmental, public health agencies,
regulatory bodies or non-governmental organizations. In particular,
we are subject to strict governmental controls on the development, manufacture,
labeling, distribution and marketing of our products. The process of
obtaining required approvals or clearances varies according to the nature of,
and uses for, a specific product. These processes can involve lengthy
and detailed laboratory testing, human or animal clinical trials, sampling
activities, and other costly, time-consuming procedures. The
submission of an application to a regulatory authority does not guarantee that
the authority will grant an approval or clearance for product. Each
authority may impose its own requirements and can delay or refuse to grant
approval or clearance, even though a product has been approved in another
country.
The time
taken to obtain approval or clearance varies depending on the nature of the
application and may result in the passage of a significant period of time from
the date of submission of the application. Delays in the approval or
clearance processes increase the risk that we will not succeed in introducing or
selling the subject products, and we may determine to devote our resources to
different products.
Changes
in government regulations could increase our costs and could require us to
undergo additional trials or procedures, or could make it impractical or
impossible for us to market our products for certain uses, in certain markets,
or at all.
Changes
in government regulations may adversely affect our financial condition and
results of operations because we may have to incur additional expenses if we are
required to change or implement new testing, manufacturing and control
procedures. If we are required to devote resources to develop such
new procedures, we may not have sufficient resources to devote to research and
development, marketing, or other activities that are critical to our
business.
For
example, the European Union and other jurisdictions have a requirement that
diagnostic medical devices used to test human biological specimens must receive
regulatory approval known as a CE mark, or be registered under the ISO 13.485
medical device directive. The letters “CE” are the abbreviation of
the French phrase “Conforme Européene,” which means “European
conformity.” ISO (“International Organization for Standardization”)
is the world’s largest developer of standards with 148 member
countries. As such, export to the European and other jurisdictions
without the CE or ISO 13.485 mark is not possible. In 2007, we
received ISO 13.485 certification, in 2008, we received a CE registration for
our Chagas test, and during 2009 we expected to receive CE registration for our
two FDA approved HIV tests. However, additional data and
documentation has been requested and there are no assurances that we will be
able to secure this certification although we are not aware of any material
reason why such approval will not be granted. However, if for any
reason a CE registration is not granted, our ability to export our products
could be adversely impacted.
We can
manufacture and sell our products only if we comply with regulations of
government agencies such as the FDA and the USDA. We have implemented
a quality system that is intended to comply with applicable
regulations. Although FDA approval is not required for the export of
our products, there are export regulations promulgated by the FDA that
specifically relate to the export of our products. Although we
believe that we meet the regulatory standards required for the export of our
products, these regulations could change in a manner that could adversely impact
our ability to export our products.
Our
products may not be able to compete with new diagnostic products or existing
products developed by well-established competitors, which would negatively
affect our business.
The
diagnostic industry is focused on the testing of biological specimens in a
laboratory or at the point-of-care and is highly competitive and rapidly
changing. Our principal competitors often have considerably greater
financial, technical and marketing resources than we do. Several
companies produce diagnostic tests that compete directly with our testing
product line, including but not limited to, Orasure Technologies, Inverness
Medical and Trinity Biotech. As new products enter the market, our
products may become obsolete or a competitor’s products may be more effective or
more effectively marketed and sold than ours. Although we have no
specific knowledge of any competitor’s product that will render our products
obsolete, if we fail to maintain and enhance our competitive position or fail to
introduce new products and product features, our customers may decide to use
products developed by our competitors, which could result in a loss of revenues
and cash flow.
We
have developed an oral fluid rapid HIV test as well as other applications
utilizing our Dual Path Platform technology, which we believe could enhance our
competitive position in HIV rapid testing and other
fields. However we still have technical, manufacturing,
regulatory and marketing challenges to meet before we will know whether we can
successfully commercialize products incorporating this
technology. There can be no assurance that we will overcome these
challenges.
We have
granted Inverness exclusive rights to market our SURE CHECK® HIV 1/2 in the
United States and non-exclusive rights in the rest of the world and exclusive
rights to market our HIV 1/2 STAT PAK® in the U.S. only. Inverness has no rapid
HIV tests that are approved for marketing in the U.S., we are not aware of any
rapid HIV products that Inverness is even contemplating for the U.S., and
Inverness is obligated to inform us of any such products as soon as it is able
to do so. Inverness does have rapid HIV tests manufactured by several
subsidiaries outside the U.S. that are being actively marketed outside the U.S.,
primarily in developing countries. Our HIV 1/2 STAT PAK cassette and dipstick
products compete against these Inverness products, and we specifically
acknowledge in our agreements with Inverness the existence of such other
products. Moreover, except for a product in the HIV barrel field as
defined in our agreement with Inverness, Inverness is permitted under our
agreements to market certain types of permitted competing rapid HIV tests in the
U.S. Under these conditions, we could choose to terminate the
applicable agreement with Inverness or change the agreement to a non-exclusive
agreement, and Inverness would expand the lateral flow license granted to the
Company to allow the Company to market the product independently or through
other marketing partners. While we believe that Inverness is
committed to successfully marketing our products particularly in the U.S. and
other developed countries where our products are or become approved for
marketing, Inverness may choose to develop or acquire competing products for
marketing in the U.S. as well as other markets where they are marketing our SURE
CHECK® HIV 1/2 product, and such an action could have at least a temporary
material adverse effect on the marketing of these products until such time as
alternative marketing arrangements could be implemented. While we
also believe that the expansion of our license to the Inverness lateral flow
patents substantially facilitates our ability to make alternative marketing
arrangements, there can be no assurance that the modification of marketing
arrangements and the possible corresponding delays or suspension of sales would
not have a material adverse effect on our business.
In
addition, the point-of-care diagnostics industry is undergoing rapid
technological changes, with frequent introductions of new technology-driven
products and services. As new technologies become introduced into the
point-of-care diagnostic testing market, we may be required to commit
considerable additional efforts, time and resources to enhance our current
product portfolio or develop new products. We may not have the
available time and resources to accomplish this and many of our competitors have
substantially greater financial and other resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers, which would materially harm our
operating results.
Although
we own our DPP® patent, we own no issued patents covering lateral flow
technology, and the field of lateral flow technology is complex and
characterized by a substantial amount of litigation, so the risk of potential
patent challenges is ongoing for us in spite of our DPP® patent.
Although
we have been granted non-exclusive licenses to the lateral flow patents owned by
Inverness Medical Innovations, Inc. , there is no assurance that their lateral
flow patents will not be challenged or that licenses from other parties may not
be required, if available at all. In the event that it is determined
that a license is required and it is not possible to negotiate a license
agreement under a necessary patent, we may be able to modify our HIV rapid test
products and other products such that a license would not be
necessary. However, this alternative could delay or limit our ability
to sell these products in the U.S. and other markets, which would adversely
affect our results of operations, cash flows and business.
On
March 13, 2007, our Dual Path Platform Immunoassay Device patent
application was issued as United States patent
no. 7,189,522. Additional protection for this intellectual
property is pending worldwide. This platform has shown improved
sensitivity as compared with conventional platforms in a number of
studies. We believe that this new platform is outside of the scope of
currently issued patents in the field of lateral flow technology, thereby
offering the possibility of a greater freedom to operate. However
there can be no assurance that our patents or our products incorporating the
patent claims will not be challenged at some time in the future.
New
developments in health treatments or new non-diagnostic products may reduce or
eliminate the demand for our products.
The
development and commercialization of products outside of the diagnostics
industry could adversely affect sales of our products. For example,
the development of a safe and effective vaccine to HIV or treatments for other
diseases or conditions that our products are designed to detect, could reduce,
or eventually eliminate, the demand for our HIV or other diagnostic products and
result in a loss of revenues.
We
may not have sufficient resources to effectively introduce and market our
products, which could materially harm our operating results.
Introducing
and achieving market acceptance for our rapid HIV tests and other new products
will require substantial marketing efforts and will require us or our contract
partners, sales agents, or distributors to make significant expenditures of time
and money. In some instances we will be significantly or
totally reliant on the marketing efforts and expenditures of our contract
partners, sales agents, distributors. If they do not have or commit
the expertise and resources to effectively market the products that we
manufacture, our operating results will be materially harmed.
The
success of our business depends, in addition to the market success of our
products, on our ability to raise additional capital through the sale of debt or
equity or through borrowing, and we may not be able to raise capital or borrow
funds in amounts necessary to continue our business, or at all.
Our
revenues and gross margins have increased significantly in recent periods, and
our operating and net losses have decreased significantly in recent
periods. Nevertheless, prior to 2009 we sustained significant
operating losses since 2004. At December 31, 2009, we had a
stockholders’ equity of $3.08 million and a working capital surplus of $1.49
million. The
Company estimates that its resources are sufficient to fund its needs through
the end of 2010 and beyond or that, in the alternative, it could raise
additional capital although the terms under which that capital could be raised
would likely be very dilutive to current shareholders. The Company’s liquidity
and cash requirements will depend on several factors. These factors include (1)
the level of revenues (the Company received $340,000 in 2009 for license fees
for which we need to meet certain milestones to earn); (2) the extent to which,
if any, that revenue level improves operating cash flows; (3) the Company’s
investments in research and development, facilities, marketing, regulatory
approvals, and other investments it may determine to make; and (4) the Company’s
investment in capital equipment (including production equipment of $323,500 that
the Company has contracted for) and the extent to which it improves cash flow
through operating efficiencies. There are no assurances that the Company will
remain profitable or generate positive cash flow in 2010 or, in the alternative,
be successful in raising sufficient capital to fund its needs through
2010.
Approval
and launch of our DPP® products in Brazil during 2010 and increased sales to
other developing world markets in 2010 is critical to our business
plan and if we fail to meet this objective, we may not generate revenues in the
amounts we expect, or in amounts necessary to fund our planned research,
development and regulatory expenses in 2010.
We intend
to attempt to increase international sales of our products. A number
of factors can slow or prevent international sales, or substantially increase
the cost of international sales, including:
·
|
regulatory
requirements and customs
regulations;
|
·
|
cultural
and political differences;
|
·
|
foreign
exchange rates, currency fluctuations and
tariffs;
|
·
|
dependence
on and difficulties in managing international distributors or
representatives;
|
·
|
the
creditworthiness of foreign
entities;
|
·
|
difficulties
in foreign accounts receivable collection;
and
|
·
|
economic
conditions and the absence of available funding
sources.
|
If we are
unable to increase our revenues from international sales, our operating results
will be materially harmed.
We
rely on trade secret laws and agreements with our key employees and other third
parties to protect our proprietary rights, and we cannot be sure that these laws
or agreements adequately protect our rights.
We
believe that factors such as the technological and creative skills of our
personnel, strategic relationships, new product developments, frequent product
enhancements and name recognition are essential to our success. All
our management personnel are bound by non-disclosure agreements. If
personnel leave our employment, in some cases we would be required to protect
our intellectual property rights pursuant to common law theories which may be
less protective than provisions of employment, non-competition or non-disclosure
agreements.
We seek
to protect our proprietary products under trade secret and copyright laws, enter
into license agreements for various materials and methods employed in our
products, and enter into strategic relationships for distribution of the
products. These strategies afford only limited
protection. We currently have some foreign patents issued, and we are
seeking additional patent protection in several other foreign jurisdictions for
our DPP® technology. We have licenses to reagents (antigens and
peptides) used in several of our products and products under
development We also have a license to manufacture, use and sell
products used to screen for antibodies to HIV-2. In addition, our
SURE CHECK®, DPP® and STAT-PAK® trademarks have been registered in the
U.S. Despite our efforts to protect our proprietary assets, and
respect the intellectual property rights of others, we participate in several
markets where intellectual property rights protections are of little or no
value. This can place our products and our company at a competitive
disadvantage.
During
2008 and in the first quarter of 2009 we terminated a number of employees who
have had access to proprietary and confidential information. In
connection with the termination of several of these employees whose positions
were terminated, individuals executed severance agreements that include strong
covenants by these former employees to keep our proprietary information
confidential. Despite these and other efforts we make to protect our
confidential information, such as entering confidentiality agreements in
connection with new business opportunities, unauthorized parties may attempt to
copy aspects of our products or to obtain information that we regard as
proprietary. We may be required to expend substantial resources in
asserting or protecting our intellectual property rights, or in defending suits
related to intellectual property rights. Disputes regarding
intellectual property rights could substantially delay product development or
commercialization activities because some of our available funds would be
diverted away from our business activities. Disputes regarding
intellectual property rights might include state, federal or foreign court
litigation as well as patent interference, patent reexamination, patent reissue,
or trademark opposition proceedings in the U.S. Patent and Trademark
Office.
To
facilitate development and commercialization of a proprietary technology base,
we may need to obtain additional licenses to patents or other proprietary rights
from other parties. Obtaining and maintaining these licenses, which
may not be available, may require the payment of up-front fees and
royalties. In addition, if we are unable to obtain these types of
licenses, our product development and commercialization efforts may be delayed
or precluded.
Our
continued growth depends on retaining our current key employees and attracting
additional qualified personnel, and we may not be able to do so.
Our
success will depend to a large extent upon the skills and experience of our
executive officers, management and sales, marketing, operations and scientific
staff. We may not be able to attract or retain qualified employees in
the future due to the intense competition for qualified personnel among medical
products businesses, geographic considerations, our ability to offer competitive
compensation , relocation packages, benefits, and/or other reasons.
If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will adversely affect
our ability to effectively manufacture, sell and market our products to meet the
demands of our strategic partners in a timely fashion, or to support internal
research and development programs. Although we believe we will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists and other personnel from numerous companies and academic
and other research institutions may limit our ability to do so on acceptable
terms.
We have
entered into employment contracts with our President, Lawrence Siebert, and our
Senior Vice President of Research and Development, Javan
Esfandiari. Due to the specific knowledge and experience of these
executives regarding the industry, technology and market, the loss of the
services of either one of them would likely have a material adverse effect on
the Company. The contract with Mr. Siebert, provides that Mr. Siebert
will serve as the Chief Executive Officer and President of the Company for an
additional three-year term through May 11, 2012. The contract with
Mr. Esfandiari has a term of three years ending March 2013. We
have obtained a key man insurance policy for Mr. Esfandiari.
We
believe our success depends on our ability to participate in large government
programs in the U.S. and worldwide and we may not be able to do so.
We
believe it to be in our best interests to meaningfully participate in the PEPFAR
Program, UN Global Fund initiatives and other programs funded by large
donors. We have initiated several strategies to participate in these
programs, such as introduction of our DPP® HIV test for use with oral fluid
samples. Participation in these programs requires alignment and
engagement with the many other participants in these programs including the
World Health Organization, U.S. Center for Disease Control, U.S. Agency for
International Development, foreign governments and their agencies,
non-governmental organizations, and HIV service organizations. If we
are unsuccessful in our efforts to participate in these programs, our operating
results could be materially harmed.
Although
we were profitable in 2009, we have a history of incurring net losses and we
cannot be certain that we will be able to sustain profitability.
Since the
inception of Chembio Diagnostic Systems, Inc. in 1985 and through the period
ended December 31, 2008, we have incurred net losses. As of
December 31, 2009, we have an accumulated deficit of $37
million. We incurred net losses of $1.9 million and $2.6 million in
2008 and 2007, respectively, while showing a net profit of $309,000 in
2009.
We expect
to make substantial expenditures for sales and marketing, and continue to make
expenditures for regulatory submissions, product development and other purpose
that may make it more difficult to maintain profitability for any given period
or periods. Our ability to continue profitability in the future will
primarily depend on our ability to increase sales of our products, reduce
production and other costs and successfully introduce new products and enhanced
versions of our existing products into the marketplace. If we are
unable to increase our revenues at a rate that is sufficient to achieve
profitability, or adequately control and reduce our operating costs, our
operating results would be materially harmed.
To
the extent that we are unable to obtain sufficient product liability insurance
or that we incur product liability exposure that is not covered by our product
liability insurance, our operating results could be materially
harmed.
We may be
held liable if any of our products, or any product which is made with the use or
incorporation of any of the technologies belonging to us, causes injury of any
type or is found otherwise unsuitable during product testing, manufacturing,
marketing, sale or usage. We have obtained product liability
insurance, we have never received a product liability claim, and have generally
not seen product liability claims for screening tests that are accompanied by
appropriate disclaimers. Nevertheless, in the event there is a claim,
this insurance may not fully cover our potential liabilities. In
addition, as we attempt to bring new products to market, we may need to increase
our product liability coverage which would be a significant additional expense
that we may not be able to afford. If we are unable to obtain
sufficient insurance coverage at an acceptable cost to protect us, we may be
forced to abandon efforts to commercialize our products or those of our
strategic partners, which would reduce our revenues.
Risks
related to our Common Stock
In
the past, our Common Stock has been classified as penny stock, and it continues
to be extremely illiquid, so investors may not be able to sell as much stock as
they want at prevailing market prices.
In the
past, our Common Stock has been classified as penny stock. Penny
stocks generally are equity securities with a price of less than $5.00 and trade
on the over-the-counter market. As a result, an investor may find it
more difficult to dispose of or obtain accurate quotations as to the price of
the securities that are classified as penny stocks. The “penny stock”
rules adopted by the Commission under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), subject the sale of the shares of penny stock
issuers to regulations that impose sales practice requirements on
broker-dealers, causing many broker-dealers to not trade penny stocks or to only
offer the stocks to sophisticated investors that meet specified net worth or net
income criteria identified by the Commission. These regulations
contribute to the lack of liquidity of penny stocks.
At the
present time, transactions in our Common Stock are not subject to the “penny
stock” rules because our average revenue for 2007, 2008 and 2009 exceeded $6
million per year. However, there can be no assurance that
transactions in our Common Stock will not be subject to the “penny stock” rules
in the future.
The
average daily trading volume of our Common Stock on the over-the-counter market
was less than 101,000 shares per day over the three months ended March 1,
2010. If limited trading in our stock continues, it may be difficult
for investors to sell their shares in the public market at any given time at
prevailing prices.
Our
management and larger stockholders exercise significant control over our Company
and may approve or take actions that may be adverse to your
interests.
As of
March 1, 2010, our named executive officers, directors and 5% stockholders
beneficially owned approximately 13.9% of our voting power. For the
foreseeable future, to the extent that our current stockholders vote similarly,
they will be able to exercise control over many matters requiring approval by
the board of directors or our stockholders. As a result, they will be
able to:
·
|
control
the composition of our board of
directors;
|
·
|
control
our management and policies;
|
·
|
determine
the outcome of significant corporate transactions, including changes in
control that may be beneficial to stockholders;
and
|
·
|
act
in each of their own interests, which may conflict with, or be different
from, the interests of each other or the interests of the other
stockholders.
|
Our
administrative offices and research facilities are located in Medford, New
York. We lease approximately 23,400 square feet of industrial space
for $14,683 per month. The space is utilized for research and
development activities (approximately 2,600 square feet), offices (approximately
2,640 square feet) and production (approximately 18,160 square
feet). The lease term expires on April 30,
2014. 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. We entered into a second lease effective February 1st of
2010, the principle terms of this lease are the same as the one entered
into in 2009 and are as follows: (a) a lease term ending April 30,
2014; (b) an initial rent of $11,350 per month plus $3,333 for the
second lease (March and April of 2010 are free and the month of April in 2011,
2012 and 2013 is also free) ; (c) the monthly rent for year two of the
lease (does not apply to second lease) will increase by the lower of (i) the
change in the consumer price index, or (ii) five percent; and (d) the
monthly rent for years three through five of the lease (years two through four
of the second lease) will increase each year by the lower of (i) the change
in the consumer price index, or (ii) two and one half
percent.
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.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.” The table below sets forth the high and low bid prices per
share of our common stock for each quarter of our two most recently completed
fiscal years. These prices represent inter-dealer quotations without
retail markup, markdown, or commission and may not necessarily represent actual
transactions.
Fiscal
Year 2009
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$.135
|
$.075
|
Second
Quarter
|
$.18
|
$.085
|
Third
Quarter
|
$.23
|
$.12
|
Fourth
Quarter
|
$.39
|
$.20
|
|
|
|
Fiscal
Year 2008
|
High
Bid
|
Low
Bid
|
First
Quarter
|
$0.30
|
$0.11
|
Second
Quarter
|
$0.26
|
$0.08
|
Third
Quarter
|
$0.28
|
$0.15
|
Fourth
Quarter
|
$0.21
|
$0.10
|
Rule
15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule,
imposes requirements on broker/dealers who sell securities subject to the rule
to persons other than established customers and accredited
investors. For transactions covered by the rule, brokers/dealers must
make a special suitability determination for purchasers of the securities and
receive the purchaser’s written agreement to the transaction prior to
sale. The Securities and Exchange Commission also has rules that
regulate broker/dealer practices in connection with transactions in “penny
stocks.” Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in that security is provided by the
exchange or system), except for securities of companies that have tangible net
assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the
previous three years. The Penny Stock Rule requires a broker/ dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker/dealer also must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker/dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker/dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. These disclosure
requirements have the effect of reducing the level of trading activity in the
secondary market for penny stock issues. As a result of these rules,
investors sometimes find it difficult to sell shares of penny stock
issuers. At the present time, transactions in our common stock are
not subject to the Penny Stock Rule because our average revenue for 2007, 2008
and 2009 exceeded $6 million per year. However, there can be no
assurance that transactions in our common stock will not be subject to the Penny
Stock Rule in the future.
Holders
As of
February 2, 2010, there were approximately 1,100 record owners of our common
stock.
Dividends
The
Company has never paid cash dividends on its common stock and has no plans to do
so in the foreseeable future.
|
ITEM
6. SELECTED FINANCIAL DATA
|
Presented
in this table are selected financial data for the past five years ending
December 31, 2009. Prior year’s financial statements have been
reclassified to conform to current year presentation As of the
year ended December 31, 2008 the Company reclassified its royalty and license
expenses to cost of goods sold, instead of selling, general and administrative
expenses.
CHEMBIO
DIAGNOSTICS, INC. AND SUBSIDIARIES
|
SELECTED
HISTORICAL
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
December
31, 2008
|
|
|
|
|
December
31, 2007
|
|
|
|
|
December
31, 2006
|
|
|
|
|
December
31, 2005
|
|
|
|
TOTAL
REVENUES
|
|
$ |
13,834,248 |
|
|
|
|
$ |
11,049,571 |
|
|
|
|
$ |
9,230,948 |
|
|
|
|
$ |
6,502,480 |
|
|
|
|
$ |
3,940,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,860,405 |
|
42 |
% |
|
|
3,851,721 |
|
35 |
% |
|
|
2,795,710 |
|
30 |
% |
|
|
1,608,272 |
|
25 |
% |
|
|
944,648 |
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OVERHEAD
COSTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
2,883,696 |
|
21 |
% |
|
|
2,605,343 |
|
24 |
% |
|
|
1,906,653 |
|
21 |
% |
|
|
1,401,472 |
|
22 |
% |
|
|
1,364,898 |
|
35 |
% |
Selling,
general and administrative expenses
|
|
|
2,659,382 |
|
19 |
% |
|
|
3,317,046 |
|
30 |
% |
|
|
3,765,221 |
|
41 |
% |
|
|
4,786,993 |
|
74 |
% |
|
|
2,877,737 |
|
73 |
% |
|
|
|
5,543,078 |
|
|
|
|
|
5,922,389 |
|
|
|
|
|
5,671,874 |
|
|
|
|
|
6,188,465 |
|
|
|
|
|
4,242,635 |
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
317,327 |
|
|
|
|
|
(2,070,668 |
) |
|
|
|
|
(2,876,164 |
) |
|
|
|
|
(4,580,193 |
) |
|
|
|
|
(3,297,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
(8,267 |
) |
|
|
|
|
121,898 |
|
|
|
|
|
249,272 |
|
|
|
|
|
(414,827 |
) |
|
|
|
|
45,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
309,060 |
|
2 |
% |
|
|
(1,948,770 |
) |
-18 |
% |
|
|
(2,626,892 |
) |
-28 |
% |
|
|
(4,995,020 |
) |
-77 |
% |
|
|
(3,252,000 |
) |
-83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
accreted/payable in stock to preferred stockholders and a beneficial
conversion feature
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
5,645,310 |
|
|
|
|
|
3,210,046 |
|
|
|
|
|
3,517,022 |
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$ |
309,060 |
|
|
|
|
$ |
(1,948,770 |
) |
-18 |
% |
|
$ |
(8,272,202 |
) |
-90 |
% |
|
$ |
(8,205,066 |
) |
-126 |
% |
|
$ |
(6,769,022 |
) |
-172 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$ |
0.00 |
|
|
|
|
$ |
(0.03 |
) |
|
|
|
$ |
(0.57 |
) |
|
|
|
$ |
(0.80 |
) |
|
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share
|
|
$ |
0.00 |
|
|
|
|
$ |
(0.03 |
) |
|
|
|
$ |
(0.57 |
) |
|
|
|
$ |
(0.80 |
) |
|
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic
|
|
|
61,946,435 |
|
|
|
|
|
61,266,954 |
|
|
|
|
|
14,608,478 |
|
|
|
|
|
10,293,168 |
|
|
|
|
|
7,705,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, diluted
|
|
|
75,041,932 |
|
|
|
|
|
61,266,954 |
|
|
|
|
|
14,608,478 |
|
|
|
|
|
10,293,168 |
|
|
|
|
|
7,705,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
This
discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion
and analysis of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent liabilities at the financial statement date and
reported amounts of revenue and expenses during the reporting period. On an
ongoing basis we review our estimates and assumptions. Our estimates were based
on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not believe
such differences will materially affect our financial position or results of
operations. Our critical accounting policies, the policies we believe are most
important to the presentation of our financial statements and require the most
difficult, subjective and complex judgments, are outlined below in ‘‘Critical
Accounting Policies,’’ and have not changed significantly.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. Specifically, 1) our ability to obtain necessary
regulatory approvals for our products; and 2) our ability to increase revenues
and operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as “may,” “could”, “will,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continues” or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
Except as
may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not
assume that our silence over time means that actual events are bearing out as
expressed or implied in such forward-looking statements. You should
carefully review and consider the various disclosures we make in this report and
our other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks, uncertainties and other factors that
may affect our business.
All of
the Company’s future products that are currently being developed are based on
its patented Dual Path Platform (DPP®), which is a unique diagnostic
point-of-care platform that has certain advantages over lateral flow
technology. The Company has completed development of four products
that employ the DPP® technology, two of which will be marketed under Chembio’s
label (DPP® HIV 1/2 Screening Assay and DPP® Syphilis Screen & Confirm) and
two that have been developed specifically related to private label agreements
with The Oswaldo Cruz Foundation (“FIOCRUZ”) for the Brazilian public
health market, as explained below. The DPP® HIV Screening Assay, will be
manufactured as an OEM product for the Brazilian market pursuant to one of our
agreements with FIOCRUZ.
The
Company has a number of additional products under development that employ the
DPP® technology. These product development activities are further
described below.
Oswaldo Cruz Foundation OEM DPP®
Agreements - During 2008 we signed four agreements with the Oswaldo Cruz
Foundation (FIOCRUZ) in Brazil relating to products based on our DPP® technology
for Leptospirosis, Canine Leishmaniasis, screening for HIV 1/2 with oral fluid
samples, and a 5-band multiplex point-of-care confirmation test for HIV
1&2. We have completed development of three of these products
(Leishmaniasis and the HIV screening and confirmation tests), and we have
substantially completed development of the Leptospirosis test. Two of
the three products developed have been submitted for regulatory approval
evaluations in Brazil and we expect the third will be filed very shortly; we
expect that these products will be approved by Brazilian regulatory authorities
(ANVISA for HIV tests and MAPA for canine test),
although there can be no assurance, during the first part of 2010,
triggering initial orders as well as approximately $1 million in technology
transfer fee payments to the Company.
During
2009, we received purchase orders from FIOCRUZ for the three products for which
development has been completed and that are pending regulatory approval in the
aggregate of approximately $2.4 million. These orders are subject to
regulatory approval, of which there can be no assurance. If
regulatory approval is obtained, we anticipate additional orders in
2011. We are currently considering entering additional agreements
based on a similar model with them in 2010.
Bio-Rad Laboratories OEM DPP®
Agreement- On April 6, 2008, we entered a development agreement with
Bio-Rad Laboratories N.A., a division of Bio-Rad Laboratories Inc (NYSE:BIO), a
leading in-vitro diagnostic and life science company. The agreement
with Bio-Rad is for the development of a six band multiplex product on our
DPP®. We will complete development of this product by the
middle of 2010, by which time Bio Rad will have paid us approximately $600,000
in development costs plus $340,000 for a DPP® license limited to this product.
Thereupon, CE marking and FDA approval will be sought by Bio-Rad with Chembio in
a supporting role as manufacturer. We believe that
Bio-Rad has begun discussions with the FDA to discuss this product, its proposed
performance claims and the intended clinical protocol to support its regulatory
submission.
Battelle/CDC DPP® Influenza Immunity
Test – In December 2009 Chembio entered into a milestone-based
development agreement for up to approximately $900,000 in connection with the
development and initial supply of a multiplex, rapid point-of-care ("POC")
influenza immunity test. The agreement contemplates a period of approximately
nine months in which the development activity is to be completed. Chembio
entered this agreement with Battelle Memorial Institute which has a master
contract with the United States Centers for Disease Control and Prevention
("CDC") to enter into, implement and provide technical oversight of agreements
relating to pandemic preparedness on behalf of CDC. Our work
plan has been delivered and been approved, which are the first two milestones
triggering approximately $178,000 in payments to Chembio. No
agreement is in place for the manufacture, commercialization or license for this
product assuming it is successfully developed in accordance with the
specifications.
The
objective of the project is to develop a product that can determine an
individual's immunity to seasonal and novel influenza viruses, including novel
swine H1N1, either in the field or in an outpatient setting. The test will have
six different parameters (representing different influenza strains) plus a
control line on a single POC DPP® device. The test will allow visual
interpretation of results and/or will be used with a portable digital reader
that will be customized for this application. Public health experts believe that
rapid responses in the field require a POC test for influenza immunity, as well
as infection. Current test platform technologies for infection and immunity are
not suitable for reliable POC testing.
DPP® Hepatitis C and DPP® Hepatitis
C/HIV Oral Fluid Antibody Tests - Prototypes of these products have been
developed and are being evaluated in a study that has been organized by the
National Center for HIV/AIDS, Viral Hepatitis, STD, and TB Prevention (NCHHSTP)
at the Centers for Disease Control and Prevention (CDC) of the Department Of
Health and Human Services. The evaluation will be completed during
2010 and the results should be useful in helping to ascertain the performance
characteristics of these products in comparison to other products that will also
be in this evaluation. Chembio’s DPP® HIV 1/2 test is also being
evaluated in this study.
DPP® Influenza –We have
developed a prototype multiplex test for FLU A/B Antigen
Detection. [This is not to be confused with the immune status
antibody detection test we are developing for the U.S. CDC]. This prototype, if
successfully developed into a commercial product, would be competitive to the
current point-of-care FLU A/B products marketed by Quidel, Meridian, Binax
(Inverness) and others. We believe that we can develop a test that
performs better than the current market leaders, and so that there is therefore
a significant opportunity to participate in this market. We are also
considering additional parameters for this product that would further
differentiate it in the market. This product will be our first commercial
antigen detection test on DPP® and we believe that this has independent value to
demonstrate the capabilities of our technology to access large markets beyond
serological antibody detection markets. Our current plan is for
development to be completed and initiation of our FDA 510(k) submission
activities during 2010.
DPP®
Leptospirosis – In June, as we previously reported, we were awarded a
three-year $3 million Small Business Innovative Research (SBIR) Phase II grant
from the United States National Institutes of Health (NIH) to fully develop,
validate, and commercialize a rapid diagnostic test for Leptospirosis for
general use worldwide, and our work is progressing on schedule. The test will be
developed with DPP® and will utilize proprietary reagents developed by Cornell
University and the Oswaldo Cruz Foundation at the Brazilian Ministry of Health.
Development of the test will be in collaboration with the Division of Infectious
Diseases, Weill Medical College, Cornell University in New York and the Oswaldo
Cruz Foundation, the largest biomedical research institution in Latin
America. In the Phase I work completed in 2008, which occurred with
this same collaborative group, novel diagnostic targets were identified and
evaluated in a prototype test in Chembio’s patented DPP® format. The studies
demonstrated that the test prototype had an overall sensitivity of 85% and a
specificity of 90% using serum samples of Leptospirosis patients from Brazil and
Thailand. Furthermore, the DPP® prototype had a sensitivity of 78% in
identifying Leptospirosis in the first 7 days of illness, the
"window-of-opportunity" during which initiation of antimicrobial therapy
provides the greatest benefit.
Other Research & Development
Activities - Chembio continues to work with commercial, governmental and
private organizations in order to obtain R&D contracts & grant funding
for development projects. These programs have subsidized the
Company’s development expenses while expanding the applications for and know-how
related to DPP® and creating important collaborative
relationships. We have other grant applications pending. In April
2009 we entered into a Services Agreement with the Infectious Disease Research
Institute to develop DPP® products for Leishmaniasis and Leprosy for which we
have received $125,000 and which, subject to attainment of development
milestones, will additionally provide us with approximately $125,000 within the
next six months. The second year provides for another $150,000,
subject to the attainment of development milestones. During the first
quarter of 2009 we entered into a funded feasibility study agreement with the
Foundation for Innovative and Novel Diagnostics (FIND), a non-profit
organization funded by the Gates Foundation, related to development of
serological tests for Tuberculosis and Malaria using our DPP®. The
Company received $165,000 from FIND and as a result of our achievement of all
milestones, we recognized revenue of $99,000 in the first and second quarters as
well as $66,000 during the third quarter with further development activity
pending a full evaluation and comparison of results.
There can
be no assurance that any of these projects will continue, meet regulatory or
other technical requirements and specifications, and/or that if continued, will
result in completed products, or that such products, if successfully completed,
will be successfully commercialized.
Platform Enhancements - In addition to the specific
products we plan to commercialize we also are pursuing enhancements to our DPP®
technology platform during 2010 and 2011. These enhancements include
enabling a simplified test procedure, lowering the overall manufacturing costs,
enabling development of combination antibody and antigen assays, and integrating
molecular sample amplification systems with our detection
system. We are active in each of these areas and also are
pursuing patent protection where applicable.
Regulatory
Activities
CE Mark for FDA approved HIV
tests – we provided all testing and related documentation that was
requested by our Notified Body during the second quarter, however additional
data was requested in correspondence we received in January and we are
evaluating the cost/benefit of producing this information at this time. Under
our agreement with Inverness, as now amended, we no longer have the obligation
to obtain a CE Marking for the Clearview® Complete HIV 1/2.
Regulatory Approvals in Brazil
through the Oswaldo Cruz Foundation (FIOCRUZ) – We anticipate that
FIOCRUZ will receive required approvals from its regulatory agencies during the
first and/or second quarter of 2010 for the DPP® Leishmaniasis, HIV
Confirmatory, and the DPP® HIV screening tests.
DPP® HIV 1/2 Screening Assay for Oral
Fluid - Field evaluations in Africa have been completed of this product
that will supplement our pending U.S. clinical studies: During the second half
of 2009 we prepared a proposed clinical trial protocol and submitted it to the
FDA in support of our application for an Investigational Device Exemption (IDE)
which we submitted and was approved during the fourth quarter of
2009. This approved protocol permits us to move forward with the
clinical trials performance data, along with other required product and
manufacturing data, in support of a Pre-Marketing Approval (PMA) application to
the FDA. We have commenced the clinical trials at two sites and we anticipate
completing the clinical trials and submitting the PMA application during 2010
and receiving approval of the PMA during 2011.
DPP® Syphilis Screen & Confirm
- The first phase of a multi-center evaluation sponsored by the World
Health Organization commenced during the third quarter and we have received only
limited first phase results. During the third quarter, we submitted a
proposed clinical plan to the FDA (Pre-IDE “Investigational Device Exemption”)
and we are currently reviewing the FDA response. We have also begun
to identify clinical testing sites, have performed additional validation,
interfering substance, and cross-reactivity studies on the product at Chembio
and at external laboratories. There is no point-of-care test for syphilis
cleared for marketing in the United States, and we believe that our product,
with its multiplexed capacity to identify both treponemal and non-treponemal
markers, provides a reliable indication of an active, untreated case of syphilis
at the point-of-care.
The table
below provides a preliminary summary estimated timetable for the regulatory
approval and commercialization of the DPP® HIV Screening Assay and the DPP®
Syphilis Screen & Confirm Assay in major markets. There can be no
assurance that these dates will be accurate.
Market
|
DPP®
HIV 1/2 Screening Assay
|
DPP®
Syphilis Screen & Confirm
|
Developing
World
|
2010
|
2010
|
CE
Mark0
|
2nd
Half 2011
|
First
Half 2010
|
US
FDA
|
2nd Half
2011
|
First
Half 2011
|
Recent
Events
In May
2009, certain warrants to purchase an aggregate of 2,489,120 shares of common
stock expired, at an average exercise price of $.764. These warrants
were related to the Series A Preferred Stock Offering and other warrants related
to the 2004 merger.
In
January 2010, certain warrants to purchase an aggregate of 4,960,370 shares of
common stock expired, at an average exercise price of $.474. These
warrants were related to the initial 2005 Series B Preferred Stock Offering (see
Form 8-K filed on January 31, 2005 with the SEC for further details on this
offering).
We
entered into a lease effective February 1, 2010 for additional warehouse space;
see Item 2 for more information.
In
February 2010, the Company took possession of the automated assembly equipment
(mentioned below under Equipment Purchase Commitment). This equipment
is expected to provide for faster throughput and thereby increasing capacity of
our manufacturing facility, in addition to reducing labor costs. The
machine will need to go through a validation process and is expected to be in
serviced during the second quarter of 2010.
The
Company entered into an employment agreement dated March 4, 2010, and to be
effective March 5, 2010 (the "Employment Agreement"), with Mr. Esfandiari to
continue as the Company's Senior Vice President of Research and Development for
an additional term of three years. Please see Item 11 of this Form
10-K for further details.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 AS COMPARED WITH THE YEAR
ENDED DECEMBER 31, 2008
Revenues:
Selected
Product Categories:
|
|
For the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HIV
|
|
$ |
10,792,947 |
|
|
$ |
9,192,297 |
|
|
$ |
1,600,650 |
|
|
|
17.41 |
% |
DPP
|
|
|
619,530 |
|
|
|
126,000 |
|
|
|
493,530 |
|
|
|
391.69 |
% |
Other
|
|
|
960,016 |
|
|
|
1,037,471 |
|
|
|
(77,455 |
) |
|
|
-7.47 |
% |
Net
Product Sales
|
|
|
12,372,493 |
|
|
|
10,355,768 |
|
|
|
2,016,725 |
|
|
|
19.47 |
% |
License
and royalty income
|
|
|
121,896 |
|
|
|
- |
|
|
|
121,896 |
|
|
|
100.00 |
% |
R&D
contracts and grants
|
|
|
1,339,859 |
|
|
|
693,803 |
|
|
|
646,056 |
|
|
|
93.12 |
% |
Total
Revenues
|
|
$ |
13,834,248 |
|
|
$ |
11,049,571 |
|
|
$ |
2,784,677 |
|
|
|
25.20 |
% |
Revenues
for our HIV tests and related components during the year ended December 31, 2009
increased by $1.60 million over the same period in 2008. This was
primarily attributable to increased sales to our distributor in the United
States which increased 148%, or $3.13 million, to $5.24 million in 2009 as
compared with $2.11 million in 2008. This increase offset reduced
sales to Africa, which decreased by 21.6%, or $1.53 million, to $5.55 million in
2009 as compared with $7.08 million in 2008. Sales of our DPP product
increased because we are working with our partner in Brazil to get several
products approved in Brazil. The increase in R&D contracts and
grants involving our patented DPP® technology, of which $1,161,000 was received
and $1,340,000 was earned in 2009, adding $21,000 to deferred revenues as of
December 31, 2009.
Gross
Margin:
Gross
Margin related to Net
Product Sales:
|
|
For the years ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin per Statement of Operations
|
|
$ |
5,860,405 |
|
|
$ |
3,851,721 |
|
|
$ |
2,008,684 |
|
|
|
52.15 |
% |
Less:R&D
contracts and grants, license and royalties
|
|
1,461,755
|
|
|
|
693,803 |
|
|
|
767,952 |
|
|
|
110.69 |
% |
Gross
Margin from Net Product Sales
|
|
$ |
4,398,650 |
|
|
$ |
3,157,918 |
|
|
$ |
1,240,732 |
|
|
|
39.29 |
% |
Gross
Margin % |
|
|
35.55 |
% |
|
|
30.49 |
% |
|
|
|
|
|
|
|
|
The
increase in our gross margin resulted primarily from increased average unit
prices on product sales as a result of the increased sales to Inverness, which
are at higher average unit prices, and decreased sales to Africa, which are at
lower average unit prices.
Research and
Development:
This
category includes costs incurred for product research and development,
regulatory approvals, technical support, evaluations and
registrations.
Selected
expense lines:
|
|
For the years ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Clinical & Regulatory
Affairs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
321,830 |
|
|
$ |
262,191 |
|
|
$ |
59,639 |
|
|
|
22.75 |
% |
Consulting
|
|
|
35,560 |
|
|
|
27,231 |
|
|
|
8,329 |
|
|
|
30.59 |
% |
Share-based
compensation
|
|
|
12,916 |
|
|
|
- |
|
|
|
12,916 |
|
|
|
100.00 |
% |
Clinical
trials
|
|
|
69,499 |
|
|
|
138,792 |
|
|
|
(69,293 |
) |
|
|
-49.93 |
% |
Other
|
|
|
32,056 |
|
|
|
60,822 |
|
|
|
(28,766 |
) |
|
|
-47.30 |
% |
Total
Regulatory
|
|
$ |
471,861 |
|
|
$ |
489,036 |
|
|
$ |
(17,175 |
) |
|
|
-3.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Other than
Regulatory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
1,541,295 |
|
|
$ |
1,354,557 |
|
|
$ |
186,738 |
|
|
|
13.79 |
% |
Consulting
|
|
|
74,194 |
|
|
|
138,436 |
|
|
|
(64,242 |
) |
|
|
-46.41 |
% |
Share-based
compensation
|
|
|
62,180 |
|
|
|
84,935 |
|
|
|
(22,755 |
) |
|
|
-26.79 |
% |
Materials
and supplies
|
|
|
462,806 |
|
|
|
282,281 |
|
|
|
180,525 |
|
|
|
63.95 |
% |
Other
|
|
|
271,360 |
|
|
|
256,098 |
|
|
|
15,262 |
|
|
|
5.96 |
% |
Total
other than Regulatory
|
|
$ |
2,411,835 |
|
|
$ |
2,116,307 |
|
|
$ |
295,528 |
|
|
|
13.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Research and Development
|
|
$ |
2,883,696 |
|
|
$ |
2,605,343 |
|
|
$ |
278,353 |
|
|
|
10.68 |
% |
Expenses
for Clinical & Regulatory Affairs for the year ended December 31, 2009
decreased by $17,000 as compared to the same period in 2008. This was primarily
due to expenses we incurred in 2008 for external clinical trials conducted in
order to lower the age limitation of our FDA approved rapid HIV tests from 18 to
13 years of age in 2008, which did not recur. This decrease was
partially offset by an increase in wages and related costs.
R&D
expenses other than Clinical & Regulatory Affairs increased by $295,000 in
the year ended December 31, 2009 as compared with the same period in 2008 and
were primarily related to an increase in personnel and material costs required
to perform the work related to funded research and development contracts and
grants all related to our patented DPP® technology. These increases
were partially offset by a decrease in consulting cost and the reduced cost of
share-based compensation related to the value of employee stock options issued
and amortized.
Selling, General and
Administrative Expense:
Selected
expense lines:
|
|
For the years ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
1,075,532 |
|
|
$ |
1,261,511 |
|
|
$ |
(185,979 |
) |
|
|
-14.74 |
% |
Consulting
|
|
|
165,371 |
|
|
|
187,494 |
|
|
|
(22,123 |
) |
|
|
-11.80 |
% |
Commissons
|
|
|
302,515 |
|
|
|
365,774 |
|
|
|
(63,259 |
) |
|
|
-17.29 |
% |
Share-based
compensation
|
|
|
98,356 |
|
|
|
187,908 |
|
|
|
(89,552 |
) |
|
|
-47.66 |
% |
Marketing
materials
|
|
|
22,779 |
|
|
|
38,379 |
|
|
|
(15,600 |
) |
|
|
-40.65 |
% |
Investor
relations
|
|
|
72,888 |
|
|
|
123,654 |
|
|
|
(50,766 |
) |
|
|
-41.05 |
% |
Legal,
accounting and Sox 404 compliance
|
|
|
470,843 |
|
|
|
556,118 |
|
|
|
(85,275 |
) |
|
|
-15.33 |
% |
Travel,
entertainment and trade shows
|
|
|
61,316 |
|
|
|
92,576 |
|
|
|
(31,260 |
) |
|
|
-33.77 |
% |
Other
|
|
|
389,782 |
|
|
|
503,632 |
|
|
|
(113,850 |
) |
|
|
-22.61 |
% |
Total
S, G &A
|
|
$ |
2,659,382 |
|
|
$ |
3,317,046 |
|
|
$ |
(657,664 |
) |
|
|
-19.83 |
% |
Selling,
general and administrative expenses for the year ended December 31, 2009
decreased by 20% as compared with the same period in 2008. During the
second half of 2008 and continuing in 2009 the Company implemented a series of
cost reductions that have resulted in lower S,G&A expenses in almost every
category in 2009 year to date with the exception of sales commissions which,
decreased as a result of a decrease in commissionable sales (and not from the
Company’s cost reductions) as compared with the 2008 period.
Other Income and
Expense:
|
For the years ended |
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
$ |
(6,696 |
) |
|
$ |
95,812 |
|
|
$ |
(102,508 |
) |
|
|
-106.99 |
% |
Interest
income
|
|
|
9,032 |
|
|
|
34,403 |
|
|
|
(25,371 |
) |
|
|
-73.75 |
% |
Interest
expense
|
|
|
(10,603 |
) |
|
|
(8,317 |
) |
|
|
(2,286 |
) |
|
|
-27.49 |
% |
Total
Other Income and (Expense)
|
|
$ |
(8,267 |
) |
|
$ |
121,898 |
|
|
$ |
(130,165 |
) |
|
|
-106.78 |
% |
Other
income and (expense) for the year ended December 31, 2009 decreased 107% as
compared with the same period in 2008 primarily as a result of a decrease in the
net amounts received from New York State related to a program for qualified
emerging technology companies. Interest income for the year
ended December 31, 2009 decreased due to a decrease in available funds to invest
in interest bearing accounts.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2009 AS COMPARED WITH THE
THREE MONTHS ENDED DECEMBER 31, 2008
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
FOR THE THREE MONTHS
ENDED
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
REVENUES:
|
|
|
|
|
|
|
Net
product sales
|
|
$ |
3,127,454 |
|
|
$ |
2,244,753 |
|
License
and royalty income
|
|
|
38,186 |
|
|
|
- |
|
Research
grant income
|
|
|
385,801 |
|
|
|
206,141 |
|
TOTAL
REVENUES
|
|
|
3,551,441 |
|
|
|
2,450,894 |
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
1,920,636 |
|
|
|
1,835,604 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,630,805 |
|
|
|
615,290 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
755,836 |
|
|
|
652,906 |
|
Selling,
general and administrative expenses
|
|
|
657,310 |
|
|
|
620,695 |
|
|
|
|
1,413,146 |
|
|
|
1,273,601 |
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
217,659 |
|
|
|
(658,311 |
) |
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
- |
|
|
|
107,363 |
|
Interest
income
|
|
|
1,949 |
|
|
|
4,446 |
|
Interest
expense
|
|
|
(2,394 |
) |
|
|
(3,901 |
) |
|
|
|
(445 |
) |
|
|
107,908 |
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
217,214 |
|
|
|
(550,403 |
) |
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
217,214 |
|
|
$ |
(550,403 |
) |
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic
|
|
|
61,950,988 |
|
|
|
61,944,901 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, diluted
|
|
|
75,365,550 |
|
|
|
61,944,901 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
Revenues:
Product
Categories:
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HIV
|
|
$ |
2,963,671 |
|
|
$ |
1,963,383 |
|
|
$ |
1,000,288 |
|
|
|
50.95 |
% |
DPP
|
|
|
- |
|
|
|
126,000 |
|
|
|
(126,000 |
) |
|
|
-100.00 |
% |
Other
|
|
|
163,783 |
|
|
|
155,370 |
|
|
|
8,413 |
|
|
|
5.41 |
% |
Net
Product Sales
|
|
|
3,127,454 |
|
|
|
2,244,753 |
|
|
|
882,701 |
|
|
|
39.32 |
% |
License
and royalty income
|
|
|
38,186 |
|
|
|
- |
|
|
|
38,186 |
|
|
|
100.00 |
% |
R&D
contracts and grants
|
|
|
385,801 |
|
|
|
206,141 |
|
|
|
179,660 |
|
|
|
87.15 |
% |
Total
Revenues
|
|
$ |
3,551,441 |
|
|
$ |
2,450,894 |
|
|
$ |
1,100,547 |
|
|
|
44.90 |
% |
Revenues
for our HIV tests during the three months ended December 31, 2009 increased by
approximately 51% or $1,000,000 over the same period in 2008. This
was primarily attributable to increased sales in North America, primarily from
sales to Inverness of our HIV products which increased by $1,292,000 to
$1,833,000, and partially offset by a decrease in sales to Brazil of
$374,000. The increase in R&D contracts and grants was primarily
due to revenue our recent NIH grant for Leptospirosis, which was effective as of
June 1, 2009. License and royalty income represents our royalties
from Brazil under our 2004 technology transfer and license
agreement.
Gross
Margin:
Gross
Margin related to Net
Product Sales:
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin per Statement of Operations
|
|
$ |
1,630,805 |
|
|
$ |
615,290 |
|
|
$ |
1,015,515 |
|
|
|
160.05 |
% |
Less:R&D
contracts and grants, license and royalties
|
|
|
423,987 |
|
|
|
206,141 |
|
|
|
217,846 |
|
|
|
105.68 |
% |
Gross
Margin from Net Product Sales
|
|
$ |
1,206,818 |
|
|
$ |
409,149 |
|
|
$ |
797,669 |
|
|
|
194.96 |
% |
Gross
Margin % |
|
|
38.59 |
% |
|
|
18.23 |
% |
|
|
|
|
|
|
|
|
The
increase in our gross margin resulted primarily from increased sales volume and
average unit prices as a result of the increased sales to Inverness, which are
at higher average unit prices and decreased sales to Africa, which are at lower
average unit prices. The increase in our gross margin in the three
months ended December 31, 2009 also includes a decrease of $225,000 in the
royalty expense paid to Inverness as partial reimbursement for Inverness’
royalty payments to Bio-Rad Laboratories, Inc. pursuant to Inverness’ HIV-2
sublicense agreement with Bio-Rad.
Research and
Development:
This
category includes costs incurred for regulatory approvals, product evaluations
and registrations.
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Clinical & Regulatory
Affairs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
96,284 |
|
|
$ |
67,294 |
|
|
$ |
28,990 |
|
|
|
43.08 |
% |
Consulting
|
|
|
5,610 |
|
|
|
2,548 |
|
|
|
3,062 |
|
|
|
120.17 |
% |
Share-based
compensation
|
|
|
4,667 |
|
|
|
- |
|
|
|
4,667 |
|
|
|
100.00 |
% |
Clinical
trials
|
|
|
23,448 |
|
|
|
- |
|
|
|
23,448 |
|
|
|
100.00 |
% |
Other
|
|
|
7,852 |
|
|
|
7,727 |
|
|
|
125 |
|
|
|
1.62 |
% |
Total
Regulatory
|
|
$ |
137,861 |
|
|
$ |
77,569 |
|
|
$ |
60,292 |
|
|
|
77.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Other than
Regulatory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
420,088 |
|
|
$ |
361,630 |
|
|
$ |
58,458 |
|
|
|
16.17 |
% |
Consulting
|
|
|
10,646 |
|
|
|
33,455 |
|
|
|
(22,809 |
) |
|
|
-68.18 |
% |
Share-based
compensation
|
|
|
9,722 |
|
|
|
9,738 |
|
|
|
(16 |
) |
|
|
-0.16 |
% |
Materials
and supplies
|
|
|
102,491 |
|
|
|
91,536 |
|
|
|
10,955 |
|
|
|
11.97 |
% |
Other
|
|
|
75,028 |
|
|
|
78,978 |
|
|
|
(3,950 |
) |
|
|
-5.00 |
% |
Total
other than Regulatory
|
|
$ |
617,975 |
|
|
$ |
575,337 |
|
|
$ |
42,638 |
|
|
|
7.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Research and Development
|
|
$ |
755,836 |
|
|
$ |
652,906 |
|
|
$ |
102,930 |
|
|
|
15.76 |
% |
Total
expenses for Clinical & Regulatory Affairs for the three months ended
December 31, 2009 increased by approximately $60,000 as compared to the same
period in 2008. An increase in compensation in Clinical and
Regulatory Affairs of $29,000, was the primary reason for the increase in wages
and related costs. In addition, start up costs for clinical trials of
our DPP® oral fluid HIV test also contributed to this increase.
Total
expenses for R&D Other than Clinical & Regulatory Affairs increased by
approximately $43,000 in the three months ended December 31, 2009 as compared
with the same period in 2008. These increases were primarily related
to an increase in compensation, materials and supplies related to R&D
contracts and grants, partially offset by a reduction in the use of consultants
and other expenses.
Selling, General and
Administrative Expenses:
Selected
expense lines: |
|
For
the three months ended |
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and related costs
|
|
$ |
324,131 |
|
|
$ |
257,778 |
|
|
$ |
66,353 |
|
|
|
25.74 |
% |
Consulting
|
|
|
22,250 |
|
|
|
45,912 |
|
|
|
(23,662 |
) |
|
|
-51.54 |
% |
Commissons
|
|
|
15,952 |
|
|
|
50,894 |
|
|
|
(34,942 |
) |
|
|
-68.66 |
% |
Share-based
compensation
|
|
|
30,414 |
|
|
|
14,082 |
|
|
|
16,332 |
|
|
|
115.98 |
% |
Marketing
materials
|
|
|
5,419 |
|
|
|
15,831 |
|
|
|
(10,412 |
) |
|
|
-65.77 |
% |
Investor
relations
|
|
|
35,839 |
|
|
|
11,906 |
|
|
|
23,933 |
|
|
|
201.02 |
% |
Legal,
accounting and Sox 404 compliance
|
|
|
123,500 |
|
|
|
81,562 |
|
|
|
41,938 |
|
|
|
51.42 |
% |
Travel,
entertainment and trade shows
|
|
|
13,849 |
|
|
|
20,730 |
|
|
|
(6,881 |
) |
|
|
-33.19 |
% |
Other
|
|
|
85,956 |
|
|
|
122,000 |
|
|
|
(36,044 |
) |
|
|
-29.54 |
% |
Total
S, G &A
|
|
$ |
657,310 |
|
|
$ |
620,695 |
|
|
$ |
36,615 |
|
|
|
5.90 |
Selling,
general and administrative expenses (S,G&A) for the three months ended
December 31, 2009 increased by 5.9% as compared with the same period in
2008. This was primarily due to increased wages and related expenses
related to bonuses paid to compensate employees who had taken pay reductions
during the first six months of the 2009 year.
Other Income and
(Expense):
|
For
the three months ended |
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
$ |
- |
|
|
$ |
107,363 |
|
|
$ |
(107,363 |
) |
|
|
-100.00 |
% |
Interest
income
|
|
|
1,949 |
|
|
|
4,446 |
|
|
|
(2,497 |
) |
|
|
-56.16 |
% |
Interest
expense
|
|
|
(2,394 |
) |
|
|
(3,901 |
) |
|
|
1,507 |
|
|
|
-38.63 |
% |
Total
Other Income and (Expense)
|
|
$ |
(445 |
) |
|
$ |
107,908 |
|
|
$ |
(108,353 |
) |
|
|
-100.41 |
% |
Other
income and (expenses) for the three months ended December 31, 2009 decreased
approximately $108,000 as compared with the same period in 2008, primarily as a
result of a decrease in the net amounts received from New York State related to
a program for qualified emerging technology companies.
LIQUIDITY
AND CAPITAL RESOURCES
|
|
For
the years ended
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
251,927 |
|
|
$ |
(1,194,227 |
) |
|
$ |
1,446,154 |
|
|
|
-121.10 |
% |
Net
cash used in investing activities
|
|
|
(376,988 |
) |
|
|
(397,462 |
) |
|
|
(8,754 |
) |
|
|
2.20 |
% |
Net
cash provided by (used) in financing activities
|
|
|
(18,926 |
) |
|
|
(23,458 |
) |
|
|
33,760 |
|
|
|
-143.92 |
% |
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
$ |
(143,987 |
) |
|
$ |
(1,615,147 |
) |
|
$ |
1,471,160 |
|
|
|
-91.09 |
% |
The
Company had a decrease in cash for the year ended December 31, 2009 as compared
to a greater decrease in cash for the same period in 2008. The decrease during
the 2009 period is primarily attributable to cash used on deposits and
acquisition of fixed assets, partially offset by cash provided from operations.
The decrease in the 2008 period is primarily attributable to the cash used in
operations.
The
Company had a working capital surplus of $1,494,000 at December 31, 2009 and a
working capital surplus of $1,664,000 at December 31, 2008. The
Company estimates that its resources are sufficient to fund its needs through
the end of 2010 and beyond or that, in the alternative, it could raise
additional capital although the terms under which that capital could be raised
would likely be very dilutive to current shareholders. The Company’s
liquidity and cash requirements will depend on several factors. These factors
include (1) the level of revenues (the Company received $340,000 in 2009 for
license fees for which we need to meet certain milestones to earn and the
Company expects to receive up to $1 million in license fees from Brazil,
although there can be no assurance); (2) the extent to which, if any, that
revenue level improves operating cash flows; (3) the Company’s investments in
research and development, facilities, marketing, regulatory approvals, and other
investments it may determine to make; (5) the payment of obligations and
commitments (including a license fee payable of $875,000 due at the end of
2010); and (4) the investment in capital equipment (including production
equipment of $323,500 that the Company has contracted for) and the extent to
which it improves cash flow through operating efficiencies. There are no
assurances that the Company will become profitable or generate positive cash
flow by the end of 2010 or, in the alternative, be successful in raising
sufficient capital to fund its needs through 2010.
RECENT
DEVELOPMENTS AND CHEMBIO’S PLAN OF OPERATIONS FOR THE NEXT TWELVE
MONTHS
Please
see section entitled Recent Events above.
In 2009
Chembio achieved record revenues, gross margin, operating results and cash flow,
including its first ever quarterly and full year profits since its reverse
merger in 2004. Following net losses from 2004-2008, including our smallest loss
in 2008 of nearly $2 million, we swung to net income of $309,000 in
2009. This was a notable achievement given that 2009 was the worst
economy since World War II. We believe this achievement was
attributable to several factors, including: (1) the $3.13 million, or 148%,
increase in our rapid HIV test sales to Inverness more than offset a $1.53
million, or 21.6%, decrease in our international HIV rapid test
sales. Higher average selling prices in the U.S. market for rapid HIV
tests helped to produce a 36.8%, or $1.16 million, increase in our gross margin
on product sales, from $3.16 million in 2008 to $4.32 million in
2009. These increased U.S. market revenues reflect the continued
expansion in the U.S. rapid HIV test market, and relatively stable funding as
rapid testing has taken hold, and expanded into more hospitals and public health
testing venues. The increased average selling prices for our FDA PMA
approved HIV rapid test products that are sold in the U.S. market as compared
with those in the developing world provide us with a much more attractive return
on the manufacturing, regulatory compliance and other costs (patent license fees
and such as royalty expense) that are applicable to these
products. This return is much lower on our international sales
primarily due to the lower average selling prices of competitive products
manufactured in Asia that do not have the same costs of regulatory compliance,
labor and other items that we have in the United States with our products; (2) a
392%, or $494,000, increase in DPP® product sales attributable to our OEM
agreements for new DPP® products with FIOCRUZ in Brazil. While such
amount was significantly less than what we had anticipated, and this product was
used by FIOCRUZ for regulatory submissions for the three DPP® products that have
been submitted for regulatory approval in Brazil, these shipments at least
allowed us to bring these products through our manufacturing
process. We are optimistic that the four DPP® products we have under
agreement will produce significant DPP® product and technology revenues during
2010 and beyond, although there can be no assurance of this; (3) A 93%, or
$646,000, increase in R&D contracts and grants to $1.34 million in 2009 from
$694,000 in 2008 more than offset the $278,000 increase in our research and
development expenses from $2.61 million in 2008 to $2.88 million in 2009, as
more commercial, governmental and non-governmental organizations entered into
development programs with us related to our DPP® technology as we reported
during 2009; and (4) 20% reduction in our SG&A expenses from $3.32 million
in 2008 to $2.66 million in 2009, which decrease followed an 11.9% reduction in
2008 over 2007 and a 21.3% reduction in 2007 over 2006.
The
December 31, 2009 cash balance was $144,000 less than at December 31,
2008. This was primarily due to $792,000 that was paid to Inverness
pursuant to our agreement of December 2008 in which we agreed to amortize a
$1.01 million liability to Inverness based on a percentage of their sales of our
products beginning in 2009. Based on Inverness’ anticipated sales of our
products in 2010, we anticipate that the liability mentioned above will be fully
amortized in the first part of 2010, thereby freeing up this cash flow
used to extinguish the obligation to Inverness for other corporate purposes.
Also contributing to the cash decrease was a $675,000 account receivable balance
that was outstanding at the year end (which amount was paid in January 2010) and
$400,000 that we invested during 2009 in new equipment and facilities (primarily
our new assembly system that we took delivery of in February 2010). Partially
offsetting these cash outflows were our net income, non-cash expenses, and
receipt of a $340,000 license fee deposit from Bio-Rad Laboratories,
Inc.
Our
results in 2009 clearly guide our strategy for growth in 2010 and beyond. We
believe we can best leverage our DPP® intellectual property together with our
U.S.-based manufacturing and regulatory credentials by bringing proprietary
products (such as our DPP® oral fluid HIV test and our Screen and Confirm
Syphilis test) to the U.S. public health and other markets. Based on
our current year and long range plan, we are optimistic that revenues will grow
significantly in the foreseeable future, although there can be no assurance of
this.
Significant
revenue growth in 2010 could be realized, based on the following assumptions:
(1) Increased sales of our rapid HIV tests in the U.S. market as the total
market and our products’ market share increases; (2) increased international
sales of our HIV rapid tests primarily based on maintaining current accounts,
increased sales to Nigeria where we resumed sales activity in the fourth quarter
of 2009 for the first time since 2008; (3) DPP® product sales and license fees
from our contracts with FIOCRUZ (including regulatory approvals required in
Brazil) and completion of the product development phase in our program with
Bio-Rad Laboratories, Inc. which would result in recognizing the $340,000
license fee we received in 2009; (4) a substantial increase in our R&D
contracts and grants primarily based on the $900,000 development contract we
entered in December 2009 with Battelle Memorial Institute and having a full year
of the $2.9 million NIH grant for Leptospirosis we received in June 2009,
and; (5) improved manufacturing efficiencies based on the delivery in
February of our customized automated assembly system which we invested in during
2009 for both our lateral flow and DPP® products, and lower costs for certain
raw materials used in our HIV tests which we will realize as a result of our
having bought out a license agreement in connection with the insolvency
procedures of the licensor in 2009.
We have
received purchase orders from FIOCRUZ for the three products pending regulatory
approval for an aggregate of over $2 million, and have an aggregate of
approximately $1 million in license fees that will be payable when the products
are approved. However the fees will not be paid and these orders
cannot be processed and shipped unless and until regulatory approval is obtained
in Brazil, which we believe will occur during the first half of 2010, but for
which there can be no assurance.
The
anticipated increased product and research and development revenues, if realized
will be accompanied by increased product costs and research and development
expenses which will be attributable to the increased R&D work primarily
required by the above-mentioned R&D contracts & grants; such expenses
may also increase as a result of other initiatives that we have identified that
we may be undertaking to further expand and enhance our technology
portfolio.
In
addition, we have commenced training for the conduct of clinical trials related
to our planned FDA PMA application for our DPP® oral fluid HIV
test. We anticipate that the total costs for thee trials during 2010
for this and related regulatory activities could approach $2
million. Moreover, additional regulatory expenses for preparing our
DPP® Syphilis Screen & Confirm test and our DPP® Flu A/B tests for 510(k)
submissions will also require significant resources, though not nearly as much
as the aforementioned PMA. We may attempt to enter an agreement with
a marketing partner for one more of these products which could result in our
being reimbursed for a portion of our regulatory expenses for one or more of
these products, but there can be no assurance of this occurring or if
it occurs, its timing. We can also defer some or all of
these costs to ensure that we can finance them with operating cash flow, though
this would impact commercialization timetables.
Although
we believe that there are still opportunities to increase our international HIV
test sales and we plan to do so in 2010, we are cognizant that these markets
will continue to be largely driven by price and therefore difficult for our
U.S.-based cost structure (though still contributing margin), and very difficult
to forecast due to their reliance on host governments’ decisions which can
suddenly and arbitrarily result in changes even though they are funded by
foreign aid budgets, mainly PEPFAR. On the other hand, based on the
outstanding data from a recent field study by the United States Centers for
Disease Control of our oral fluid HIV test in Africa, where it was compared with
two leading blood tests and an oral fluid test of a competitor’s, we believe
that there could well be significant opportunities for this product in the
international market, in which we are one of only two oral fluid HIV tests
approved for procurement by PEPFAR, as compared with dozens now that only work
on blood matrices. Further, we believe that if studies that having
been completed can show that oral fluid tests can improve prevention strategies
by encouraging more people to be tested, and particularly if we can continue to
lower our productions costs for this product to be more competitively priced for
this market, the international opportunity for this product will be significant
indeed.
If the
assumptions set forth above hold true, of which there is no assurance –
particularly where timing is concerned – we believe that our operating cash flow
from our existing business will likely be sufficient to fund a substantial
portion of the research and development and regulatory expenses required in
order to begin commercializing these new products in 2011, though there can no
assurance of this. We believe that we must invest in these new
product approvals in order to meet our long range plan for significant
growth.
We will
endeavor to time the increases in our research and development expenses, with
the increased R&D contracts and grants we anticipate receiving as described
above. However, delays in achievement of milestones and/or their
approval for the purpose of funding of payments that may be due to us can
occur.
We also
anticipate that our SG&A expenses, after having decreased in each of the
last three years, will not continue this trend into 2010. This is
attributable to: a) our having reduced this expense so significantly over
the last three years; b) expenses we may incur in 2010 that are associated with
the potential establishment of our own Chembio/DPP® branded product line in
2011; and c) expenses we may incur related to expansion of our board of
directors and investor relations activities as compared to 2009.
Accordingly,
in order to increase the likelihood that the regulatory approvals and
commercialization of new DPP® products occur on a timely basis, we may choose to
raise some additional capital if we believe such capital will best ensure our
ability to execute our business plan on a timely basis.
Equipment
Purchase Commitment:
In
January 2009, the Company entered into an agreement with an equipment
manufacturer to design and build equipment that will be used to automate the
assembling of our tests and lower our production costs. The estimated
cost of $323,500 is being paid in installments. In addition in June
and November of 2009, the Company entered into an agreement with an equipment
manufacturer to design and build a mold for its DPP® tests. The
estimated cost of $113,800 is being paid in installments.
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 are recognized
upon shipment to the customer. Income from R&D contracts and
grants are recognized in earnings in the period in which the related
expenditures are incurred. 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 $15,000.
Allowance
for doubtful accounts –
Our
policy is to review our accounts receivable on a periodic basis, no less than
monthly. On a quarterly basis an analysis is made of the adequacy of
our allowance for doubtful accounts and adjustments are made
accordingly. The current allowance is approximately 1.1% of
accounts receivable. For example each additional 1% of accounts
receivable that becomes uncollectible would reduce such balance of accounts
receivable by approximately $18,000.
Income Taxes –
Income
taxes are accounted for under ASC740 "Accounting for Income
Taxes.” ASC740 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, even though
we have become profitable, we may be unable to utilize our deferred tax asset,
which approximates $8,418,000 at December 31, 2009.
ASC740
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.
ASC740
also prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the consolidated financial statements tax positions taken or
expected to be taken on a tax return, including a decision whether to file or
not to file in a particular jurisdiction.
The
calculation of our tax liabilities involves the inherent uncertainty associated
with the application of complex tax laws. We are subject to examination by
various taxing authorities. We believe that as a result of our losses sustained
to date, any examination would result in a reduction of our net operating losses
rather than a tax liability. As such, we have not provided for
additional taxes estimated under ASC740, Accounting for Uncertainty in Income
Taxes.
The above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles, generally
accepted in the United States of America, with no need for management’s judgment
in their application. There are also areas in which management’s
judgment in selecting any viable alternative would not produce a materially
different result. See our audited financial statements and notes
thereto which contain accounting policies and other disclosures required by
accounting principles generally accepted in the United States of
America.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
Consolidated Financial Statements and schedules that constitute Item 8 are
attached at the end of this Annual Report on Form 10-K. An index to
these Financial Statements and schedules is also included on page F-1 of this
Annual Report on Form 10-K.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
There
have been no disagreements, or transactions or events similar to those which
involved such disagreements or reportable events, with former accountants on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter disagreements in connection with any of its
reports.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
(a) Disclosure
Controls and Procedures. Under the supervision and with the
participation of our senior management, consisting of our chief executive
officer and our chief financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this report (the "Evaluation Date"). Based on that
evaluation, the Company’s management, including our chief executive officer and
chief financial officer, concluded that as of the Evaluation Date our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Our disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our Exchange Act reports is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Management's
Annual Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)). Our internal control over financial reporting is a
process, under the supervision of our chief executive officer and chief
financial officer, designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles in the United States. These internal controls over
financial reporting processes include policies and procedures that:
(1)
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
(2)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
(3)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.
In
evaluating the effectiveness of our internal control over financial reporting,
our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this evaluation, our management concluded that
our internal control over financial reporting was effective as of
December 31, 2009.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
(b) Changes
in Internal Control over Financial Reporting. There were no changes
in our internal control over financial reporting identified in connection with
the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the
Exchange Act that occurred during the Company’s last fiscal quarter of the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
Not
applicable.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
and Executive Officers
Lawrence A. Siebert (53),
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 thirteen 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. Mr. Siebert as president and CEO is an
integral part of the Chembio management team. His experience in the
rapid test field and financing markets made him an excellent candidate for
serving on the board and as its chairman.
Richard J. Larkin (53), 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 (43), Executive VP of Research
and Development. Mr. Esfandiari joined Chembio Diagnostic Systems,
Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner of
Sinovus Biotech AB where he served as Director of Research and Development
concerning lateral flow technology until Chembio Diagnostic Systems Inc.
acquired Sinovus Biotech AB in 2000. From 1993 to 1997, Mr.
Esfandiari was Director of Research and Development with On-Site
Biotech/National Veterinary Institute, Uppsala, Sweden, which was working in
collaboration with Sinovus Biotech AB on development of veterinary lateral flow
technology. Mr. Esfandiari received his B.Sc. in Clinical Chemistry
and his M. Sc. in Molecular Biology from Lund University, Sweden. He
has published articles in various veterinary journals and has co-authored
articles on tuberculosis serology with Dr. Lyashchenko.
Richard Bruce (56), Vice
President, Operations. Mr. Bruce was hired in April 2000 as Director of
Operations. He is responsible for manufacturing, maintenance, inventory,
shipping, receiving, and warehouse operations. Prior to joining
Chembio Diagnostic Systems Inc., he held director level positions at Wyeth
Laboratories from 1984 to 1993. From 1993 to 1998, he held various management
positions in the Operations department at Biomerieux. From 1998 to
2000, he held a management position at V.I. Technologies. Mr. Bruce
has over thirty 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.
Tom Ippolito (47), 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.
Dr. Gary Meller (59),
Director. Dr. Meller was elected to our Board of Directors on March
15, 2005, and currently serves on the Company’s Audit, Compensation and
Nominating and Corporate Governance Committees, including as Chairman of the
Compensation Committee. Dr. Meller has been the president of
CommSense Inc., a healthcare business development company, since
2001. CommSense Inc. works with clients in Europe, Asia, North
America, and the Middle East on medical information technology, medical records,
pharmaceutical product development and financing, health services operations and
strategy, and new product and new market development. From 1999 until
2001 Dr. Meller was the executive vice president, North America, of NextEd Ltd.,
a leading internet educational services company in the Asia Pacific
region. Dr. Meller also was a limited partner and a member of the
Advisory Board of Crestview Capital Master LLC, which was our largest
stockholder. Dr. Meller is a graduate of the University of New Mexico School of
Medicine and has an MBA from the Harvard Business School. Dr.
Meller’s experience in the medical field both domestic and foreign (especially
his experience with CommSense Inc.) as well as his financing experience made him
an excellent candidate for serving on the board.
Kathy Davis (53),
Director. Ms. Davis was elected to the Company’s Board of Directors
in May 2007, and currently serves on the Company’s Audit, Compensation and
Nominating And Corporate Governance Committees, including as Chairman of each of
the Audit Committee and the Nominating And Corporate Governance
Committee. Since January 2007, Ms. Davis has been the owner of Davis
Design Group LLC, a company that provides analytical and visual tools for public
policy design. Previously, from February 2005 to December 2006, she served
as the Chief Executive Officer of Global Access Point, a start up company with
products for data transport, data processing, and data storage network and hub
facilities. From October 2003 to January 2005, Ms. Davis was Lieutenant
Governor of the State of Indiana, and from January 2000 to October 2003 was
Controller of the City of Indianapolis. From 1989 to 2003, Ms. Davis held
leadership positions with agencies and programs in the State of Indiana
including State Budget Director, Secretary of Family & Social Services
Administration, and Deputy Commissioner of Transportation. From 1982 to 1989 Ms.
Davis held increasingly senior positions with Cummins Engine, where she managed
purchasing, manufacturing, engineering, and assembly of certain engine product
lines. Ms. Davis also led the startup of and initial investments by a $50
million Indiana state technology fund, serves on the not-for-profit boards of
Noble of Indiana, University of Evansville Institute of Global Enterprise,
Purdue College of Science Dean’s Leadership Council and Indiana University
School of Public and Environmental Affairs Dean’s Advisory Council. She has a
Masters of Business Administration from Harvard Business School and a Bachelor
of Science in Mechanical Engineering from the Massachusetts Institute of
Technology. Ms. Davis has varied experience in business, political
and financial areas made her an excellent candidate for serving on the
board.
Section
16(a) Beneficial Ownership Reporting Compliances
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the Company’s directors, executive officers and beneficial owners of
more than 10% of the Company’s common stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the
Company. The Company believes that during the year ended December 31,
2009, each person who was an officer, director and beneficial owner of more than
10% of the Company’s common stock complied with all Section 16(a) filing
requirements, except for the following: (i) one Form 4 for Gary Meller
filed on October 30, 2009 that covered two reports and three transactions that
were not reported on a timely basis; and (ii) one Form 4 for Lawrence Siebert
filed on October 30, 2009 that covered one report and seven transactions; (iii)
one Form 4 for Richard Larkin filed on October 30, 2009 that covered one report
and seven transactions; (iv) one Form 4 for Katherine Davis that covered one
report and two transactions; and (iv) one Form 4 for Javan Esfandiari that
covered one report and eleven transactions.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer, controller,
and persons performing similar functions. A copy of the Company’s
code of ethics is available on the Company’s website at
www.chembio.com.
Identification
of Audit Committee; Audit Committee Financial Expert
The
Company’s board of directors has established an audit
committee. Katherine L. Davis and Dr. Gary Meller each serves on the
audit committee, with Ms. Davis serving as chairman. The Company’s
board of directors has determined that Ms. Davis is an audit committee financial
expert and is independent.
ITEM
11. EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by the Company in each of
the last two completed fiscal years for our principal executive officer, our two
most highly compensated executive officers other than our principal executive
officer whose annual compensation exceeded $100,000.
Name
/
Principal
Position
|
Year
|
Salary1
($)
|
Bonus2
($)
|
Option
Awards3
($)
|
Stock
Awards
($)
|
All
Other Compensation5
($)
|
Total
($)
|
Lawrence
A. Siebert4
|
2009
|
$ 265,000
|
$ 110,200
|
$ 37,950
|
$ -
|
$ 7,200
|
$ 420,350
|
CEO
|
2008
|
265,000
|
26,000
|
36,695
|
-
|
8,267
|
335,962
|
|
|
|
|
|
|
|
|
Javan
Esfandiari
|
2009
|
$ 230,192
|
$ 29,400
|
$ 28,200
|
$ 5,000
|
$ 4,883
|
$ 297,675
|
VP-R&D
|
2008
|
215,692
|
16,000
|
45,297
|
28,702
|
5,872
|
311,563
|
|
|
|
|
|
|
|
|
Tom
Ippolito
|
2009
|
$ 181,500
|
$ 35,600
|
$ 21,150
|
$ -
|
$ 140
|
$ 238,390
|
VP-Regulatory
|
2008
|
173,631
|
12,000
|
8,129
|
-
|
1,708
|
195,468
|
|
|
|
|
|
|
|
|
1 Salary
is total base salary.
2 Bonuses
earned in 2009 were partially based on reaching certain objectives, which
included revenue dollar levels and operating profit levels, additional amounts
earned were discretionary. Bonuses earned in 2008 were paid solely on
a discretionary basis, and not pursuant to any bonus plan.
3 The estimated
fair value of any option or common stock granted was determined in accordance
with ASC 718, "Share-Based Payment".
4 Mr.
Siebert also serves as a director on the Company’s board of
directors. Mr. Siebert does not receive any compensation for this
director role.
5 Other
compensation includes an employer match to 401(K) contributions and car
allowances where applicable.
Employment
Agreements
Mr.
Siebert. Effective May 11, 2009, the Company’s Board of
Directors approved the Company’s extension of the June 15, 2006 employment
agreement (the “Employment Agreement”) with Lawrence A. Siebert, the Company’s
President and Chief Executive Officer, for an additional three-year
term. On June 15, 2006, Mr. Siebert and the Company entered into an
Employment Agreement, effective May 10, 2006, which was to terminate on May
10, 2008, extended in 2008 to May 10, 2009. Pursuant to the
Employment Agreement, Mr. Siebert serves as the President and Chief Executive
Officer of the Company and received an initial salary of $240,000 per year,
which had been increased to $265,000 per year until Mr. Siebert agreed to a 15
percent reduction, to $225,000, effective January 19, 2009. Mr.
Siebert’s salary was restored to $265,000 per annum effective in July
2009. Mr. Siebert also is 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. The terms of the extended May 11, 2009 and May 11, 2008
Employment Agreements are identical to the June 15, 2006 Employment Agreement,
except that under the May 11, 2008 extended Employment Agreement, Mr. Siebert
received additional consideration in the form of incentive stock options to
purchase 250,000 shares of the Company’s common stock exercisable at $0.13 per
share, which was the closing price of the Company's common stock on June 3,
2008. The incentive stock options are immediately exercisable and
they expire on the June 3, 2013.
Mr. Esfandiari. The
Company entered into an employment agreement dated March 4, 2010, and to be
effective March 5, 2010 (the "Employment Agreement"), with Mr. Esfandiari
to continue as the Company's Senior Vice
President of Research and
Development for
an additional term of three years. Mr. Esfandiari's salary under the
Employment Agreement is $245,000 for the first year, $255,000 for the second
year, and $265,000 for the final
year. Mr. Esfandiari is eligible for a cash bonus of up to 50% of his
base salary for each respective year, consisting of (i) a cash bonus of up to
30% of his calendar year base salary based on the performance of the Company's
Dual Path Platform Technology, which is directly related to certain annual
revenue targets budgeted by management of the Company; (ii) a cash bonus of up
to 10% of his calendar year base salary based on the attainment of certain
specific research and development objectives, as determined by the Board, and
(iii) a cash bonus of up to 10% of his calendar year base salary that is at the
complete discretion and determination of the board of directors.
The Company also granted Mr.
Esfandiari, pursuant to the Company's 2008 Stock Incentive Plan,
incentive stock options to purchase 300,000
shares of the Company's common stock. The price per share of these options is
equal to the fair market value of the Company's common stock as of the close of
the market on March 5, 2010, which is the date on which the Agreement was
effective. Of these stock options to purchase 100,000 shares vest on the
effective date, options to purchase an additional 100,000 shares of the stock
options vested on the second anniversary of the Employment Agreement, and
options to purchase an additional 100,000 shares of the stock options vested on
the third anniversary of the Employment Agreement. Mr. Esfandiari is
eligible to participate in any profit sharing, stock option, retirement plan,
medical and/or hospitalization plan, and/or other benefit plans except for
disability and life insurance that the Company may from time to time place in
effect for the Company’s executives during the term of Mr. Esfandiari’s
employment agreement. If Mr. Esfandiari’s employment agreement is terminated by
the Company without cause, or if Mr. Esfandiari terminates his employment
agreement for a reasonable basis, as defined in the Employment Agreement
including within 12 months of a change in control, the Company is required to
pay as severance Mr. Esfandiari’s salary for twelve months.
Mr.
Ippolito does not have an employment contract with the Company.
Executive
Bonus Plan
The
Company has established a bonus plan for its executives who do not have a
contract. For the fiscal year ended December 31, 2010, there were
three executives eligible for this bonus plan. Each executive can
earn up to 25% of that executive’s salary in the form of a
bonus. Half of the amount, or 12.5%, is determined by the
Compensation Committee in its discretion, and the other half is subject to the
Company’s attaining certain objectives based on revenue and operating profit
levels for the fiscal year for which the bonus is paid. The plan,
during 2009, called for a sliding percentage of the executive’s salary, from
zero to 6.25% for attaining 85% to 100% of revenue goals, and from zero to 6.25%
of the executive’s salary for attaining between zero percent to 150% of the
designated operating profit goals. The Company achieved 98.3% of its
revenue goals for 2009, resulting in a bonus of 5.5% of each executive’s salary,
and achieved greater than 150% of its operating profit goal, resulting in a
bonus of 6.25% of salary, for a total of 11.75% of salary. In
addition, the Compensation Committee approved approximately 8% of salary in
discretionary bonuses for the subject executives, bringing the total bonus to
approximately 20% of salary. Goals for 2010 have not yet been
established.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2009
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexcercised Options Excerciseable
(#)
|
Number
of Securities Underlying Unexcercised Options Unexcersable
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Option
Vesting Date
|
|
Number
of Shares of Stock That Have Not Vest
(#)
|
Market
Value of Shares of Stock That Have Not Vested
($)
|
Foot-
note
|
Lawrence
A. Siebert
|
|
|
133,333
|
0.13
|
5/6/2014
|
5/6/2012
|
|
|
|
5
|
|
|
|
133,333
|
0.13
|
5/6/2014
|
5/7/2011
|
|
|
|
5
|
|
|
|
133,333
|
0.13
|
5/6/2014
|
5/6/2010
|
|
|
|
5
|
|
|
250,000
|
|
0.13
|
6/3/2013
|
6/3/2008
|
|
|
|
3
|
|
|
75,000
|
|
0.22
|
2/15/2013
|
2/15/2008
|
|
|
|
2
|
|
|
50,000
|
|
0.13
|
5/28/2011
|
1/1/2007
|
|
|
|
1,
4
|
|
|
50,000
|
|
0.13
|
5/28/2011
|
4/17/2006
|
|
|
|
1,
4
|
|
|
10,000
|
|
0.13
|
5/4/2011
|
4/17/2006
|
|
|
|
4
|
|
|
50,000
|
|
0.13
|
5/4/2011
|
5/5/2004
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Javan
Esfandiari
|
|
|
100,000
|
0.13
|
5/6/2014
|
5/6/2012
|
|
|
|
5
|
|
|
|
100,000
|
0.13
|
5/6/2014
|
5/7/2011
|
|
|
|
5
|
|
|
|
100,000
|
0.13
|
5/6/2014
|
5/6/2010
|
|
|
|
5
|
|
|
100,000
|
|
0.13
|
4/23/2012
|
3/5/2009
|
|
|
|
1,
4
|
|
|
100,000
|
|
0.13
|
4/23/2012
|
3/5/2008
|
|
|
|
1,
4
|
|
|
60,000
|
|
0.22
|
2/15/2013
|
2/15/2008
|
|
|
|
2
|
|
|
25,000
|
|
0.13
|
5/28/2011
|
5/28/2007
|
|
|
|
4
|
|
|
100,000
|
|
0.13
|
4/23/2012
|
4/23/2007
|
|
|
|
1,
4
|
|
|
18,750
|
|
0.13
|
3/24/2011
|
1/1/2007
|
|
|
|
4
|
|
|
25,000
|
|
0.13
|
5/17/2010
|
1/1/2007
|
|
|
|
4
|
|
|
25,000
|
|
0.13
|
5/28/2011
|
4/17/2006
|
|
|
|
1,
4
|
|
|
25,000
|
|
0.13
|
5/28/2011
|
4/17/2006
|
|
|
|
1,
4
|
|
|
5,000
|
|
0.13
|
5/4/2011
|
4/17/2006
|
|
|
|
4
|
|
|
25,000
|
|
0.13
|
5/17/2010
|
4/17/2006
|
|
|
|
4
|
|
|
18,750
|
|
0.13
|
3/24/2011
|
3/24/2006
|
|
|
|
4
|
|
|
30,000
|
|
0.13
|
5/4/2011
|
5/5/2004
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Tom
Ippolito
|
|
|
75,000
|
0.13
|
5/6/2014
|
5/6/2012
|
|
|
|
5
|
|
|
|
75,000
|
0.13
|
5/6/2014
|
5/7/2011
|
|
|
|
5
|
|
|
|
75,000
|
0.13
|
5/6/2014
|
5/6/2010
|
|
|
|
5
|
|
|
50,000
|
|
0.22
|
2/15/2013
|
2/15/2008
|
|
|
|
2
|
|
|
15,000
|
|
0.13
|
3/24/2011
|
3/24/2006
|
|
|
|
4
|
1 Stock issued in connection
with an employment contract and under the 1999 Stock Option Plan.
2 On February 15, 2008 the
Company granted options under the 1999 Stock Option Plan.
3 Options issued in connection
with an employment contract and under the 2008 Stock Incentive
Plan.
4 On May 7, 2009, the
Compensation Committee of the Company reduced, to $0.13 per share, the exercise
price of each outstanding employee option that was issued under the 1999 Equity
Incentive Plan (the “1999 Plan”) for which the exercise price was greater than
$0.44 per share of the Company’s common stock. There was no other
change made to the terms of the stock options other than the reduction in the
exercise price. A total of 1,036,750 options were affected and the fair value
difference of the options before and after the reduction was $31,660 and was
expensed in the three months ended June 30, 2009.
5 On May 7, 2009 in accordance
with the terms of the Company’s 2008 Stock Incentive Plan, the Company granted
certain employees of the Company, options to purchase an aggregate of 2,925,000
shares of the Company’s common stock. The exercise price for these
options is equal to $0.13 per share. The options become exercisable
in thirds on the first, second and third anniversaries of the date of the
grant. Each option granted will expire and terminate, if not
exercised sooner, upon the earlier to occur of (a) 30 days after termination of
the employee’s employment with the Company or (b) the fifth anniversary of the
date of grant. The fair value of these options is being amortized
over the vesting life of the options.
Name
|
|
Fees
Earned or Paid in Cash
($) 1
|
|
|
Option
Awards
($) 2
|
|
|
Total
($)
|
|
Katherine
L. Davis
|
|
$ |
29,500 |
|
|
$ |
31,950 |
|
|
$ |
61,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Meller
|
|
|
26,500 |
|
|
$ |
31,950 |
|
|
|
58,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
D. Merselis3
|
|
|
1,000 |
|
|
|
- |
|
|
|
1,000 |
|
1 Fees earned or paid in cash represents
a yearly fee and fees for meeting expenses: (a) Ms. Davis received an $18,000
annual fee as a member of the board of directors, a $2,500 annual fee as audit
committee chairman and $9,000 in meeting fees paid during 2009; (b) Mr. Meller
received an $18,000 annual fee as a member of the board of directors, and $8,500
in meeting fees; (d) Mr. Merselis received $1,000 in meeting
fees.
2 Each outside member of the board of
directors is granted, once every five years, the right to purchase 375,000
shares of the company’s common stock with an exercise price equal to the market
price on the date of the grant as part of their annual compensation. One-fifth
of these options are exercisable on the date of grant, one-fifth become
exercisable on the first anniversary of the date of grant, and additional
one-fifths become exercisable on the second through fourth anniversary of the
date of grant. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model.
3 Mr.
Merselis resigned from our Board of Directors on February 9, 2009.
Director
Compensation
All
non-employee directors are paid an $18,000 annual retainer, semi-annually, and
once every five years, on the date of the annual meeting of stockholders that
directors are elected or re-elected (every 5 years), receive stock options to
acquire 375,000 shares of the Company's common stock, with an exercise price
equal to the market price on the date of the grant. Stock options to
acquire 75,000 shares become exercisable on the date of grant, and options to
acquire an additional 75,000 shares become exercisable on the date of each of
the four succeeding annual meetings of stockholders if and to the extent that
the non-employee director is reelected as a director at each such annual
meeting. The audit committee chairman is paid an annual retainer of
$2,500, paid semi-annually. In addition, the non-employee directors
are paid $1,000 in cash for each board of directors' meeting attended, and paid
$500 in cash for each telephonic board of directors meeting. The
non-employee directors who are members of a committee of the board of directors
are paid $500 in cash for each committee meeting attended, or $750 in cash for
each committee meeting attended if that non-employee director is the committee
chairman.
Compensation
Committee Interlocks and
Insider Participation
No
executive officer of the Company served as a member of the Board of any other
public company during the year ended December 31, 2009. No member of the
Compensation Committee serves as an executive officer of any other public
company during the year ended December 31, 2009. No interlocking relationship
exists between the members of our Compensation Committee and the Board or
compensation committee of any other company.
ITEM
12.
|
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 1, 2010.
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of Beneficial Owner
|
|
|
Percent
of Class
|
|
Siebert,
Lawrence (1)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
6,933,615 |
|
|
|
11.10 |
% |
Esfandiari,
Javan (2)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
777,573 |
|
|
|
1.24 |
% |
Larkin,
Richard (3)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
267,672 |
|
|
|
0.43 |
% |
Ippolito,
Tom (4)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
65,000 |
|
|
|
0.10 |
% |
Bruce,
Richard (5)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
135,075 |
|
|
|
0.22 |
% |
Meller,
Gary (6)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
534,300 |
|
|
|
0.86 |
% |
Davis,
Katherine L. (7)
3661
Horseblock Road
Medford,
NY 11763
|
|
|
150,650 |
|
|
|
0.24 |
% |
GROUP (8)
|
|
|
8,863,585 |
|
|
|
13.89 |
% |
|
|
|
|
|
|
|
|
|
Inverness
Medical Innovations, Inc.
51
Sawyer Road, Suite 200
Waltham,
MA 02453
|
|
|
5,367,840 |
|
|
|
8.66 |
% |
Crestview
Capital Offshore Fund, Inc.
95
Revere Drive, Suite A
Northbrook,
IL 60062
|
|
|
3,356,040 |
|
|
|
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 (61,944,901) of the Company's common stock
outstanding as of March 17, 2009. Each stockholder's ownership is
calculated as the number of shares of common stock owned plus the number of
shares of common stock into which any preferred stock, warrants, options or
other convertible securities owned by that stockholder can be converted within
60 days.
The term
“named executive officer” refers to our principal executive officer, our two
most highly compensated executive officers other than the principal executive
officer who were serving as executive officers at the end of 2008, 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 2008.
|
(1)
|
Includes
485,000 shares issuable upon exercise of options exercisable within 60
days. Does not include 400,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(2)
|
Includes
557,500 shares issuable upon exercise of options exercisable within 60
days. Does not include 300,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(3)
|
Includes
212,500 shares issuable upon exercise of options exercisable within 60
days. Does not include 275,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(4)
|
Includes
65,000 shares issuable upon exercise of options exercisable within 60
days. Does not include 225,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(5)
|
Includes
135,000 shares issuable upon exercise of options exercisable within 60
days. Does not include 225,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(6)
|
Includes
234,000 shares issuable upon exercise of options exercisable within 60
days. Does not include 300,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
(7)
|
Includes
150,650 shares issuable upon exercise of options exercisable within 60
days. Does not include 300,000 shares issuable upon exercise of options
that are not exercisable within the next 60
days.
|
|
(8)
|
Includes
footnotes (1)-(8)
|
Equity
Compensation Plan Information
Combined
Equity Compensation Plans - Information as of December 31,
2009
|
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
(a)
|
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column (a)
(c)
|
Equity
compensation plans approved by security holders1
|
|
5,586,900 |
1 |
|
$ |
0.152 |
|
1,821,350 |
Equity
compensation plans not approved by security holders
|
|
-- |
|
|
|
-- |
|
-- |
Total
|
|
5,586,900 |
|
|
$ |
0.152 |
|
1,821,350 |
1 The
“Number of Securities to be Issued Upon Exercise of Outstanding Warrants and
Rights” represents 2,408,250 from the 1999 Stock Option Plan and
3,178,650 under the 2008 Stock Incentive Plan. The “Number of
Securities Remaining Available for Future Issuance Under Equity Compensation
Plans” represents shares issuable under the 2008 Stock Incentive
Plan.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The
executive officers of the Company are as follows: Lawrence A. Siebert, president
and chairman of the board of directors of the Company, Richard J. Larkin, chief
financial officer of the Company, and Javan Esfandiari, executive vice president
of Research and Development of the Company.
On May 7,
2009, the Compensation Committee of the Company reduced, to $0.13 per share, the
exercise price of each outstanding employee option that was issued under the
1999 Equity Incentive Plan (the “1999 Plan”) for which the exercise price was
greater than $0.44 per share of the Company’s common stock. There was
no other change made to the terms of the stock options other than
the reduction in the exercise price. A total of 1,036,750 options were
affected. Mr. Siebert, Mr. Esfandiari and Mr. Larkin had options to
purchase common stock that were so reduced of 160,000, 497,500 and 137,500,
respectively.
In
addition, on May 7, 2009 in accordance with the terms of the Company’s 2008
Stock Incentive Plan, the Company granted certain employees of the Company,
options to purchase an aggregate of 2,925,000 shares of the Company’s common
stock. The exercise price for these options is equal to $0.13 per
share. The options become exercisable in thirds on the first, second
and third anniversaries of the date of the grant. Each option granted will
expire and terminate, if not exercised sooner, upon the earlier to occur of (a)
30 days after termination of the employee’s employment with the Company or (b)
the fifth anniversary of the date of grant. Mr. Siebert, Mr. Esfandiari
and Mr. Larkin received options to purchase common stock of 400,000, 300,000 and
275,000, respectively.
During
the quarter ended December 31, 2008, Inverness notified the Company that
Inverness had entered into a contract with Bio-Rad Laboratories, Inc.
(“Bio-Rad”) for royalties on Bio-Rad’s patent for the detection of HIV-2
antibodies. The agreement also provided for Inverness to pay past
royalties. On June 25, 2009, the Company and Inverness Medical
Innovations, Inc. (Inverness) entered into a letter agreement whereby certain
obligations aggregating approximately $1,010,000 as of December 31, 2008 were
agreed to be paid from future revenues. The obligations include the
Company’s share under its agreements with Inverness for the amount of HIV-2
royalties that Inverness paid when Inverness entered into an HIV-2 license
agreement with Bio-Rad Laboratories, Inc. of approximately $485,000 and
royalties owed by Chembio on lateral flow licenses to Inverness of approximately
$525,000 as of December 31, 2008. Under the agreement Inverness will retain an
additional 10% of Clearview® HIV 1/2 STAT-PAK® net sales and 5% of Clearview®
Complete HIV 1/2 net sales until these obligations are
extinguished. The approximate aggregate balance due is $242,000
as of December 31, 2009.
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.
We are not currently subject to
corporate governance standards defining the independence of our directors, and
we have chosen to define an “independent” director in accordance with the NASDAQ
Global Market's requirements for independent directors. Under this
definition, we have determined that Katherine L. Davis currently qualifies as
independent director. We do not list the “independent” definition we
use on our internet website.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
All fees
discussed below were paid to ParenteBeard LLC, except 2008 amounts, which were
paid to Lazar Levine & Felix LLP. In February 2009, Lazar Levine
& Felix LLP merged its practice into Parente Randolph, LLC, which
subsequently changed their name to ParenteBeard LLC.
Audit
Fees
For the
years ended December 31, 2009 and 2008, the Company’s independent accounting
firm billed the Company $100,000 and $136,000, respectively, for fees for the
audit of the Company’s annual financial statements and review of financial
statements included in the Company’s Forms 10-Q and 10-K.
Audit-Related
Fees
For the
years ended December 31, 2009 and 2008, the independent accounting firm, did not
provide the Company with any assurance and related services reasonably related
to the performance of the audit or review of the Company’s financial statements
that are not reported above under “Audit Fees.”
Tax
Fees
For the
years ended December 31, 2009 and 2008, the independent accounting firm billed
the Company $20,000 and $13,500, respectively, for professional services for tax
compliance, tax advice and tax planning.
All
Other Fees
For the
years ended December 31, 2009 and 2008, the independent accounting firm billed
the Company none and $2,500 for fees associated with the preparation and filing
of the Company’s registration statements, responses to SEC comment letters and
other related matters.
Audit
Committee Pre-Approval Policies
The Audit
Committee approves in advance all audit and non-audit services performed by the
independent accounting firm. There are no other specific policies or
procedures relating to the pre-approval of services performed by the independent
accounting firm.
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
Number Description
3.1
|
Articles
of Incorporation, as amended. (2)
|
3.2
|
Amended
and Restated Bylaws. (1)
|
4.8
|
Form
of Common Stock Warrant issued pursuant to the January 26, 2005 Securities
Purchase Agreement. (7)
|
4.9
|
Amended
Form of Common Stock Warrant issued pursuant to the January 26, 2005
Securities Purchase Agreement.
|
4.10
|
Registration
Rights Agreement, dated as of January 26, 2005, by and among the
Registrant and the purchasers listed therein.
(9)
|
4.11
|
Form
of Warrant, dated June 29, 2006, issued pursuant to Company and purchasers
of the Company’s Secured
Debentures. (7)
|
4.12
|
Registration
Rights Agreement, dated June 29, 2006.
(3)
|
4.14
|
Registration
Rights Agreement, dated as of September 29, 2006, by and among the
Registrant and the Purchasers listed therein.
(3)
|
4.15
|
Form
of Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated September 29, 2006
(5).
|
4.16
|
Amended
Form of Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated October 5, 2006.
(5)
|
4.17
|
Amended
Form of Common Stock Warrant issued to Placement Agents pursuant to the
October 5, 2005 Securities Purchase Agreement.
(9)
|
4.18*
|
Form
of Employee Option Agreement. (9)
|
4.20
|
1999
Equity Incentive Plan. (11)
|
4.20
|
2008
Stock Incentive Plan. (12)
|
10.1*
|
Employment
Agreement dated June 15, 2006 with Lawrence A. Siebert.
(4)
|
10.2*
|
Employment
Agreement dated April 23, 2007 with Javan Esfandiari.
(10)
|
10.4
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
January 26, 2005, by and among the Registrant and the purchasers listed
therein. (7)
|
10.5
|
Amendment
No. 1 to Securities Purchase Agreement, dated as of January 28, 2005 by
and among the Registrant and the purchasers listed therein.
(8)
|
10.7
|
Security
Purchase Agreement, dated June 29, 2006, among the Company and purchasers
of the Company’s Secured Debentures.
(3)
|
10.11
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
September 29, 2006, by and among the Registrant and the Purchasers listed
therein. (5)
|
10.11
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
September 29, 2006, by and among the Registrant and the Purchasers listed
therein. (5)
|
10.12
|
Letter
of Amendment to Securities Purchase Agreements dated as of September 29,
2006 by and among the Registrant and the Purchasers listed therein.
(5)
|
10.13
|
HIV
Barrel License, Marketing and Distribution Agreement, dated as of
September 29, 2006, by and among the Registrant, Inverness and StatSure.
(5)
|
10.14
|
HIV
Cassette License, Marketing and Distribution Agreement, dated as of
September 29, 2006, between the Registrant and Inverness.
(5)
|
10.15
|
Non-Exclusive
License, Marketing and Distribution Agreement, dated as of September 29,
2006, between the Registrant and Inverness.
(5)
|
10.16
|
Joint
HIV Barrel Product Commercialization Agreement, dated as of September 29,
2006, between the Registrant and StatSure.
(5)
|
23.1
|
Consent
of ParenteBeard LLC, 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 and the Registrant's Forms 8-K
filed on May 14, 2004, December 20, 2007 and April 18,
2008.
|
(2)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 31, 2005.
|
(3)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on July 3, 2006.
|
(4)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on June 21, 2006.
|
(5)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on October 5, 2006.
|
(6)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on June 7,
2004.
|
(7)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on January 31, 2005.
|
(8)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on March 28,
2005.
|
(9)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 12, 2008.
|
(10)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K/A filed with
the Commission on May 3, 2007.
|
(11)
|
Incorporated
by reference to the Registrant’s definitive proxy statement on Schedule
14A filed with the Commission on May 11,
2005.
|
(12)
|
Incorporated
by reference to the Registrant’s definitive proxy statement on Schedule
14A filed with the Commission on April 14,
2008.
|
(13)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 30, 2006.
|
(*)
|
An
asterisk (*) beside an exhibit number indicates the exhibit contains a
management contract, compensatory plan or arrangement which is required to
be identified in this report.
|
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
5,
2010 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.
|
|
|
|
|
/s/ Lawrence A.
Siebert
Lawrence
A. Siebert
|
|
Chief
Executive Officer, President and Chairman Of The Board
(Principal
Executive Officer)
|
|
March
5, 2010
|
/s/
Richard J. Larkin
Richard
J. Larkin
|
|
Chief
Financial Officer (Principal Financial & Accounting
Officer)
|
|
March
5, 2010
|
/s/ Gary
Meller
Dr.
Gary Meller
|
|
Director
|
|
March
5, 2010
|
/s/ Katherine L.
Davis
Katherine
L. Davis
|
|
Director
|
|
March
5, 2010
|
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
|
|
Index to Consolidated Financial
Statements
|
|
|
—INDEX—
|
|
Page(s)
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Financial Statements:
|
|
|
|
Balance
Sheets
|
|
December
31, 2009 and 2008
|
F-3
|
|
|
Statements
of Operations
|
|
Years
ended December 31, 2009 and 2008
|
F-4
|
|
|
Statements
of Changes in Stockholders’ Equity
|
|
Years
ended December 31, 2009 and 2008
|
F-5
|
|
|
Statements
of Cash Flows
|
|
Years
ended December 31, 2009 and 2008
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
- F-22
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiary
Medford,
New York 11763
We have
audited the accompanying consolidated balance sheets of Chembio Diagnostics,
Inc. and Subsidiary (the “Company”) as of December 31, 2009 and 2008 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31,
2009. 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 audit 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 audits of
its internal control over financial reporting. Our audit 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 provides 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 Subsidiary as of December 31, 2009 and 2008, and their consolidated
results of its operations and their cash flows for each of the two years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
PARENTEBEARD
LLC
/s/ PARENTEBEARD LLC
New York,
New York
March 4,
2010
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
CONSOLIDATED BALANCE
SHEETS
|
AS OF
|
|
|
|
|
|
|
|
-
ASSETS -
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,068,235 |
|
|
$ |
1,212,222 |
|
Accounts
receivable, net of allowance for doubtful accounts of $20,000 and $10,301
for 2009 and 2008, respectively
|
|
|
1,776,327 |
|
|
|
809,303 |
|
Inventories
|
|
|
1,555,903 |
|
|
|
1,819,037 |
|
Prepaid
expenses and other current assets
|
|
|
266,637 |
|
|
|
225,153 |
|
TOTAL
CURRENT ASSETS
|
|
|
4,667,102 |
|
|
|
4,065,715 |
|
|
|
|
|
|
|
|
|
|
FIXED ASSETS, net of
accumulated depreciation
|
|
|
580,213 |
|
|
|
881,406 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
License
agreements, net of current portion
|
|
|
700,000 |
|
|
|
940,000 |
|
Deposits
on manufacturing equipment
|
|
|
338,375 |
|
|
|
- |
|
Deposits
and other assets
|
|
|
29,560 |
|
|
|
27,820 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
6,315,250 |
|
|
$ |
5,914,941 |
|
|
|
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY -
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
1,906,163 |
|
|
$ |
2,383,021 |
|
Current
portion of loan payable
|
|
|
9,600 |
|
|
|
- |
|
Deferred
research and development revenue
|
|
|
360,833 |
|
|
|
- |
|
License
fee payable
|
|
|
875,000 |
|
|
|
- |
|
Current
portion of obligations under capital leases
|
|
|
21,536 |
|
|
|
18,780 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,173,132 |
|
|
|
2,401,801 |
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES:
|
|
|
|
|
|
|
|
|
Loan
payable - net of current portion
|
|
|
14,931 |
|
|
|
- |
|
Obligations
under capital leases - net of current portion
|
|
|
39,273 |
|
|
|
60,808 |
|
License
fee payable - net of current portion
|
|
|
- |
|
|
|
875,000 |
|
TOTAL
LIABILITIES
|
|
|
3,227,336 |
|
|
|
3,337,609 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock – 10,000,000 shares authorized, none outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock - $.01 par value; 100,000,000 shares authorized, 61,979,901 and
61,944,901 shares issued and outstanding for 2009 and 2008,
respectively
|
|
|
619,799 |
|
|
|
619,449 |
|
Additional
paid-in capital
|
|
|
39,453,522 |
|
|
|
39,252,350 |
|
Accumulated
deficit
|
|
|
(36,985,407 |
) |
|
|
(37,294,467 |
) |
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
3,087,914 |
|
|
|
2,577,332 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
6,315,250 |
|
|
$ |
5,914,941 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
FOR THE YEARS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
REVENUES:
|
|
|
|
|
|
|
Net
product sales
|
|
$ |
12,372,493 |
|
|
$ |
10,355,768 |
|
License
and royalty income
|
|
|
121,896 |
|
|
|
- |
|
Research
grant income
|
|
|
1,339,859 |
|
|
|
693,803 |
|
TOTAL
REVENUES
|
|
|
13,834,248 |
|
|
|
11,049,571 |
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
7,973,843 |
|
|
|
7,197,850 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,860,405 |
|
|
|
3,851,721 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
2,883,696 |
|
|
|
2,605,343 |
|
Selling,
general and administrative expenses
|
|
|
2,659,382 |
|
|
|
3,317,046 |
|
|
|
|
5,543,078 |
|
|
|
5,922,389 |
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
317,327 |
|
|
|
(2,070,668 |
) |
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(6,696 |
) |
|
|
95,812 |
|
Interest
income
|
|
|
9,032 |
|
|
|
34,403 |
|
Interest
expense
|
|
|
(10,603 |
) |
|
|
(8,317 |
) |
|
|
|
(8,267 |
) |
|
|
121,898 |
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
309,060 |
|
|
|
(1,948,770 |
) |
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
309,060 |
|
|
$ |
(1,948,770 |
) |
|
|
|
- |
|
|
|
- |
|
Basic
earnings (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic
|
|
|
61,946,435 |
|
|
|
61,266,594 |
|
|
|
|
- |
|
|
|
- |
|
Weighted
average number of shares outstanding, diluted
|
|
|
75,041,932 |
|
|
|
61,266,594 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY |
FOR THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Shares
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
Balance
at December 31, 2007
|
|
60,537,534 |
|
|
$ |
605,375 |
|
|
$ |
39,003,148 |
|
|
$ |
(35,345,697
|
) |
|
$ |
4,262,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excercised
|
|
1,407,367 |
|
|
|
14,074 |
|
|
|
(14,074
|
) |
|
|
- |
|
|
|
- |
|
Stock
option compensation
|
|
- |
|
|
|
- |
|
|
|
263,276 |
|
|
|
- |
|
|
|
263,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2008
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,948,770
|
) |
|
|
(1,948,770
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
61,944,901 |
|
|
|
619,449 |
|
|
|
39,252,350 |
|
|
|
(37,294,467
|
) |
|
|
2,577,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excercised
|
|
35,000 |
|
|
|
350 |
|
|
|
4,200 |
|
|
|
- |
|
|
|
4,550 |
|
Stock
option compensation
|
|
- |
|
|
|
- |
|
|
|
196,972 |
|
|
|
- |
|
|
|
196,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for 2009
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
309,060 |
|
|
|
309,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
61,979,901 |
|
|
$ |
619,799 |
|
|
$ |
39,453,522 |
|
|
$ |
(36,985,407
|
) |
|
$ |
3,087,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
CHEMBIO DIAGNOSTICS, INC. AND
SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
FOR THE YEARS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Cash
received from customers
|
|
$ |
12,871,921 |
|
|
$ |
11,186,608 |
|
Cash
paid to suppliers and employees
|
|
|
(12,618,423 |
) |
|
|
(12,406,921 |
) |
Interest
received
|
|
|
9,032 |
|
|
|
34,403 |
|
Interest
paid
|
|
|
(10,603 |
) |
|
|
(8,317 |
) |
Net
cash provided by (used in) operating activities
|
|
|
251,927 |
|
|
|
(1,194,227 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
13,750 |
|
|
|
- |
|
Acquisition
of and deposits on fixed assets
|
|
|
(390,738 |
) |
|
|
(397,462 |
) |
Net
cash used in investing activities
|
|
|
(376,988 |
) |
|
|
(397,462 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises
|
|
|
4,550 |
|
|
|
- |
|
Payment
of loan obligation
|
|
|
(4,697 |
) |
|
|
- |
|
Payment
of capital lease obligation
|
|
|
(18,779 |
) |
|
|
(23,458 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(18,926 |
) |
|
|
(23,458 |
) |
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(143,987 |
) |
|
|
(1,615,147 |
) |
Cash
and cash equivalents - beginning of the period
|
|
|
1,212,222 |
|
|
|
2,827,369 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of the period
|
|
$ |
1,068,235 |
|
|
$ |
1,212,222 |
|
|
|
|
|
|
|
|
|
|
RECONCILIATION
OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
309,060 |
|
|
$ |
(1,948,770 |
) |
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
362,338 |
|
|
|
345,388 |
|
Provision
for doubtful accounts
|
|
|
9,699 |
|
|
|
- |
|
Loss
on sale of fixed asset
|
|
|
6,696 |
|
|
|
- |
|
Share
based compensation
|
|
|
198,220 |
|
|
|
291,979 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(976,723 |
) |
|
|
137,037 |
|
Inventories
|
|
|
263,134 |
|
|
|
(365,187 |
) |
Prepaid
expenses and other assets
|
|
|
(42,732 |
) |
|
|
(10,108 |
) |
Deposits
and other assets
|
|
|
238,260 |
|
|
|
(683,462 |
) |
Deferred
revenue
|
|
|
360,833 |
|
|
|
(43,334 |
) |
Accounts
payable and accrued expenses
|
|
|
(476,858 |
) |
|
|
207,230 |
|
Licenses
fee payable
|
|
|
- |
|
|
|
875,000 |
|
Net
cash provided by (used in) operating activities
|
|
$ |
251,927 |
|
|
$ |
(1,194,227 |
) |
|
|
|
|
|
|
|
|
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Value
of common stock issued upon cashless warrant exercise
|
|
$ |
- |
|
|
$ |
14,074 |
|
Purchase
of fixed assets through a loan |
|
|
29,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
NOTE
1—DESCRIPTION OF BUSINESS:
Chembio
Diagnostics, Inc. (the “Company” or “Chembio”) and its subsidiary, Chembio
Diagnostic Systems, Inc., develop, manufacture, and market rapid diagnostic
tests that detect infectious diseases. The Company’s main products 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. Rapid HIV tests represented nearly 88% of the Company’s
product revenues in 2009. The Company also has other rapid
tests that together represented approximately 12% of sales in
2009. The Company’s products are sold to medical laboratories
and hospitals, governmental and public health entities, non-governmental
organizations, medical professionals and retail establishments both domestically
and internationally. Chembio’s products are sold under the Company’s STAT PAK®,
SURE CHECK® or DPP® registered trademarks, or under the private labels of its
marketing partners, for example the Clearview® label owned by Inverness Medical
Innovations, Inc., which is the Company’s exclusive marketing partner for its
rapid HIV lateral flow test products in the United States. These
products employ lateral flow technologies that are proprietary and/or licensed
to the Company. All of the Company’s products that are currently
being developed are based on its patented Dual Path Platform (DPP®), which is a
unique diagnostic point-of-care platform that has certain advantages over
lateral flow technology. In 2008 and 2009 to date, the Company has
completed development of its first four products that employ the DPP®, and the
Company has a number of additional products under development that employ the
DPP®.
NOTE
2—SIGNIFICANT ACCOUNTING POLICIES:
(a)
|
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the Company, and its
wholly owned subsidiary. All intercompany transactions and balances
have been eliminated in consolidation.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
assumptions and estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods covered thereby. Actual results could
differ from these estimates. Judgments and estimates of uncertainties are
required in applying the Company’s accounting policies in certain areas. The
following are some of the areas requiring significant judgments and estimates:
determinations of the useful lives of assets, estimates of allowances for
doubtful accounts, cash flow and valuation assumptions in performing asset
impairment tests of long-lived assets, estimates of the realizability of
deferred tax assets and inventory reserves.
(c)
|
Fair
Value of Financial Instruments:
|
Fair
values of cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets and accounts payable, loans and accrued expenses reflected
in these financial statements approximate carrying value as these are short-term
in nature.
(d)
|
Statements
of Cash Flows:
|
For
purposes of the statements of cash flows the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
(e)
|
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 $250,000 FDIC
Insurance limit. The Company monitors the credit ratings of the
financial institutions to mitigate this risk. The Company maintains
three accounts with a well established multi-national bank and as of December
31, 2009 had approximately an aggregate of $818,000 above the federally insured
limit. Concentration of credit risk with respect to trade receivables is
principally mitigated by the Company’s ability to obtain letters of credit from
certain foreign customers, and its diverse customer base both in number of
customers and geographic locations. We currently do not require
collateral.
Inventories,
consisting of material, labor and manufacturing overhead, are stated at the
lower of cost or market. Cost is determined on the first-in,
first-out method.
Fixed
assets are stated at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the respective assets, which range from three to seven
years. Leasehold improvements are amortized over the useful life of
the asset or the lease term, whichever is shorter.
In
February 2008, the Company entered into a sublicense agreement (see Note 6) for
which it had initially recorded an asset of $1,000,000. This
asset is being expensed over an estimated economic life of ten
years. The current portion of this asset is $100,000 and is reported
in prepaid expenses and other current assets. The long-term portion
as of December 31, 2009 is $700,000 and is reflected in other
assets.
(i)
|
Impairment
of Long-Lived Assets and Intangible
Assets
|
In
accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", long-lived assets to be held and used are analyzed for
impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. The Company evaluates at
each balance sheet date whether events and circumstances have occurred that
indicate possible impairment. If there are indications of impairment,
the Company uses future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value. We believe that the carrying values of
our long-lived tangible and intangible assets were realizable at December 31,
2009.
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB
104”). Under SAB 104, revenue is recognized when there is persuasive
evidence of an arrangement, delivery has occurred or services have been
rendered, the sales price is determinable, and collectability is reasonably
assured. Revenue typically is recognized at time of
shipment. Sales are recorded net of discounts, rebates and
returns.
The
Company recognizes income from R&D contracts and grants when
earned. Grants are invoiced after expenses are
incurred. Revenues from projects or grants funded in advance are
deferred until earned.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
(k)
|
Research
and Development:
|
Research
and development costs are expensed as incurred.
(l)
|
Stock
Based Compensation:
|
The
Company’s 2008 Stock Incentive Plan and 1999 Stock Option Plan (“Plans”)
are accounted for in accordance with the recognition and measurement provisions
of ASC 718. ASC 718 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 ASC 718 and certain SEC rules and regulations and provides
interpretations with respect to the valuation of share-based payments for public
companies. See Note 12 for further details.
The
Company accounts for income taxes under the provisions of ASC 740 "Accounting
for
Income
Taxes". Under ASC 740, 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.
ASC 740
also 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. ASC 740 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. Any interest and penalties accrued
related to unrecognized tax benefits will be recorded in tax
expense.
The
following weighted average shares were used for the computation of basic and
diluted earnings per share:
|
|
December
31, 2009
|
|
December
31, 2008
|
Basic
|
|
|
61,946,435 |
|
|
|
61,266,594 |
|
|
|
|
|
|
|
|
Diluted
|
|
|
75,041,932 |
|
|
|
61,266,594 |
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 earnings per share for the year ended December 31, 2009 reflects
the potential dilution from the exercise or conversion of other securities into
common stock. Diluted loss per share for the year ended December 31, 2008 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 that period.
The following securities, presented on a common share equivalent basis, have
been excluded from the per share computations:
|
|
For the years ended
|
|
|
December
31, 2009
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
1999
and 2008 Plan Stock Options
|
|
|
4,451,129 |
|
|
|
2,555,837 |
|
Other
Stock
Options
|
|
|
124,625 |
|
|
|
124,625 |
|
Warrants
|
|
|
8,519,743 |
|
|
|
14,657,050 |
|
|
|
|
13,095,497 |
|
|
|
17,337,512 |
|
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
(o)
|
Recent
Accounting Pronouncements Affecting the
Company:
|
Codification
In July
2009, the Financial Accounting Standards Board’s (FASB) Accounting Standards
Codification (ASC) became the single official source of authoritative,
nongovernmental generally accepted accounting principles (“US-GAAP” or “GAAP”)
in the United States. This guidance is contained in ASC Topic 105 “Generally
Accepted Accounting Principles.” The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. This guidance is effective for
interim and annual periods ending after September 15, 2009. The Company adopted
the provisions of this guidance as of September 30, 2009. The Company’s
accounting policies were not affected by the conversion to the ASC. However,
references to specific accounting standards have been changed to refer to the
appropriate section of the ASC.
Fair
Value Measurements
In
September 2006, the FASB issued guidance that defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This guidance is contained in ASC Topic 820 “Fair Value
Measurements and Disclosures.” This guidance does not require any new fair value
measurements, but applies under other accounting pronouncements that require or
permit fair value measurements. The effective date of this guidance for
financial assets and liabilities that are recognized or disclosed at fair value
on a recurring basis was January 1, 2008, and the Company did adopt the
provisions of this guidance at that time as it related to financial assets and
liabilities recognized or disclosed at fair value on a recurring basis.
Effective January 1, 2009, pursuant to this guidance, the Company adopted the
provisions of this guidance as it relates to non financial assets and
liabilities that are not recognized or disclosed at fair value on a recurring
basis. The adoption of this guidance had no impact on the Company’s financial
statements.
In April
2009, the FASB issued guidance that extends the disclosure requirements
regarding the fair value of financial instruments to interim financial
statements of publicly traded companies. This guidance is primarily contained in
ASC Topic 825 “Financial Instruments” and ASC Topic 270 “Interim Reporting.”
This guidance is effective for interim periods ending after June 15, 2009. The
adoption of this guidance had no impact on the Company’s financial
statements.
Collaborative
Arrangements
In
December 2007, the FASB issued guidance to participants in a collaborative
arrangement which is contained in ASC Topic 808. A collaborative
arrangement is a contractual arrangement that involves a joint operating
activity. These arrangements involve two (or more) parties who are both (a)
active participants in the activity and (b) exposed to significant risks and
rewards dependent on the commercial success of the activity. Many collaborative
arrangements involve licenses of intellectual property, and the participants may
exchange consideration related to the license at the inception of the
arrangement. Participants in a collaborative arrangement shall report costs
incurred and revenue generated from transactions with third parties (that is,
parties that do not participate in the arrangement) in each entity's respective
income statement pursuant to such guidance. An entity should not apply the
equity method of accounting to activities of collaborative arrangements. This
guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
adoption of this guidance had no material impact on the Company’s financial
statements.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
Business
Combinations
On
January 1, 2009, we adopted the accounting pronouncements relating to
business combinations (primarily contained in ASC Topic 805 “Business
Combinations”), including assets acquired and liabilities assumed arising from
contingencies. These pronouncements established principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree as well as provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. In addition, these pronouncements eliminate the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria and require an acquirer to develop
a systematic and rational basis for subsequently measuring and accounting for
acquired contingencies depending on their nature. Our adoption of
these pronouncements will have an impact on the manner in which we account for
any future acquisitions.
Non-Controlling
Interests in Consolidated Financial Statements
On
January 1, 2009, we adopted the accounting pronouncement on non-controlling
interests in consolidated financial statements, which establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance is primarily contained
in ASC Topic 810 “Consolidation”. It clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. The adoption of this standard has not had a material
impact on our consolidated financial statements.
Subsequent
Events
In May
2009, the FASB issued guidance that is intended to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before the financial statements are issued or are available to be
issued. This guidance is contained in ASC Topic 855 “Subsequent Events.” It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. This guidance is effective for
interim and annual periods ending after June 15, 2009. The Company adopted the
provisions of this guidance as of June 30, 2009.
In June
2009, an update was made to “Consolidation – Consolidation of Variable
Interest Entities.” Among other things, the update replaces the calculation for
determining which entities, if any, have a controlling financial interest in a
variable interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a Company’s involvement in VIEs. This
update will be effective for the Company beginning January 1, 2010. The
Company is evaluating the impact that this guidance will have on its financial
statements, if any.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
Inventories
consist of the following at December 31:
|
|
December
31, 2009
|
|
December
31, 2008
|
Raw
materials
|
|
$ |
1,031,567 |
|
|
$ |
836,446 |
Work
in process
|
|
|
184,081 |
|
|
|
300,986 |
Finished
goods
|
|
|
340,255 |
|
|
|
681,605 |
|
|
$ |
1,555,903 |
|
|
$ |
1,819,037 |
Fixed
assets consist of the following at December 31:
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$ |
1,222,216 |
|
|
$ |
1,195,975 |
|
Furniture
and fixtures
|
|
|
212,106 |
|
|
|
195,611 |
|
Computer
and telephone equipment
|
|
|
329,491 |
|
|
|
329,865 |
|
Leasehold
improvements
|
|
|
400,589 |
|
|
|
400,589 |
|
Automobiles
|
|
|
29,228 |
|
|
|
29,442 |
|
|
|
|
2,203,630 |
|
|
|
2,151,482 |
|
Less
accumulated depreciation and amortization
|
|
|
(1,623,417 |
) |
|
|
(1,270,076 |
) |
|
|
$ |
580,213 |
|
|
$ |
881,406 |
|
Included
in fixed assets is $70,500 and $70,500, net of accumulated depreciation of
$62,600 and $40,000 of assets held under capital leases as of December 31, 2009
and 2008, respectively. Depreciation expense for the 2009 and
2008 years aggregated $362,338 and $345,388, respectively.
NOTE
5—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts
payable and accrued liabilities at December 31:
|
|
December
31, 2009
|
|
December
31, 2008
|
Accounts
payable – suppliers
|
|
$ |
662,739 |
|
|
$ |
634,083 |
|
Accrued
royalties / license fees
|
|
|
612,709 |
|
|
|
1,400,941 |
|
Accrued
payroll
|
|
|
114,234 |
|
|
|
95,135 |
|
Accrued
vacation
|
|
|
99,057 |
|
|
|
91,895 |
|
Accrued
bonuses
|
|
|
238,600 |
|
|
|
- |
|
Accrued
expenses – other
|
|
|
178,824 |
|
|
|
160,967 |
|
TOTAL
|
|
$ |
1,906,163 |
|
|
$ |
2,383,021 |
|
NOTE
6—DEFERRED RESEARCH AND DEVELOPMENT REVENUE:
In
January 2009, the Company received a refundable license fee of $340,000 from
Bio-Rad Laboratories, Inc., pursuant to an exclusive license of our DPP®
technology for a specific field of use. The license fee will become
fully earned and non-refundable based upon certain future conditions being met
and is currently classified as deferred revenue. In addition, the
Company recognizes income from R&D contracts and grants when
earned. Grants are invoiced after expenses are incurred. Any projects
or grants funded in advance are deferred until earned. As of December 31, 2009,
an aggregate of $360,833 of advanced revenues was unearned.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
NOTE
7—VEHICLE FINANCING AND LICENSE FEE PAYABLE:
In June
2009, the Company purchased a vehicle for use by the CEO and obtained financing
in the amount of $29,228. The financing is for a period of 3 years,
is secured by the vehicle and is guaranteed by the CEO. The financing
agreement provides for monthly principal and interest payments of $849 and
carries an interest rate of 2.9% per annum. The balance due on this
loan as of December 31, 2009 was $24,531.
Future
minimum payments under this obligation, including interest as of December 31,
2009 were as follows:
Year
ending December 31,
2010
|
|
$ |
9,600 |
|
2011
|
|
|
9,882 |
|
2012
|
|
|
5,049 |
|
|
|
|
24,531 |
|
Less:
current maturities
|
|
|
(9,600
|
) |
|
|
$ |
14,931 |
|
In
February 2008, the Company entered into a sublicense agreement (the
“Agreement”), with Bio-Rad Laboratories, Inc. and Bio-Rad Pasteur (collectively,
“Bio-Rad”). Bio-Rad is the exclusive licensee of the HIV-2 patent
portfolio held by Institute Pasteur of Paris, France. Pursuant to the
terms of the Agreement, Bio-Rad sublicensed to the Company patents related to
the manufacture, use or sale of screening assays that detect
HIV-2. In exchange for global non-exclusive rights to these patents,
the Agreement initially provided that the Company will pay Bio-Rad a $1,000,000
sublicense fee, $500,000 payable during 2008, of which $125,000 was paid and
$375,000 was payable by December 31, 2008, with the remaining $500,000 being
payable by December 31, 2009. On January 29, 2009, the Company and
Bio-Rad agreed to amend the Agreement so as to defer the remaining $875,000 of
payments due under the Agreement to one payment due in December
2010. The Company will also pay Bio-Rad a royalty on net sales in the
United States and Canada, if any, of rapid test immunoassay tests sold under the
Company’s brands of Licensed Products as defined in the Agreement. The Agreement
will continue until the expiration of the last-to-expire of the sublicensed
patents, unless otherwise terminated at an earlier date by the Company or
Bio-Rad.
NOTE
8—OBLIGATIONS UNDER CAPITAL
LEASES:
The
Company is obligated under capitalized leases for certain manufacturing and
computer equipment.
Future
minimum lease payments under these capitalized lease obligations, including
interest as of December 31, 2009 were as follows:
Year
ending December 31,
2010
|
|
$ |
28,572 |
|
2011
|
|
|
28,572 |
|
2012
|
|
|
15,204 |
|
|
|
|
72,348 |
|
Less:
imputed interest
|
|
|
(11,539
|
) |
Present
value of future minimum lease payments
|
|
|
60,809 |
|
Less:
current maturities
|
|
|
(21,536
|
) |
|
|
$ |
39,273 |
|
These
leases have annual interest rates ranging from 13% - 15%.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
In September of 2006, the Company entered into distribution and
licensing agreements with Inverness Medical Innovations, Inc.
(“Inverness”). As of December 31, 2009 Inverness owned 8.7% of the
Company. See Note 14 where Inverness is listed as customer 1.
During
the quarter ended December 31, 2008, Inverness Medical Innovations, Inc.
(“Inverness”) notified the Company that Inverness had entered into a contract
with Bio-Rad Laboratories, Inc. (“Bio-Rad”) for royalties on Bio-Rad’s patent
for the detection of HIV-2 antibodies. The agreement also provided
for Inverness to pay past royalties. On June 25, 2009, the Company
and Inverness entered into a letter agreement whereby certain obligations
aggregating approximately $1,010,000 as of December 31, 2008 (included in
accounts payable and accrued expenses – see Note 5) were agreed to be paid from
future revenues. The obligations include the Company’s royalties owed
under its agreements with Inverness on lateral flow licenses . The approximate
aggregate balance due is $242,000 as of December 31, 2009 and is included in
accounts payable and accrued expenses – see Note 5.
No
provision for Federal or state income taxes was required for the years ended
December 31, 2009 or 2008, due to the Company’s utilization of net operating
loss carryfoward in 2009 and its operating loss in 2008. State and local
minimum taxes are included in selling, general and administrative
expenses.
At
December 31, 2009, the Company has unused net operating loss carry-forwards of
approximately $21,500,000 which expire between 2012 and 2029. Most of this
amount may be 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
$628,000 for the year ended December 31, 2009 which expire between 2012 and
2029.
As of
December 31, 2009 and 2008, the deferred tax assets related to the
aforementioned net operating loss carry-forwards have been fully offset by a
valuation allowance, since significant utilization of such amounts is not
presently expected in the foreseeable future.
Deferred
tax assets and valuation allowances consist of:
|
|
2009
|
|
|
2008
|
|
Current
assets
|
|
|
|
|
|
|
Inventory
|
|
$ |
124,000 |
|
|
$ |
169,000 |
|
Less
valuation allowance
|
|
|
(124,000
|
) |
|
|
(169,000
|
) |
Net
current deferred asset
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$ |
7,490,000 |
|
|
$ |
7,750,000 |
|
Research
and development credit
|
|
|
628,000 |
|
|
|
505,000 |
|
Other
|
|
|
176,000 |
|
|
|
174,000 |
|
Gross
deferred tax assets
|
|
|
8,294,000 |
|
|
|
8,429,000 |
|
Less
valuation allowances
|
|
|
(8,294,000
|
) |
|
|
(8,429,000
|
) |
Net
deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
The
change in the valuation allowances between 2009 and 2008 are mainly due to the
utilization of net operating loss carryfowards.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
A
reconciliation of the Federal statutory rate to the total effective rate
applicable to income (loss) from continuing operations before income taxes is as
follows:
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
Federal
income tax (benefit) at statutory rates
|
|
|
34.0
|
% |
|
|
(34.0
|
)% |
State
income taxes, net of federal benefit |
|
|
- |
% |
|
|
- |
% |
Nondeductible
expenses
|
|
|
17.8
|
% |
|
|
3.3
|
% |
Change
in valuation allowance
|
|
|
(52.3
|
)
% |
|
|
31.2
|
% |
Other
|
|
|
.5
|
% |
|
|
(.5
|
)
% |
Income
tax (benefit)
|
|
|
-
|
% |
|
|
-
|
% |
The
Company adopted the provisions of ASC 740 in January 1, 2007. The cumulative
effect of adopting ASC 740 did not have a material impact on the Company’s
financial position or results of operations.
Interest
and penalties, if any, related to income tax liabilities are included in income
tax expense. As of December 31, 2009, the Company does not have a
liability for unrecognized tax benefits.
The
Company files Federal and New York state income tax returns. Tax years for
fiscal 2006 through 2008 are open and potentially subject to examination by the
federal and New York state taxing authorities.
NOTE
11—STOCKHOLDERS’ EQUITY:
(a) Common
Stock
During
the December 31, 2009 quarter, options to purchase 35,000 shares of the
Company’s common stock were exercised at an exercise price of $.13.
During
the June 30, 2008 quarter, warrants to purchase 9,323,854 shares of the
Company’s common stock were exercised on a cashless basis, resulting in the
issuance of 1,407,367 shares of common stock. These warrants were exercised
on a cashless basis in connection with the Company’s preferred stock and warrant
amendments that were completed on December 19, 2007 (“Plan”), and the Company
received no cash consideration for these issuances of common stock.
On
December 19, 2007 (the “Closing Date”), amendments to the governing documents
for the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”), not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”), were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants. Subsequent to these amendments, among other matters, all the
Preferred Stock and certain of the Non-Employee Warrants were converted to
shares of the Company’s common stock.
The
Company has 10,000,000 shares of preferred stock authorized and none
outstanding. These shares can become issuable upon an approved resolution
by the board of directors and the filing of a Certificate of Designation with
the state of Nevada.
(c) Warrants
During
2009 certain warrants to purchase an aggregated 2,489,120 shares of common stock
expired, at an average exercise price of $.764.
In
January, 2010 certain warrants to purchase an aggregated 4,960,370 shares of
common stock expired, at an average exercise price of $.474
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
NOTE
12—EMPLOYEE STOCK OPTION PLAN:
The
Company has a 1999 Stock Option Plan (“SOP”) originally covering 1,500,000
shares of Common Stock. Under the terms of the SOP, the Compensation Committee
of the Company’s board is authorized to grant incentive options to key employees
and to grant non-qualified options to key employees and key individuals. The
options become exercisable at such times and under such conditions as determined
by the Compensation Committee. The SOP was amended at the Company’s
2005 stockholders’ meeting. The number of options under the SOP was
increased to cover 3,000,000 shares of common stock. It was also
amended to allow independent directors to be eligible for grants under the
portion of the SOP concerning non-qualified options.
Effective June 3, 2008,
the Company’s stockholders voted to approve the 2008 Stock Incentive Plan
(“SIP”). Under the terms of the SIP, the Compensation Committee of
the Company’s board shall have the discretion to select the persons to whom
Awards are to be granted. Awards can be incentive stock options, restricted
stock and/or restricted stock units. The Awards become vested at such times and
under such conditions as determined by the Compensation Committee.
As a
result of the adoption of ASC 718, the Company's results for the years ended
December 31, 2009 and 2008 include share-based compensation expense totaling
$198,000 and $292,000, respectively. Such amounts have been included
in the Consolidated Statements of Operations within cost of goods sold ($25,000
and $19,000, respectively), research and development ($75,000 and $56,000,
respectively) and selling, general and administrative expenses ($98,000 and
$217,000, respectively). No income tax benefit has been recognized in
the income statement for share-based compensation arrangements due to the
history of operating losses.
Stock
option compensation expense in the years ended December 31, 2009 and 2008
represent the estimated fair value of options outstanding which is 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, 2009 and 2008 was $.13 and $.37 per share,
respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model. The expected volatility
is based upon historical volatility of our stock and other contributing factors.
The expected term is determined using the simplified method as permitted by SAB
107, as the Company has no history of employee exercise of options to
date.
The
assumptions made in calculating the fair values of options are as
follows:
|
|
For the years ended
|
|
|
December
31, 2009
|
|
December
31, 2008
|
Expected
term (in years)
|
|
1
to 4
|
|
|
1
to 4
|
|
Expected
volatility
|
|
|
123.81 |
% |
|
|
109.33-112.33 |
% |
Expected
dividend yield
|
|
|
n/a |
|
|
|
n/a |
|
Risk-free
interest rate
|
|
.54%
to 1.95%
|
|
1.91
to 2.98%
|
The
Company granted 3,675,000 new options under the plans during the year ended
December 31, 2009 at an exercise price of $.13 per share (750,000 were issued
under the SOP and 2,925,000 were issued under the SIP).
On May 7,
2009, the Compensation Committee of the Company reduced, to $0.13 per share, the
exercise price of each outstanding employee option that was issued under the
1999 Equity Incentive Plan (the “1999 Plan”) for which the exercise price was
greater than $0.44 per share of the Company’s common stock. There was
no other change made to the terms of the stock options other than
the reduction in the exercise price. A total of 1,036,750 options were
affected and the fair value difference of the options before and after the
reduction was $31,660 and was expensed in the three months ended June 30,
2009.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
In
addition, on May 7, 2009 in accordance with the terms of the Company’s 2008
Stock Incentive Plan, the Company granted certain employees of the Company,
options to purchase an aggregate of 2,925,000 shares of the Company’s common
stock. The exercise price for these options is equal to $0.13 per
share. The options become exercisable in thirds on the first, second
and third anniversaries of the date of the grant. Each option granted will
expire and terminate, if not exercised sooner, upon the earlier to occur of (a)
30 days after termination of the employee’s employment with the Company or (b)
the fifth anniversary of the date of grant. The fair value of these
options is being amortized over the vesting life of the options.
On May 7,
2009, the Board of Directors of the Company revised the compensation of
non-employee directors to increase the number of options to purchase the
Company’s common stock issued to directors once every five years from 180,000 to
375,000. To accommodate the transition, on June 3, 2009 at the annual
meeting, non-employee directors that were re-elected were issued their five-year
allotment of options and those options previously granted but not exercisable as
of June 3, 2009 were cancelled. The number issued was 750,000 and the
number cancelled was 216,000. The 216,000 options were treated as a
re-price for accounting purposes. The fair value of these options
granted is being amortized over the vesting life of the options.
The
following table provides stock options activity for the years ended December 31,
2009 and 2008:
Stock
Options
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2008
|
|
|
2,201,500 |
|
|
$ |
0.64 |
|
3.52
years
|
|
$ |
- |
|
Impact of re-price (for accounting purposes
treated as a cancellation and re-issue):
|
|
effect
as if cancelled
|
|
|
(1,846,500 |
) |
|
$ |
0.64 |
|
|
|
|
|
|
effect
as if re-issiued
|
|
|
1,846,500 |
|
|
$ |
0.48 |
|
|
|
|
|
|
Granted
|
|
|
967,650 |
|
|
$ |
0.18 |
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Forfeited/expired
/cancelled
|
|
|
(752,500 |
) |
|
$ |
0.58 |
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
2,416,650 |
|
|
$ |
0.36 |
|
3.23
years
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of re-price (for accounting purposes
treated as a cancellation and re-issue):
|
|
effect
as if cancelled
|
|
|
(1,252,750 |
) |
|
$ |
0.48 |
|
|
|
|
|
|
effect
as if re-issiued
|
|
|
1,252,750 |
|
|
$ |
0.13 |
|
|
|
|
|
|
Granted
|
|
|
3,459,000 |
|
|
$ |
0.13 |
|
|
|
|
|
|
Exercised
|
|
|
(35,000 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(253,750 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
5,586,900 |
|
|
$ |
0.15 |
|
3.59
years
|
|
$ |
756,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
2,061,900 |
|
|
$ |
0.19 |
|
2.27
years
|
|
$ |
234,240 |
|
The
following table summarizes information about stock options outstanding at
December 31, 2009:
|
|
Stock
Options Outstanding
|
|
Stock Options
Exercisable
|
Range
of Exercise Prices
|
|
Shares
|
|
Average
Remaining Contract Life (Year)
|
|
Weighted
Average Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Aggregate
Intrinsic Value
|
$ |
0.13
- .13 |
|
4,930,400 |
|
3.72 |
|
$ |
0.130 |
|
$ |
739,560 |
|
|
1,405,400 |
|
$ |
0.130 |
|
$ |
210,810 |
$ |
0.14
- .22 |
|
415,500 |
|
3.13 |
|
$ |
0.220 |
|
|
24,930 |
|
|
415,500 |
|
$ |
0.220 |
|
|
24,930 |
$ |
0.23
- .45 |
|
15,000 |
|
0.96 |
|
$ |
0.350 |
|
|
- |
|
|
15,000 |
|
$ |
0.350 |
|
|
- |
$ |
0.46
- .88 |
|
226,000 |
|
1.84 |
|
$ |
0.498 |
|
|
- |
|
|
226,000 |
|
$ |
0.498 |
|
|
- |
Total
|
|
5,586,900 |
|
3.59 |
|
$ |
0.152 |
|
$ |
764,490 |
|
|
2,061,900 |
|
$ |
0.190 |
|
$ |
235,740 |
As of
December 31, 2009, there was $208,000 of net unrecognized compensation cost
related to stock options that are not vested, which is expected to be recognized
over a weighted average period of approximately 1.58 years. The total
fair value of shares vested during the years ended December 31, 2009 and 2008,
was $60,000 and $273,000, respectively.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
NOTE
13—GEOGRAPHIC INFORMATION:
ASC 280,
“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 ASC 280, management believes that it
operates in a single business segment. Net sales by geographic area are as
follows:
|
|
For the years ended
|
|
|
December
31, 2009
|
|
December
31, 2008
|
Africa
|
|
$ |
3,351,115 |
|
|
$ |
4,740,858 |
Asia
|
|
|
165,293 |
|
|
|
227,049 |
Europe
|
|
|
111,755 |
|
|
|
160,824 |
Middle
East
|
|
|
185,700 |
|
|
|
308,053 |
North
America
|
|
|
6,129,789 |
|
|
|
2,415,344 |
South
America
|
|
|
2,428,841 |
|
|
|
2,503,640 |
|
|
$ |
12,372,493 |
|
|
$ |
10,355,768 |
Sales to
Africa in 2009 were primarily to Ethiopia of approximately $1,700.000 and
Nigeria of approximately $608,000. Sales in 2009 to North America
were primarily from sales in the U.S of approximately $5,200,000 and sales in
2009 to South America were primarily from sales in Brazil of approximately
$2,300,000.
During
the first quarter of 2008, the Nigerian Ministry of Health published a report
indicating that our designation in Nigeria as one of the screening tests in a
parallel testing algorithm (wherein each patient is tested with two rapid tests
from different manufacturers) to a confirmatory and/or tie-breaker test in a
serial algorithm in which only positive results are confirmed with a
confirmatory test, and only discrepant results between those are tested with a
confirmatory test. Consequently, our sales to Nigeria decreased
significantly in 2009 as compared to 2008.
NOTE
14—COMMITMENTS AND CONTINGENCIES:
Employment
Contracts:
The
Company has contracts with two key employees. The contracts call for
salaries presently aggregating $510,000 per year. One contract
expires in May 2012 and one contract expires in March 2013. The
following table is a schedule of future minimum salary commitments:
2010
|
|
$ |
508,300 |
|
2011
|
|
|
518,300 |
|
2012
|
|
|
373,750 |
|
2013
|
|
|
44,200 |
|
|
|
$ |
1,444,550 |
|
Pension Plan:
The
Company has a 401(k) plan established for its employees. The Company
elected to match 20% of the first 5% (or 1% of salary) that an employee
contributes to their 401(k) plan. Expenses related to this matching
contribution aggregated $1,534 and $23,850 for the years ended December 31, 2009
and 2008, respectively.
As of
January 19, 2009, the Company suspended the matching contribution.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
Agreement
with Adaltis
In
October 2009, the Company entered into a letter agreement (“Agreement”) with the
Trustee of Adaltis, Inc, a Canadian company that filed for bankruptcy in Canada
in August 2009. Pursuant to a License and Supply Agreement (“L&S
Agreement”) dated August 30, 2002 by and between Chembio Diagnostic Systems Inc.
and Adaltis Inc., Adaltis licensed and supplied certain HIV 1&2 peptides
that the Company used in certain HIV tests manufactured and sold by the
Company. Under the terms of the Agreement, the Company purchased for a
lump-sum amount a paid-up license to the patents through their expiration dates,
thereby cancelling its obligation to pay any additional liabilities under the
L&S Agreement. The Company also acquired the right to purchase
the peptides from any supplier chosen by Chembio, including but not limited to
the current supplier that previously supplied the Company through Adaltis
pursuant to the L&S Agreement with Adaltis. The Agreement further provides
for a full mutual release of all claims, including any and all obligations under
the L&S Agreement.
Obligations
Under Operating Leases:
The
Company leases approximately 23,400 square feet of industrial space used for
office, R&D and manufacturing facilities, currently with a monthly rent of
$14,683. The current lease expires on April 30, 2014. We
entered into a second lease effective February 1, 2010, the principal terms of
this lease are the same as the one entered into in 2009 and are as
follows: (a) a lease term ending April 30, 2014; (b) an initial
rent of $11,350 per month plus $3,333 for the second lease (March and April of
2010 are free and the month of April in 2011, 2012 and 2013 is also free) ;
(c) the monthly rent for year two of the lease (does not apply to
second lease) will increase by the lower of (i) the change in the consumer price
index, or (ii) five percent; and (d) the monthly rent for years three
through five of the lease (years two through four of the second lease) will
increase each year by the lower of (i) the change in the consumer price
index, or (ii) two and one half percent. The following is a
schedule of future minimum rental commitments (assuming no
increases):
Year
ending December 31,
2010
|
|
$ |
166,197 |
|
2011
|
|
|
172,863 |
|
2012
|
|
|
172,863 |
|
2013
|
|
|
172,863 |
|
2014
|
|
|
55,399 |
|
|
|
$ |
740,185 |
|
Rent
expense was $145,300 and $130,300 for the years ended December 31, 2009 and
2008, respectively.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
Economic
Dependency:
The
following table delineates sales the Company had to customers in excess of 10%
of total sales for the periods indicated:
|
|
For
the years ended
|
|
Accounts
Receivable
|
|
|
December
31, 2009
|
|
December
31, 2008
|
|
As
of
|
|
|
Sales
|
|
%
of Sales
|
|
Sales
|
|
%
of Sales
|
|
December
31, 2009
|
Customer
1
|
|
$ |
5,240,996 |
|
42 |
|
$ |
2,111,151 |
|
26 |
|
$ |
609,605 |
Customer
2
|
|
|
1,292,640 |
|
10 |
|
|
* |
|
* |
|
|
- |
Customer
3
|
|
|
2,293,770 |
|
19 |
|
|
2,434,420 |
|
30 |
|
|
- |
Customer
4
|
|
|
* |
|
* |
|
|
3,732,615 |
|
46 |
|
|
* |
In the
table above the asterisk (*) indicates that sales to the customer did not exceed
10% for the period indicated.
The
following table delineates purchases the Company had with vendors in excess of
10% of total purchases for the periods indicated:
|
|
For
the years ended
|
|
Accounts
Payable
|
|
|
December
31, 2009
|
|
December
31, 2008
|
|
As
of
|
|
|
Purchases
|
|
%
of Purc.
|
|
Purchases
|
|
%
of Purc.
|
|
December
31, 2009
|
Vendor
1
|
|
$ |
575,362 |
|
20 |
|
$ |
627,637 |
|
21 |
|
$ |
- |
Vendor
2
|
|
|
* |
|
* |
|
|
303,750 |
|
10 |
|
|
* |
In the
table above the asterisk (*) indicates that purchases from the vendor’s did not
exceed 10% for the period indicated.
The
Company currently buys materials which are purchased under intellectual property
rights agreements and are important components in its
products. Management believes that other suppliers could provide
similar materials on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would affect operating results adversely.
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.
Voluntary
Component Recall:
In April
2008, we initiated a voluntary recall of two lots of Control kits used with our
HIV 1-2 Stat Pak® Assay distributed by Inverness under its Clearview® brand.
Control kits are to be used in order to verify the operator’s ability to
properly perform the test and to interpret the results. These kits are supplied
directly to Inverness by our vendor in accordance with our specifications and
instructions. In the case of these two lots of Control kits, although
they met our specifications, they were at the lower limit of such
specifications, and this produced some issues with the interpretation of the
Control kit results by certain customers. Chembio has provided the kit supplier
with a more clearly defined specification and has reviewed copies of revised
manufacturing and testing procedures to ensure implementation of the new
specification. Based upon this new specification, packaged HIV Rapid Test
Control Packs containing the new HIV Controls have been in distribution since
May 2008. The FDA has classified this voluntary recall as a Class II recall, “a
situation in which the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences are
remote”. Approximately $22,000 in costs were incurred in 2008. We
completed all of our recall activity in 2008, including monitoring and final
product disposition and in 2008 the FDA issued a letter to the Company
confirming that this investigation is officially closed.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
Equipment
Purchase Commitment:
In
January of 2009, the Company entered into an agreement with an equipment
manufacturer to design and build equipment that will be used to automate the
assembling of our tests and lower our production costs. The estimated
cost of $323,500 is being paid in installments. In addition in June and November
of 2009, the Company entered into an agreement with a tooling manufacturer to
design and build a tool for cassettes that house, its DPP® tests. The
estimated cost of $113,800 is being paid in installments. As of December 31,
2009, an aggregate of $338,375 has been paid for these two items and is included
in deposits and other assets on the Company’s balance sheet.
R&D contracts &
grants:
In 2009
and 2008, the Company earned $1,340,000 and $694,000, respectively from research
grants, feasibility and development contracts. The Company is
now involved in additional feasibility and development contracts related to its
DPP® technology. The total expended on R&D in 2009 and 2008, not
including regulatory, was approximately $2,400,000 and $2,100,000,
respectively.
In June
2009, the Company received a $3 million, three-year grant from the United States
National Institutes of Health to complete development of a test for
Leptospirosis. Grants are invoiced after expenses are
incurred. In addition the Company has several development contracts
with third parties related to its DPP® technology. These development
projects are funded in advance and are presented as deferred revenue until
earned.
On
January 29, 2008 we signed three new technology transfer, supply and license
agreements with the Bio-Manguinhos unit of the Oswaldo Cruz Foundation of Brazil
(“FIOCRUZ”) for products we have developed or are have nearly completed
development of.
On
October 2, 2008 the Company signed a fourth technology transfer
supply and license agreement with FIOCRUZ for it’s DPP® HIV 1/2 rapid test (for
use with oral fluid or whole blood samples).
On April
16, 2008 we announced a new development agreement with Bio-Rad Laboratories,
N.A. (“Bio-Rad”). The agreement with Bio-Rad is for the development
of a new multiplex product that would be developed on DPP® and which would be
marketed exclusively by Bio-Rad under an exclusive limited DPP® license from
Chembio to Bio-Rad limited to the field of application of this
product. Our agreement with Bio-Rad contemplated that we were to
enter into a license agreement no later than December 2008 subject to the
satisfaction of certain development and other conditions. On January
19, 2009 Chembio granted, effective December 31, 2008, a limited exclusive
license within a defined field of application for Chembio’s Dual Path Platform
technology to Bio-Rad Laboratories, Inc. (“Bio-Rad”). The license was
granted following development milestones as set forth in the agreement mentioned
above. As part of this agreement, in 2009, Chembio received $340,000 from
Bio-Rad as a license fee.
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
d.
|
Battelle/CDC DPP®
Influenza Immunity Test:
|
In
December 2009, Chembio entered into a milestone-based development agreement for
up to approximately $900,000 in connection with the development and initial
supply of a multiplex, rapid point-of-care ("POC") influenza immunity test. The
agreement contemplates a period of approximately nine months in which the
development activity is to be completed. Chembio entered this agreement with
Battelle Memorial Institute which has a master contract with the United States
Centers for Disease Control and Prevention ("CDC") to enter into, implement and
provide technical oversight of agreements relating to pandemic preparedness on
behalf of CDC.
NOTE
15—SUBSEQUENT EVENTS:
In
January 2010, after the balance sheet date, certain warrants to purchase an
aggregated 4,960,370 shares of common stock expired, at an average exercise
price of $.474. These warrants were related to the initial 2005
Series B Preferred stock Offering (see Form 8-K filed on January 31, 2005 with
the SEC for further details on this offering).
Subsequent
to the balance sheet date the Company entered into a lease effective February
2010 for additional warehouse space, see Item 2 of our 2009 10-K for more
information.
In
February 2010, after the balance sheet date, the Company took possession of the
automated assembly equipment (mentioned in MD&A under Equipment Purchase
Commitment and Note 15). This equipment is expected to provide for
faster throughput and thereby increasing capacity of our manufacturing facility,
in addition to reducing labor costs. The machine will need to go
through a validation process and is expected to be in serviced during the second
quarter of 2010.
Subsequent
to the balance sheet date the Company entered into an employment agreement dated
March 4, 2010, and to be effective March 5, 2010 (the "Employment Agreement"),
with Mr. Esfandiari to continue as the Company's Senior Vice President of
Research and Development for an additional term of three
years. Please see Item 11 of this Form 10-K for further
details.
F-22