Filed
Pursuant to Rule 424(b)(3)
Registration
Number 333-123600
PROSPECTUS
CHEMBIO
DIAGNOSTICS, INC.
40,466,304
SHARES OF COMMON STOCK
This
prospectus relates to the sale by certain stockholders of Chembio Diagnostics,
Inc. of up to 40,466,304 shares of our common stock which they own, or which
they may at a later date acquire upon the conversion of shares of our 8%
series A convertible preferred stock, upon the conversion of shares of our
9% series B convertible preferred stock, or upon the exercise of warrants
and options to purchase shares of our common stock.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “CEMI.” On May
19, 2005 the closing bid and ask prices for one share of our common stock were
$.68 and $.71, respectively, as reported by the OTC Bulletin Board website.
These over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
These
securities are speculative and involve a high degree of risk. You should
consider carefully the “Risk Factors” beginning on Page 5 of this prospectus
before making a decision to purchase our stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is May 23, 2005
TABLE
OF CONTENTS
|
|
Prospectus
Summary |
1 |
Risk
Factors |
5 |
Use
of Proceeds |
11 |
Dilution |
11 |
Selling
Security Holders |
11 |
Plan
of Distribution |
17 |
Legal
Proceedings |
19 |
Directors,
Executive Officers and Control Persons |
19 |
Security
Ownership of Certain Beneficial Owners and Management |
21 |
Description
of Securities |
23 |
Cautionary
Statement Regarding Forward-Looking Statements |
36 |
Management’s
Discussion and Analysis and Plan of Operation |
36 |
Description
of Property |
43 |
Certain
Relationships and Related Transactions |
43 |
Market
for Common Equity and Related Stockholder Matters |
45 |
Executive
Compensation |
46 |
Financial
Statements |
48 |
Experts |
49 |
Legal
Matters |
49 |
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities |
49 |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
49 |
Additional
Information |
49 |
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus.
You should read the entire prospectus carefully before making an investment
decision.
Overview
Chembio
Diagnostic Systems Inc. was formed in 1985. Since inception we have been
involved in developing, manufacturing, selling and distributing medical
diagnostic tests, including rapid tests, for a number of diseases and for
pregnancy. On May 5, 2004, Chembio Diagnostic Systems Inc. completed a
merger through which it became a wholly-owned subsidiary of Chembio Diagnostics,
Inc., formerly known as Trading Solutions.com, Inc. (“Chembio” or the
“Company”). As a result of this transaction, the management and business of
Chembio Diagnostic Systems Inc. became the management and business of the
Company.
Our
Business
We are a
developer and manufacturer of rapid diagnostic tests that aid in the detection
of infectious diseases; until recently, we also manufactured pregnancy tests.
Our revenues until 2004 were primarily from private label over-the-counter
pregnancy tests. In 2004 we sold substantially all of the business related to
our private label pregnancy test. We are currently focused on obtaining FDA
regulatory approval for, and increasing revenues from, our HIV rapid test
products. During 2004 we experienced a significant increase in sales of our HIV
rapid test products as a result of a contract we entered into with an
organization affiliated with the Brazilian government. We are engaged in
marketing efforts for distribution of our HIV rapid test products in markets
outside the United States. We also are focused on efforts to complete
development of, and proceed to seek regulatory approval for, other rapid tests
in the areas of tuberculosis (human and veterinary), dental bacteria and Mad Cow
Disease.
Our main
products and products under development are summarized in the following
tables:
|
|
|
|
|
|
|
Existing
or Proposed Product
|
|
Regulatory
Status
|
|
Development
Status
|
|
Partners
Involved in the Development or Marketing of the
Products
|
HIV
Rapid Tests (Sure Check™ HIV; HIV 1/2 Stat Pak; HIV 1/2 Stat Pak
Dipstick). Rapid Tests for detection of antibodies to HIV 1 and 2 in
finger-stick whole blood, venous whole blood, serum and
plasma
|
|
In
December 2004 we completed clinical trials for Sure CheckTM
and HIV 1/2 Stat-Pak in the U.S. for FDA approval for sales in the U.S.
with results that we believe will exceed the performance requirements for
U.S. FDA approval. We are pursuing U.S. FDA approval for these products
and on February 17, 2005 we submitted our Pre-Marketing Approval
application to the FDA. We currently qualify under U.S. FDA export
regulations to sell, subject to any required approval by the importing
country, to customers outside the U.S. To date we have received approval
from a number of potential importing countries, although Brazil is the
only country in which we have significant sales. We have also just
recently qualified for procurements by the United States Agency for
International Development under the President’s Emergency Plan for AIDS
Relief and the World Health Organization’s Bulk Procurement Scheme.
|
|
Completed
|
|
Thirteen-year
supply and technology transfer agreement with FIOCRUZ-Bio-Manguinhos, a
division of the Ministry of Health of Brazil. FIOCRUZ-Bio-Manguinhos will
supply product to Brazilian public health market and potentially other
markets in the region. We also have been actively seeking to have our
tests procured by governmental and non-governmental organizations engaged
in HIV prevention programs in numerous locations outside the United
States.
|
Rapid
test for detection of Bovine Spongeiform Encephalopathy in
cattle
|
|
Product
has been evaluated for approval in the European Union and approval is
pending.
|
|
We
are waiting for Prionics AG to complete the transfer of production
specifications in order to begin production scale-up, validation, and
regulatory submission. There is a significant risk that Prionics AG will
be unable to transfer product specifications.
|
|
Subject
to obtaining European Union approval and completing the technology
transfer, Prionics AG, Zurich, Switzerland has contracted with Chembio to
provide manufacturing services. Additionally, Prionics AG will exclusively
market product directly and through its designated distributors.
|
|
|
|
|
|
|
|
Existing
or Proposed Product
|
|
Regulatory
Status
|
|
Development
Status
|
|
Partners
Involved in the Development or Marketing of the
Products |
Dental
Bacteria Test
|
|
Regulatory
submissions in the European Union will be made in 2005 if product
development is satisfactorily completed in accordance with development
timetable.
|
|
Discussing
revised development plan with marketing partner Ivoclar Vivadent, AG due
to technical issues.
|
|
If
a new development plan is agreed upon, Ivoclar Vivadent AG, Schaan,
Liechtenstein will exclusively market the product and is the exclusive
licensee of patented antibodies being incorporated by Chembio in product
development.
|
Cerebral
Spinal Fluid (CSF) Leak Rapid Test
|
|
Not
yet submitted for approval.
|
|
Initial
development work being supported with matching funds from the State of New
York.
|
|
The
State University of New York at Stony Brook (SUNY) is developing
antibodies against this marker. SUNY has applied for a patent for the
antibodies and the test. Chembio has an exclusive option to license the
technology once the patent is issued.
|
Rapid
diagnostic test for the detection of antibodies to active pulmonary
tuberculosis in non-human primate whole blood samples
|
|
Submitted
to United States Department of Agriculture for regulatory approval in the
U.S. in March 2005.
|
|
Product
validation completed.
|
|
Sequella
Corporation, Rockville, MD and Chembio have entered into an agreement
whereby Chembio will have exclusive worldwide marketing and manufacturing
rights for the product.
|
Rapid
diagnostic test for the detection of antibodies to active pulmonary
tuberculosis in human whole blood samples
|
|
Evaluation
by World Health Organization to be completed in 2005 to support use in
international programs is pending. We do not plan to market this product
in the U.S. or Europe and have no plans for seeking regulatory approval in
these markets.
|
|
Product
validation completed.
|
|
Public
Health Research Institute, Newark, NJ provided initial research
collaboration on product development.
|
Rapid
diagnostic test for the detection of antibodies to Chagas
Disease
|
|
Evaluation
by World Health Organization to be completed in 2005 to support use in
international programs is pending. We do not plan to market this product
in the US or Europe and have no plans for seeking regulatory approval in
these markets.
|
|
Product
validation completed. Studies have been completed that have increased
awareness of product. United Nations Development Program began to procure
product in 2004.
|
|
A
consortium of researchers from Latin America collaborated to develop the
recombinant antigen incorporated in this product.
|
|
|
|
|
|
|
|
Existing
or Proposed Product
|
|
Regulatory
Status
|
|
Development
Status
|
|
Partners
Involved in the Development or Marketing of the
Products |
Private
label pregnancy tests
|
|
Cleared
for marketing by FDA.
|
|
Completed
|
|
During
2004 we sold substantially all of the business related with this product
line for the right to receive participation in future profits, if any,
derived from this product line. We have also continued to supply the buyer
with certain components for these products.
|
Our
historical revenues on a percentage basis are reflected as follows:
|
|
2004 |
|
2003 |
|
Pregnancy
Tests |
|
|
25.93 |
% |
|
46.84 |
% |
HIV
Tests |
|
|
37.58 |
% |
|
18.50 |
% |
Other
Infectious Disease Tests |
|
|
19.65 |
% |
|
24.88 |
% |
Research
Grants and Contracts |
|
|
16.84 |
% |
|
9.78 |
% |
Total |
|
|
100.00 |
% |
|
100.00 |
% |
We
manufacture all of the products we sell. All of these products, as well as those
that are under development employ various formats of lateral flow technology.
Lateral flow generally refers to the process of a sample flowing from the point
of application on a test strip to provide a test result on a portion of the
strip downstream from the point of application. We believe we have expertise and
proprietary know-how in the field of lateral flow technology.
We have a
history of losses and we continue to incur operating and net losses. We own no
patents though we have non-exclusive licenses to lateral flow patents from
Abbott Laboratories, Inc. and to reagents including those that are used in our
HIV rapid tests. However, these licenses do not necessarily insulate us from
patent challenges by other patent holders.
Our
principal executive offices are located at 3661 Horseblock Road, Medford, New
York 11763. Our telephone number is (631) 924-1135. Our website address is
www.chembio.com.
The
Offering
By means
of this prospectus, a number of our stockholders are offering to sell up to
6,288,238 shares of common stock which they own, up to 14,783,600 shares of
common stock which they may at a later date acquire upon the conversion of our
series A and/or series B preferred stock, and up to 19,394,466 shares of common
stock which they may at a later date acquire upon the exercise of warrants
and/or options. In this prospectus, we refer to these persons as the selling
security holders.
As of May
12, 2005, we had 7,108,086 shares of common stock issued and outstanding, which
includes shares offered by this prospectus. The number of outstanding shares of
common stock does not give effect to common stock which may be issued pursuant
to the conversion of our series A and B preferred stocks and the exercise
of options and/or warrants previously issued by Chembio Diagnostics,
Inc.
We will
not receive any proceeds from the sale of common stock by the selling security
holders pursuant to this prospectus.
Summary
Financial Data
The
following table presents summary historical financial information for the fiscal
quarter ended March 31, 2005, as well as the fiscal years ended
December 31, 2004 and 2003. The financial statements are set forth
beginning on page F-1 of this prospectus, and you should read this information
for a more complete understanding of the presentation of this information. As
described in the audited financial statements, on January 28, 2005 the Company
substantially improved its balance sheets with the completion of the $5,047,500
Series B Private Placement financing. The Series B Private Placement financing
is reflected in the financial statements for the three months ended March 31,
2005.
|
|
|
|
|
|
|
|
Three
Months Ended March
31, 2005 (Unaudited) |
|
Year
Ended December
31, 2004 |
|
Year
Ended December 31, 2003 |
|
Revenue |
|
|
731,885 |
|
|
3,305,932 |
|
|
2,818,351 |
|
Operating
Expenses |
|
|
890,811 |
|
|
3,923,701 |
|
|
1,516,076 |
|
Net
Loss |
|
|
(619,986 |
) |
|
(3,098,891 |
) |
|
(1,059,074 |
) |
Current
Assets |
|
|
4,766,750 |
|
|
1,211,060 |
|
|
772,680 |
|
Total
Assets |
|
|
5,135,090 |
|
|
1,426,449 |
|
|
1,086,745 |
|
Current
Liabilities |
|
|
1,278,191 |
|
|
1,663,196 |
|
|
1,503,418 |
|
Total
Liabilities |
|
|
1,525,926 |
|
|
1,950,413 |
|
|
3,544,186 |
|
Convertible
Redeemable Preferred |
|
|
5,783,793 |
|
|
2,427,030 |
|
|
- |
|
Stockholders’
Deficit |
|
|
(2,174,629 |
) |
|
(2,950,994 |
) |
|
(2,457,441 |
) |
RISK
FACTORS
You
should carefully consider each of the following risk factors and all of the
other information provided in this prospectus before purchasing our common
stock. The risks described below are those we currently believe may materially
affect us. An investment in our common stock involves a high degree of risk, and
should be considered only by persons who can afford the loss of their entire
investment.
Risks
related to our industry, business and strategy
Because
we may not be able to obtain necessary regulatory approvals for some of our
products, we may not generate revenues in the amounts we expect, or in the
amounts necessary to continue our business.
All of
our proposed and existing products are subject to regulation in the United
States by the United States Food and Drug Administration, the United States
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 as we may determine to devote our resources to different
products.
Changes
in government regulations could increase our costs and could require us to
undergo additional trials or procedures, or could make it impractical or
impossible for us to market our products for certain uses, in certain markets,
or at all.
Changes
in government regulations may adversely affect our financial condition and
results of operations because we may have to incur additional expenses if we are
required to change or implement new testing, manufacturing and control
procedures. If we are required to devote resources to develop such new
procedures, we may not have sufficient resources to devote to research and
development, marketing, or other activities that are critical to our business.
For
example, the European Union and other jurisdictions have recently established a
requirement that diagnostic medical devices used to test human biological
specimens must receive regulatory approval known as a CE mark, or be registered
under the ISO 13.485 medical device directive. The letters “CE” are the
abbreviation of the French phrase “Conforme Européene” which means “European
conformity.” ISO (“International Organization for Standardization”) is the
world’s largest developer of standards with 148 member countries. As such,
export to the European and other jurisdictions without the CE or ISO 13.485 mark
is not possible. Although we are not currently selling products to countries
requiring CE marking, we expect that we will do so in the near future in order
to grow our business. We are in the process of implementing quality and
documentary procedures in order to obtain CE and ISO 13.485 registration, and we
are not aware of any material reason why such approvals will not be granted.
However, if for any reason CE or ISO 13.485 registration is not granted, our
ability to export our products could be adversely impacted.
We can
manufacture and sell our products only if we comply with regulations of
government agencies such as the FDA and USDA. We have implemented a quality
system that is intended to comply with applicable regulations. Although FDA
approval is not required for the export of our products, there are export
regulations promulgated by the FDA that specifically relate to the export of our
products. Although we believe that we meet the regulatory standards required for
the export of our products, these regulations could change in a manner that
could adversely impact our ability to export our products.
Our
products may not be able to compete with new diagnostic products or existing
products developed by well-established competitors, which would negatively
affect our business.
The
diagnostic industry is focused on the testing of biological specimens in a
laboratory or at the point-of-care and is highly competitive and rapidly
changing. Our principal competitors often have considerably greater financial,
technical and marketing resources than we do. Several companies produce
diagnostic tests that compete directly with our testing product line, including
but not limited to Abbott Laboratories, Orasure Technologies, Inverness Medical
and Trinity Biotech. As new products enter the market, our products may become
obsolete or a competitor’s products may be more effective or more effectively
marketed and sold than ours. Although we have no specific knowledge of any
competitor’s product that will render our products obsolete, if we fail to
maintain and enhance our competitive position or fail to introduce new products
and product features, our customers may decide to use products developed by
competitors which could result in a loss of revenues and cash flow.
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.
New
developments in health treatments or new non-diagnostic products may reduce or
eliminate the demand for our products.
The
development and commercialization of products outside of the diagnostics
industry could adversely affect sales of our product. For example, the
development of a safe and effective vaccine to HIV or treatments for other
diseases or conditions that our products are designed to detect, could reduce,
or eventually eliminate, the demand for our HIV or other diagnostic products and
result in a loss of revenues.
We
may not have sufficient resources to effectively introduce and market our
products, which could materially harm our operating results.
Introducing
and achieving market acceptance for our rapid HIV tests and other new products
will require substantial marketing efforts and will require us or our contract
partners to make significant expenditures. We have no history upon which to base
market or customer acceptance of these products. In some instances we will be
totally reliant on the marketing efforts and expenditures of our contract
partners. If they do not have or commit the expertise and resources to
effectively market the products that we manufacture, our operating results will
be materially harmed.
If
we lose our funding from research and development grants, we may not be able to
fund future research and development and implement technological improvements,
which would materially harm our operating results.
We
received $556,789 or 16.84% of our revenues in 2004 and $275,730 or 9.7% of our
revenues in 2003 from grant and contract development work in connection with
grants from the United States National Institute of Health, as well as from
universities and commercial companies related to product development efforts for
our tuberculosis, mad cow, and dental bacteria rapid test development work.
During the first quarter of 2005, we entered into a license and technology
transfer agreement for certain rapid test technology. These revenues have funded
some of our personnel and other research and developmental costs and expenses
for us. However, if these awards are not funded in their entirety or if new
grants and contracts are not awarded in the future, our ability to fund future
research and development and implement technological improvements would be
diminished which could negatively impact our ability to compete in our
industry.
The
success of our business depends on our ability to raise additional capital
through the sale of debt or equity or through borrowing, and we may not be able
to raise capital or borrow funds in amounts necessary to continue our business,
or at all.
As a
result of the completion of the $5,047,500 Series B Private Placement on January
28, 2005, we believe that our current cash balances, together with cash
generated from operations, will be sufficient to fund operations at least
through the third quarter of 2005. We
anticipate this based upon our recently completed operating budget which assumes
significant new expenditures this year that are intended to help us increase
revenues and cash flow, and to achieve a variety of other corporate objectives
that are aimed to increase shareholder value. The Company is considering
alternatives to provide for its capital requirements for late 2005 and beyond.
There are no assurances that it will be successful in raising sufficient
capital. Any
additional equity financing will result in dilution to existing shareholders. If
we are unable to obtain any such additional equity financing on satisfactory
terms, we will not be able to effectively carry out our business
plan.
The
amount of additional capital we need and our ability to obtain it will depend on
a number of factors. These factors primarily include (1) whether we can
generally achieve revenue growth for our HIV rapid tests and the extent, if any,
to which that revenue growth improves operating cash flows; (2) our investments
in research and development, facilities, marketing, regulatory approvals, and
other investments we may determine to make; (3) the availability and cost of
raising additional capital and potential dilution to shareholders; and (4) the
extent, if any, to which any of the Company’s outstanding options or warrants
are exercised for cash.
Our
objective of increasing international sales is critical to our business plan and
if we fail to meet this objective, we may not generate revenues in the amounts
we expect, or in amounts necessary to continue our
business.
We intend
to attempt to increase international sales of our products. A number of factors
can slow or prevent international sales, or substantially increase the cost of
international sales, including:
|
· |
regulatory
requirements and customs regulations; |
|
· |
cultural
and political differences; |
|
· |
foreign
exchange rates, currency fluctuations and
tariffs; |
|
· |
dependence
on and difficulties in managing international distributors or
representatives; |
|
· |
the
creditworthiness of foreign entities; |
|
· |
difficulties
in foreign accounts receivable collection;
and |
|
· |
economic
conditions and the absence of available funding
sources. |
If we are
unable to increase our revenues from international sales, our operating results
will be materially harmed.
We
rely on trade secret laws and agreements with our key employees and other third
parties to protect our proprietary rights, and we cannot be sure that these laws
or agreements adequately protect our rights.
We
believe that factors such as the technological and creative skills of our
personnel, strategic relationships, new product developments, frequent product
enhancements, and name recognition are essential to our success. All our
management personnel are bound by non-disclosure agreements. If personnel leave
our employment, in some cases we would be required to protect our intellectual
property rights pursuant to common law theories which may be less protective
than provisions of employment, non-competition or non-disclosure
agreements.
We seek
to protect our proprietary products under trade secret and copyright laws, enter
into license agreements for various materials and methods employed in our
products, and enter into strategic relationships for distribution of the
products. These strategies afford only limited protection. We currently have no
U.S. or foreign patents, although we have several license agreements for
reagents. Our Sure Check™ trademark has been registered in the United States.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain information that we regard as
proprietary. We may be required to expend substantial resources in asserting or
protecting our intellectual property rights, or in defending suits related to
intellectual property rights. Disputes regarding intellectual property rights
could substantially delay product development or commercialization activities
because some of our available funds would be diverted away from our business
activities. Disputes regarding intellectual property rights might include state,
federal or foreign court litigation as well as patent interference, patent
reexamination, patent reissue, or trademark opposition proceedings in the United
States Patent and Trademark Office.
To
facilitate development and commercialization of a proprietary technology base,
we may need to obtain additional licenses to patents or other proprietary rights
from other parties. Obtaining and maintaining these licenses, which may not be
available, may require the payment of up-front fees and royalties. In addition,
if we are unable to obtain these types of licenses, our product development and
commercialization efforts may be delayed or precluded.
In
order to sell our rapid HIV tests and generate expected revenue from these
tests, we will need to arrange for a license to patents for detection of the
HIV-2 virus, and we may not be able to do so.
Although
the current licensor of the peptides used in our HIV tests claims an HIV-2
patent, other companies have also claimed such patents. Even though HIV-2 is a
type of the HIV virus estimated to represent only a small fraction of the known
HIV cases worldwide, it is still considered to be an important component in the
testing regimen for HIV in many markets. HIV-2 patents often are found in most
of the countries of North America and Western Europe, as well as in Japan,
Korea, South Africa, and Australia. Access to a license for one or more HIV-2
patents may be necessary to sell HIV-2 tests in countries where such patents are
in force, or to manufacture in countries where such patents are in force and
then sell into non-patent markets. Since HIV-2 patents are in force in the
United States, we may be restricted from manufacturing a rapid HIV-2 test in the
United States and selling into other countries, even if there were no HIV-2
patents in those other countries. The license agreement that we have in effect
for the use and sale of the Adaltis HIV 1 and 2 peptides that are used in our
HIV rapid test does not necessarily insulate us from claims by other parties
that we need to obtain a license to other HIV-1 and/or HIV-2 patents. Although
we have discussed additional HIV-2 licenses that would be advantageous for some
markets, if we are unable to complete these discussions successfully our
business and operating results could be materially harmed.
Our
continued growth depends on retaining our current key employees and attracting
additional qualified personnel, and we may not be able to do
so.
Our
success will depend to a large extent upon the skills and experience of our
executive officers, management, and sales, marketing, operations and scientific
staff. Although we have not experienced unusual retention and/or recruitment
problems to date, we may not be able to attract or retain qualified employees in
the future due to the intense competition for qualified personnel among medical
products businesses.
If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will adversely affect
our ability to effectively manufacture, sell and market our products, to meet
the demands of our strategic partners in a timely fashion, or to support
internal research and development programs. Although we believe we will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists and other personnel from numerous companies and academic
and other research institutions may limit our ability to do so on acceptable
terms.
We have
entered into employment contracts with our President, Lawrence Siebert, our
Director of R&D, Javan Esfandiari, and our Director of Sales &
Marketing, Avi Pelossof. Due to the specific knowledge and experience of these
executives regarding the industry, technology and market, the loss of the
services of any one of them would likely have a material adverse effect on the
Company. The contract with Mr. Siebert has a term of two years ending May 2006,
and the contracts with Messrs. Esfandiari and Pelossof have terms of three years
ending May 2007. We have obtained key man insurance policies for Messrs.
Esfandiari and Pelossof.
We
believe our success depends on our ability to participate in large government
programs in the United States and worldwide and we may not be able to do
so.
We
believe it to be in our best interest to meaningfully participate in the
Presidential Emergency Plan for Aids Relief Program, UN Global Fund initiatives
and other programs funded by large donors. We have initiated several strategies
to participate in these programs. Participation in these programs requires
alignment with the many other participants in these programs including the World
Health Organization, U.S. Center for Disease Control, U.S. Agency for
International Development, non-governmental organizations, and HIV service
organizations. If we are unsuccessful in our efforts to participate in these
programs, our operating results could be materially harmed.
We
have a history of incurring net losses and we cannot be certain that we will be
able to achieve profitability.
Since the
inception of Chembio Diagnostic Systems, Inc. in 1985 and through the period
ended December 31, 2004, we have incurred net losses. As of December 31,
2004, we have an accumulated deficit of $(12,099,406). We incurred net losses of
$(3,098,891), and $(1,059,704) in 2004 and 2003, respectively.
We expect
to continue to make substantial expenditures for sales and marketing, regulatory
submissions, product development and other purposes. Our ability to achieve
profitability in the future will primarily depend on our ability to increase
sales of our products, reduce production and other costs and successfully
introduce new products and enhanced versions of our existing products into the
marketplace. If we are unable to increase our revenues at a rate that is
sufficient to achieve profitability, our operating results would be materially
harmed.
To
the extent that we are unable to obtain sufficient product liability insurance
or that we incur product liability exposure that is not covered by our product
liability insurance, our operating results could be materially
harmed.
We may be
held liable if any of our products, or any product which is made with the use or
incorporation of any of the technologies belonging to us, causes injury of any
type or is found otherwise unsuitable during product testing, manufacturing,
marketing, sale or usage. Although we have obtained product liability insurance,
this insurance may not fully cover our potential liabilities. In addition, as we
attempt to bring new products to market, we may need to increase our product
liability coverage which would be a significant additional expense that we may
not be able to afford. If we are unable to obtain sufficient insurance coverage
at an acceptable cost to protect us, we may be forced to abandon efforts to
commercialize our products or those of our strategic partners, which would
reduce our revenues.
Risks
related to our common stock
Our
common stock is classified as penny stock and is extremely illiquid, so
investors may not be able to sell as much stock as they want at prevailing
market prices.
Our
common stock is classified as penny stock. Penny stocks generally are equity
securities with a price of less than $5.00 and trade on the over-the-counter
market. As a result, an investor may find it more difficult to dispose of or
obtain accurate quotations as to the price of the shares of the common stock
being registered in this registration statement. In addition, the “penny stock”
rules adopted by the Commission under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), subject the sale of the shares of the common stock
to regulations which impose sales practice requirements on broker-dealers,
causing many broker-dealers to not trade penny stocks or to only offer the
stocks to sophisticated investors that meet specified net worth or net income
criteria identified by the Commission. These regulations contribute to the lack
of liquidity of penny stocks.
The
average daily trading volume of our common stock on the over-the-counter market
was less than 13,000 shares per day over the three months ended February 28,
2005. If limited trading in our stock continues, it may be difficult for
investors to sell their shares in the public market at any given time at
prevailing prices. Since the certificates of designation creating our
series A and series B preferred stock contain restrictions on our
ability to declare and pay dividends on our common stock, the lack of liquidity
of our common stock could negatively impact the rate of return on your
investment.
Sales
of a substantial number of shares of our common stock into the public market by
the selling stockholders may result in significant downward pressure on the
price of our common stock and could affect the ability of our stockholders to
realize the current trading price of our common stock.
At the
time of effectiveness of the registration statement, the number of shares of our
common stock eligible to be immediately sold in the market will increase
approximately from 180,000 to 40,798,309. If the selling stockholders sell
significant amounts of our stock, our stock price could drop. Even a perception
by the market that selling stockholders will sell in large amounts after the
registration statement is effective could place significant downward pressure on
our stock price.
You
will experience substantial dilution upon the conversion of the shares of
preferred stock and the exercise of warrants that we issued in two private
placements and the warrants and options that were assumed in connection with the
merger.
On May 5,
2004, we completed three separate private placements in which we issued
151.57984 shares of our series A preferred stock and warrants to acquire
9,094,801 shares of our common stock at an exercise price of $.90 per share. The
shares of series A preferred stock are convertible into 7,578,985 shares of
our common stock. We also issued warrants to purchase 425,000 shares of our
common stock at an exercise price of $0.72 per share and warrants to purchase
510,000 shares of common stock at an exercise price of $1.08 per share to
designees of our placement agents. We also issued warrants pursuant to an
employment agreement with Mark L. Baum, our former president and a current
member of our board of directors, to purchase 425,000 shares and 425,000 shares
of our common stock, respectively, at exercise prices of $0.60 and $0.90 per
share respectively. In connection with the acquisition of Chembio Diagnostic
Systems, Inc., we assumed the obligation to issue 690,000 shares of our common
stock upon the exercise of warrants, which warrants are exercisable at prices
ranging from $0.45 to $4.00 per share. We also adopted the stock option plan of
Chembio Diagnostic Systems, Inc. and assumed all of the obligation to issue
704,000 common shares upon the exercise of the options outstanding as of the
merger date. On
January 28, 2005, we completed a private placement in which we issued 100 shares
of our 9% Series B Convertible Preferred Stock, which we refer to as the “Series
B Stock,” together with warrants to purchase 7,786,960 shares of our common
stock. For each $.61 invested in this private placement, an investor received
(a) $.61 of face amount of Series B Stock, which is convertible into one share
of our common stock, and (b) a five-year warrant to acquire .95 of a share of
our common stock. Each full share of the Series B Stock was purchased for
$50,000, with fractional shares of Series B Stock being purchased by investments
of less than $50,000. In connection with the January 28, 2005 offering, we also
issued to the placement agent Series B Stock in an aggregate amount equal to 5%
of the amount of cash proceeds from the private placement, together with
accompanying warrants to purchase our common stock. We also issued to the
placement agent warrants to purchase 737,712 shares of our common
stock. As of
May 19, 2005, there were 1,169,000 options issued and outstanding under the
stock option plan and 331,000 options available for issuance under the stock
option plan. As a result, the conversion of the outstanding preferred stock and
the exercise of the outstanding warrants and options will result in substantial
dilution to the holders of our common stock.
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
December 31, 2004, our named executive officers, directors and 5%
stockholders beneficially owned approximately 47.81% of our voting power. For
the foreseeable future, to the extent that our current stockholders vote
similarly, they will be able to exercise control over many matters requiring
approval by the board of directors or our stockholders. As a result, they will
be able to:
|
· |
control
the composition of our board of directors; |
|
· |
control
our management and policies; |
|
· |
determine
the outcome of significant corporate transactions, including changes in
control that may be beneficial to stockholders;
and |
|
· |
act
in each of their own interests, which may conflict with, or be different
from, the interests of each other or the interests of the other
stockholders. |
USE
OF PROCEEDS
We will
not receive proceeds from the sale of shares under this prospectus by the
selling security holders.
DILUTION
We are
not selling any common stock in this offering. The selling security holders are
current stockholders of Chembio. As such, there is no dilution resulting from
the common stock to be sold in this offering.
SELLING
SECURITY HOLDERS
The
securities are being offered by the named selling security holders below. The
selling security holders hold one or more of the following securities which are
described in section “Description of Securities”: Common stock, Series A
preferred stock which is convertible into common stock at $.60 per share, Series
B preferred stock which is convertible into common stock at $.61 per share,
options to purchase common stock at prices ranging from $0.45 per share to $4.00
per share, or warrants to purchase common stock exercisable at prices ranging
from $0.45 per share to $4.00 per share. However, the table below assumes the
immediate conversion by all Series A and B preferred stock into common stock and
the immediate exercise of all options and warrants to purchase commons stock,
without regard to other factors which may determine whether such rights of
conversion or purchase are exercised. These factors include but are not limited
to the other rights associated with remaining a preferred stockholder, the terms
of these agreements, and the specific conversion or exercise price of the
securities held by such selling security holder and its relation to the market
price. The selling security holders may from time to time offer and sell
pursuant to this prospectus up to an aggregate of 6,288,238 shares of our common
shares now owned by them, 6,067,218 shares issuable to them upon the conversion
of series A preferred stock that they hold, 8,716,382 shares issuable to them
upon the conversion of series B preferred stock that they hold, 18,594,216
shares issuable to them upon the exercise of warrants that they hold and 800,250
shares issuable to them upon the exercise of options that they hold. The selling
security holders may, from time to time, offer and sell any or all of the shares
that are registered under this prospectus, although they are not obligated to do
so.
Certain
of the individuals listed below received the shares offered hereby in connection
with the merger described under the caption “Description of Business - Merger.”
In connection with the merger, we agreed to prepare and file at our expense, as
promptly as practical, and in any event, by June 4, 2004, a registration
statement with the Securities and Exchange Commission covering the resale of the
shares received in the merger by the individuals listed below. The list of
selling security holders also includes Mark L. Baum, who acquired, or has
the right to acquire, the shares and warrants indicated next to his name
pursuant to an employment agreement dated May 5, 2004 with Chembio
Diagnostics, Inc. Also named as selling security holders are designees of H.C.
Wainwright & Co., Inc. and WellFleet Partners, Inc., each of which received
common stock and warrants to purchase the indicated number of shares of common
stock in connection with serving as placement agents in connection with our
May 5, 2004 private placement of series A preferred stock, and Patton Boggs
LLP, which received 37,319 shares as payment for a past obligation of $27,989,
that we owed. Also included are a total of 25,000 shares and options to acquire
166,250 shares that we issued to non-employee third parties for services
performed, together with 375,000 options to purchase shares issued to employees
and directors.
Certain
of the entities or individuals listed below acquired the shares offered hereby
in connection with our May 5, 2004 private placement of series A preferred
stock. Pursuant to this private placement, we received $2.2 million in cash as
payment for 73.3333 shares of preferred stock that are convertible into
3,666,664 shares of common stock. We also issued to the investors in the series
A preferred stock warrants to acquire 4.4 million shares of common stock at an
exercise price of $.90 per share. Based on the $2.2 million paid, the purchase
price per common share is $.60, without allocating any portion of the purchase
price to the warrants. At the same time as this transaction, a conversion of
$1,009,803 face amount and accrued interest of convertible notes that had been
issued in March 2004 occurred. Of this conversion, $330,696 face amount and
interest was converted into 826,741 shares of common for a conversion price,
based on the face amount of the notes, of $.40 per share; and $679,107 face
amount and interest was converted into 33.83682 shares of our series A
preferred, together with warrants to purchase 2,030,217 shares of common stock
at $.90 per share. The 33.83682 shares of series A preferred are convertible
into 1,691,835 shares of our common stock, which based on the face amount of the
notes, represents a purchase price of $.40 per share of common stock, without
allocating any portion of the purchase price to the warrants. Also
simultaneously with the other two private placement transactions, we issued
44.40972 shares of our series A preferred stock, convertible into 2,220,486
shares of our common stock, together with warrants to purchase 2,664,584 shares
of our common stock at an exercise price of $.90 per share, in exchange for
$1,332,292 face amount of our debt obligations. Based on the face amount of
these obligations, the price per common share is $.60 per share, without
allocating any portion of the purchase price to the warrants. On
December 29, 2004 the Company converted $361,560 of additional debt into
12.05199 shares of series A preferred stock and associated warrants to purchase
723,120 shares of common stock. Also in
connection with these three private placements, we agreed to prepare and file at
our expense, as promptly as practical, and in any event, by June 4, 2004, a
registration statement with the Securities and Exchange Commission covering the
resale of the shares of common stock issuable upon conversion of the series A
preferred stock and the shares of common stock issuable upon exercise of the
warrants.
Certain
of the entities or individuals listed below acquired the shares offered hereby
in connection with our January 28, 2005 private placement of series B
preferred stock. Pursuant to this private placement, we received $5 million in
cash as payment for (a) 100 shares of preferred stock that are convertible into
8,196,800 shares
of common stock, and (b) warrants to acquire 7,786,960 shares of common stock at
an exercise price of $.61 per share. Based on the $5 million paid, the
purchase price per common share is $.61, without allocating any portion of the
purchase price to the warrants. Also in connection with these private
placements, we agreed to prepare and file at our expense, as promptly as
practical, and in any event, on or before 60 days after January 26, 2005, a
registration statement with the Securities and Exchange Commission covering the
resale of the shares of common stock issuable upon conversion of the series B
preferred stock and the shares of common stock issuable upon exercise of the
warrants. In
connection with the private placement, the Company issued to the placement
agent, Midtown Partners & Co., LLC, or its designees, 4.98 shares of series
B preferred stock that are convertible into 409,012 shares of common
stock,
together with warrants to acquire 388,588 shares of common stock at an exercise
price of $.61 per share. The Company also issued to Midtown Partners & Co.,
LLC, or its designees, warrants to purchase 737,712 shares of the Company’s
common stock at an exercise price of $.80 per share.
In
connection with the series B private placement, three of the investors in the
series A preferred stock collectively acquired a .95 share of series B preferred
stock, convertible into 77,868 shares of common stock, together with warrants to
acquire 73,972 shares of common stock. In addition, one investor in our series A
preferred stock converted all of his interests in the series A preferred stock
for a .4 share of series B preferred stock, convertible into 32,786 shares of
common stock, together with warrants to acquire 38,933 shares of common
stock.
The
remaining entity listed below acquired the shares offered hereby pursuant to an
investor relations contract with the Company. The entity acquired 56,250 shares
of common stock on December 9, 2004, and an additional 20,000 shares of common
stock on March 9, 2005.
The
following table sets forth, to the Company’s best knowledge and belief, with
respect to the selling security holders:
|
· |
the
number of shares of common stock beneficially owned as of March 18, 2005
and prior to the offering contemplated
hereby, |
|
· |
the
number of shares of common stock eligible for resale and to be offered by
each selling security holder pursuant to this prospectus,
|
|
· |
the
number of shares owned by each selling security holder after the offering
contemplated hereby assuming that all shares eligible for resale pursuant
to this prospectus actually are sold, |
|
· |
the
percentage of shares of common stock beneficially owned by each selling
security holder after the offering contemplated hereby,
and |
|
· |
in
notes to the table, additional information concerning the selling security
holders including any NASD affiliations and any relationships, excluding
non-executive employee and other non-material relationships, that a
selling security holder had during the past three years with the
registrant or any of its predecessors or affiliates.
|
Selling
security holders (C)
|
|
Number
of Shares of Common Stock Owned Before Offering (A)
|
|
Number
of Shares To Be Offered (B)
|
|
Number
of Shares Owned After Offering
|
|
Percentage
of Shares of Common Stock Owned After Offering
|
|
Alchemy,
LLC 1 |
|
|
40,471 |
|
|
40,471 |
|
|
—
|
|
|
0.00 |
% |
Alpha
Capital AG 2 ,3 |
|
|
1,232,000 |
|
|
1,232,000 |
|
|
—
|
|
|
0.00 |
% |
Bassett,
Truman 1 |
|
|
42,526
|
|
|
42,526
|
|
|
—
|
|
|
0.00 |
% |
Baum,
Mark L. 2 |
|
|
1,792,666
|
|
|
1,792,666
|
|
|
—
|
|
|
0.00 |
% |
Bell,
Lon E. 2 |
|
|
282,198
|
|
|
282,198
|
|
|
—
|
|
|
0.00 |
% |
Beller,
Claudio 2 |
|
|
145,582
|
|
|
145,582
|
|
|
—
|
|
|
0.00 |
% |
BioEquity
Partners, Inc.
1,4 |
|
|
175,000 |
|
|
175,000 |
|
|
—
|
|
|
0.00 |
% |
Breitbart,
Ted 1,5 |
|
|
18,208
|
|
|
18,208
|
|
|
—
|
|
|
0.00 |
% |
Bruce,
Richard 1 |
|
|
75,500
|
|
|
75,500
|
|
|
—
|
|
|
0.00 |
% |
Calamaro,
Jean—Paul 2 |
|
|
309,581
|
|
|
309,581
|
|
|
—
|
|
|
0.00 |
% |
CEOcast,
Inc. |
|
|
76,250
|
|
|
76,250
|
|
|
—
|
|
|
0.00 |
% |
Chrust,
Steve 1 |
|
|
127,656
|
|
|
127,656
|
|
|
—
|
|
|
0.00 |
% |
Clarke,
John R.1,6 |
|
|
158,400
|
|
|
158,400
|
|
|
—
|
|
|
0.00 |
% |
Colby,
Russ 1 |
|
|
12,500
|
|
|
12,500
|
|
|
—
|
|
|
0.00 |
% |
Crestview
Capital Master, LLC 7 |
|
|
9,590,162
|
|
|
9,590,162
|
|
|
—
|
|
|
0.00 |
% |
Dabush,
Ami 2 |
|
|
569,718 |
|
|
569,718 |
|
|
—
|
|
|
0.00 |
% |
Daedalus
Consulting, Inc.8 |
|
|
35,963
|
|
|
35,963
|
|
|
—
|
|
|
0.00 |
% |
Dashefsky,
Jeff 1 |
|
|
12,500
|
|
|
12,500
|
|
|
—
|
|
|
0.00 |
% |
Diamond
Deecembra 8 |
|
|
143,853
|
|
|
143,853
|
|
|
—
|
|
|
0.00 |
% |
DKR
Soundshore Oasis Holding Fund, Ltd.9 |
|
|
1,198,770
|
|
|
1,198,770
|
|
|
— |
|
|
0.00 |
% |
(A) |
Includes
shares underlying series A and series B preferred stock into which the
series A and series B preferred stock is convertible, and shares
underlying warrants and/or options held by the selling security holder
that are covered by this prospectus, including any convertible securities
that, due to contractual restrictions, may not be exercisable within 60
days of the date of this prospectus.
|
(B) |
The
number of shares of common stock to be sold assumes that the selling
security holder elects to sell all the shares of common stock held by the
selling security holder that are covered by this
prospectus. |
(C) |
It
is our understanding that any selling security holder that is an affiliate
of a broker-dealer purchased the securities offered hereunder in the
ordinary course of business, and at the time of the purchase, had no
agreements or understanding to distribute the
securities. |
1 |
The
sale of all of these shares is currently registered under Chembio’s
Registration Statement on Form SB-2 that became effective with the SEC on
November 4, 2004. The sale of these shares also is included in this
Prospectus so that Chembio can make any future amendments for the
Registration Statement of which this Prospectus is a part, together with
amendments of the 2004 Registration Statement in a single joint
prospectus. |
2 |
The
sale of all of these shares, except for less than 235,000 that represent
dividend shares, currently is registered under Chembio’s Registration
Statement on Form SB-2 that became effective with the SEC on November 4,
2004. The sale of these shares also is included in this Prospectus so that
Chembio can make any future amendments for the Registration Statement of
which this Prospectus is a part, together with amendments of the 2004
Registration Statement, in a single joint
prospectus. |
3 |
Konrad
Ackerman has ultimate control over Alpha Capital AG and the shares held by
Alpha Capital AG. |
4 |
Provides
marketing consulting services to the
Company. |
5 |
Affiliated
with Wellfleet Partners. |
6 |
Affiliated
with HC Wainwright, investment banking
services. |
7 |
Affiliated
with Dillion Capital, a NASD member. Robert Hoyt has ultimate control over
Crestview Capital Master, LLC and the shares held by Crestview Capital
Master, LLC. |
8 |
Affiliated
with Midtown Partners & Co., LLC, investment banking
services. |
Selling
security holders (C)
|
|
Number
of Shares of Common Stock Owned Before Offering (A)
|
|
Number
of Shares To Be Offered (B)
|
|
Number
of Shares Owned After Offering
|
|
Percentage
of Shares of Common Stock Owned After Offering
|
|
Eckert,
Christopher & Lynn 2,10 |
|
|
186,666
|
|
|
186,666
|
|
|
—
|
|
|
0.00 |
% |
Engel,
Sam 1 |
|
|
4,118
|
|
|
4,118
|
|
|
—
|
|
|
0.00 |
% |
Esfandiari,
Javan 1 |
|
|
167,080
|
|
|
167,080
|
|
|
—
|
|
|
0.00 |
% |
Falvo,
Pete 2 |
|
|
40,000 |
|
|
40,000 |
|
|
—
|
|
|
0.00 |
% |
FAMALOM,
LLC 8 |
|
|
179,817
|
|
|
179,817
|
|
|
—
|
|
|
0.00 |
% |
Feldman,
Stephen 1 |
|
|
2,055
|
|
|
2,055
|
|
|
—
|
|
|
0.00 |
% |
Fuchs,
Ari 2,6 |
|
|
49,058 |
|
|
49,058 |
|
|
—
|
|
|
0.00 |
% |
Ginsberg,
Mike 1 |
|
|
2,375
|
|
|
2,375
|
|
|
—
|
|
|
0.00 |
% |
Glass,
Marc 1 |
|
|
20,708
|
|
|
20,708
|
|
|
—
|
|
|
0.00 |
% |
Goldberg,
Jeffrey 1,11 |
|
|
52,875
|
|
|
52,875
|
|
|
—
|
|
|
0.00 |
% |
Greenblatt,
Phil 1 |
|
|
10,347
|
|
|
10,347
|
|
|
—
|
|
|
0.00 |
% |
Gregoretti,
Gordan |
|
|
79,916
|
|
|
79,916
|
|
|
—
|
|
|
0.00 |
% |
Gressel,
Daniel 1,12 |
|
|
462,501
|
|
|
462,501 |
|
|
—
|
|
|
0.00 |
% |
Guzikowski,
Frank J.1 |
|
|
178,114
|
|
|
178,114
|
|
|
—
|
|
|
0.00 |
% |
H.C.
Wainwright & Co.
1,13 |
|
|
390,867
|
|
|
390,867
|
|
|
—
|
|
|
0.00 |
% |
Haendler,
Kurt 1 |
|
|
434,288
|
|
|
434,288
|
|
|
—
|
|
|
0.00 |
% |
Haendler,
Renata 1 |
|
|
138,211
|
|
|
138,211
|
|
|
—
|
|
|
0.00 |
% |
Haendler,
Tomas 2,14 |
|
|
540,710 |
|
|
540,710
|
|
|
—
|
|
|
0.00 |
% |
Haim,
Eduardo 1 |
|
|
7,115
|
|
|
7,115
|
|
|
—
|
|
|
0.00 |
% |
Hamblett,
Michael 15 |
|
|
498,714
|
|
|
498,714
|
|
|
—
|
|
|
0.00 |
% |
Hanson,
Andrew Merz 2,16 |
|
|
119,545 |
|
|
119,545 |
|
|
—
|
|
|
0.00 |
% |
Hunt,
David 1 |
|
|
60,000
|
|
|
60,000
|
|
|
—
|
|
|
0.00 |
% |
Ide,
Bruce J.2,17 |
|
|
491,062
|
|
|
491,062
|
|
|
—
|
|
|
0.00 |
% |
Jacob,
Sam 1 |
|
|
10,000
|
|
|
10,000
|
|
|
—
|
|
|
0.00 |
% |
Jacoby,
Richard A.2 |
|
|
469,545
|
|
|
469,545
|
|
|
—
|
|
|
0.00 |
% |
Joffe,
Wendy 2 |
|
|
37,222
|
|
|
37,222
|
|
|
—
|
|
|
0.00 |
% |
Jordan,
Bruce 18 |
|
|
67,931
|
|
|
67,931
|
|
|
—
|
|
|
0.00 |
% |
9 |
DKR
SoundShore Oasis Holding Fund Ltd. (the "Fund") is a master fund in a
master-feeder structure. The Fund's investment manager is DKR Oasis
Management Company LP (the "Investment Manager"). Pursuant to an
investment management agreement among the Fund, the feeder funds and the
Investment Manager, the Investment Manager has the authority to do any and
all acts on behalf of the Fund, including voting any shares held by the
Fund. Mr. Seth Fischer is the managing partner of Oasis Management
Holdings LLC, one of the general partners of the Investment Manager. Mr.
Fischer has ultimate responsibility for trading with respect to the Fund.
Mr. Fischer disclaims beneficial ownership of the
shares. |
10 |
Christopher
Eckert is an employee of Smith Barney. |
11 |
Affiliated
with Wellfleet Partners and Starobin Partners, investment banking
services. |
12 |
Former
Director of CDS. |
14 |
Former
President of CDS and Director. |
15 |
Employee
of Starboard Capital Markets, LLC, investment banking
services. |
16 |
Assisted
the Company in fundraising. |
18 |
Employee
of Midtown Partners & Co., LLC, investment banking
services. |
Selling
security holders (C)
|
|
Number
of Shares of Common Stock Owned Before Offering (A)
|
|
Number
of Shares To Be Offered (B)
|
|
Number
of Shares Owned After Offering
|
|
Percentage
of Shares of Common Stock Owned After Offering
|
|
JP
Turner 1,5 |
|
|
41,250
|
|
|
41,250
|
|
|
—
|
|
|
0.00 |
% |
Keskinen,
Karen 1 |
|
|
1,579
|
|
|
1,579
|
|
|
—
|
|
|
0.00 |
% |
Klaus,
Elaine 1 |
|
|
2,242
|
|
|
2,242 |
|
|
—
|
|
|
0.00 |
% |
Knasin,
Paul and Ellen 2 |
|
|
152,307
|
|
|
152,307
|
|
|
—
|
|
|
0.00 |
% |
Koch,
Scott F.1,6 |
|
|
158,400
|
|
|
158,400
|
|
|
—
|
|
|
0.00 |
% |
Kolstad
Jr., Kaare 1 |
|
|
50,589
|
|
|
50,589
|
|
|
—
|
|
|
0.00 |
% |
Kreger,
Richard 18 |
|
|
453,435
|
|
|
453,435
|
|
|
—
|
|
|
0.00 |
% |
Krumholz,
Jacob & Arlene |
|
|
66,869
|
|
|
66,869
|
|
|
—
|
|
|
0.00 |
% |
Kurzman
Partners, LP 19 |
|
|
65,265
|
|
|
65,265
|
|
|
—
|
|
|
0.00 |
% |
Lankenau,
Robert 1 |
|
|
226,585
|
|
|
226,585
|
|
|
—
|
|
|
0.00 |
% |
Lanouette,
Kevin P. |
|
|
31,966
|
|
|
31,966
|
|
|
—
|
|
|
0.00 |
% |
Larkin,
Richard 2 |
|
|
109,189
|
|
|
109,189
|
|
|
—
|
|
|
0.00 |
% |
Lawrence,
Colin 1 |
|
|
7,115
|
|
|
7,115
|
|
|
—
|
|
|
0.00 |
% |
Ledowitz,
Bill 1 |
|
|
7,118 |
|
|
7,118 |
|
|
—
|
|
|
0.00 |
% |
Lew,
Felicia 1 |
|
|
31,250
|
|
|
31,250
|
|
|
—
|
|
|
0.00 |
% |
Lew,
Hanka 1 |
|
|
31,250
|
|
|
31,250
|
|
|
—
|
|
|
0.00 |
% |
Lifshitz,
Joshua 20 |
|
|
98,959
|
|
|
98,959
|
|
|
—
|
|
|
0.00 |
% |
Little
Gem Life Sciences Fund LLC 21 |
|
|
173,248
|
|
|
173,248
|
|
|
—
|
|
|
0.00 |
% |
Lyashchenko,
Konstantin 1 |
|
|
10,500
|
|
|
10,500
|
|
|
—
|
|
|
0.00 |
% |
Maloney
& Company, LLC |
|
|
79,916
|
|
|
79,916
|
|
|
—
|
|
|
0.00 |
% |
Mayer-Wolf,
Mike 1 |
|
|
18,379
|
|
|
18,379
|
|
|
—
|
|
|
0.00 |
% |
McCarthy,
Michael 1 |
|
|
4,145
|
|
|
4,145
|
|
|
—
|
|
|
0.00 |
% |
McGusty,
Edwin 1 |
|
|
125,000
|
|
|
125,000
|
|
|
—
|
|
|
0.00 |
% |
Metasequoia,
LLC 2 |
|
|
37,332
|
|
|
37,332
|
|
|
—
|
|
|
0.00 |
% |
Midtown
Partners & Co., LLC 22 |
|
|
116,639
|
|
|
116,639
|
|
|
—
|
|
|
0.00 |
% |
Millennium
3 Opportunity Fund, LLC 23 |
|
|
3,196,720 |
|
|
3,196,720 |
|
|
—
|
|
|
0.00 |
% |
Moran,
Sean |
|
|
47,950
|
|
|
47,950
|
|
|
—
|
|
|
0.00 |
% |
19 |
Affiliated
with Needham & Company, investment banking
services. |
20 |
Except
for 26,393 shares, the sale of these shares is registered under Chembio’s
Registration Statement on Form SB-2 that became effective with the SEC on
November 4, 2004. The sale of these shares also is included in this
Prospectus so that Chembio can make any future amendments for the
Registration Statement of which this Prospectus is a part, together with
amendments of the 2004 Registration Statement, in a single joint
prospectus. |
21 |
Except
for 81,582 shares, the sale of these shares is registered under Chembio’s
Registration Statement on Form SB-2 that became effective with the SEC on
November 4, 2004. The sale of these shares also is included in this
Prospectus so that Chembio can make any future amendments for the
Registration Statement of which this Prospectus is a part, together with
amendments of the 2004 Registration Statement, in a single joint
prospectus. |
22 |
NASD
member, assisted the Company in
fundraising. |
23 |
Fred
Fraenkel and Udi Toledano have ultimate control over Millennium 3
Opportunity Fund and the shares held by Millennium 3 Opportunity
Fund. |
Selling
security holders (C)
|
|
Number
of Shares of Common Stock Owned Before Offering (A)
|
|
Number
of Shares To Be Offered (B)
|
|
Number
of Shares Owned After Offering
|
|
Percentage
of Shares of Common Stock Owned After Offering
|
|
MSAS
Trust 2 |
|
|
742,666
|
|
|
742,666
|
|
|
—
|
|
|
0.00 |
% |
Nite
Capital, LP |
|
|
719,261
|
|
|
719,261
|
|
|
—
|
|
|
0.00 |
% |
Patton
Boggs LLP 1 |
|
|
37,319
|
|
|
37,319
|
|
|
—
|
|
|
0.00 |
% |
Pelossof,
Avi 2 |
|
|
570,685 |
|
|
570,685 |
|
|
—
|
|
|
0.00 |
% |
Pelossof,
Elior 2 |
|
|
84,659
|
|
|
84,659
|
|
|
—
|
|
|
0.00 |
% |
Perlmutter,
Alan 1 |
|
|
60,000 |
|
|
60,000 |
|
|
—
|
|
|
0.00 |
% |
Phillips,
Chris 8 |
|
|
86,264
|
|
|
86,264
|
|
|
—
|
|
|
0.00 |
% |
Phillips,
Scott W.1 |
|
|
50,589
|
|
|
50,589
|
|
|
—
|
|
|
0.00 |
% |
Poole,
Colin 2 |
|
|
141,098
|
|
|
141,098
|
|
|
—
|
|
|
0.00 |
% |
Poole,
John G.1 |
|
|
68,365
|
|
|
68,365
|
|
|
—
|
|
|
0.00 |
% |
Raker,
Gilbert 2 |
|
|
84,659
|
|
|
84,659
|
|
|
—
|
|
|
0.00 |
% |
Reibman,
Spencer 1 |
|
|
18,780
|
|
|
18,780
|
|
|
—
|
|
|
0.00 |
% |
Rohan,
J. Rory 18 |
|
|
453,435
|
|
|
453,435
|
|
|
—
|
|
|
0.00 |
% |
Rojas,
Zilma 1 |
|
|
5,500
|
|
|
5,500
|
|
|
—
|
|
|
0.00 |
% |
Ross,
Anne 1 |
|
|
63,236 |
|
|
63,236 |
|
|
—
|
|
|
0.00 |
% |
Sandler,
J & S 1 |
|
|
8,287
|
|
|
8,287
|
|
|
—
|
|
|
0.00 |
% |
Sandler,
Mark and Lori 2 |
|
|
186,666
|
|
|
186,666
|
|
|
—
|
|
|
0.00 |
% |
Schnipper,
Steve 24 |
|
|
160,426
|
|
|
160,426
|
|
|
—
|
|
|
0.00 |
% |
Schwartz,
Eric 1 |
|
|
5,496
|
|
|
5,496
|
|
|
—
|
|
|
0.00 |
% |
Seren,
Stanley 1 |
|
|
8,287
|
|
|
8,287
|
|
|
—
|
|
|
0.00 |
% |
Shapiro,
Alex 1 |
|
|
112,412 |
|
|
112,412 |
|
|
—
|
|
|
0.00 |
% |
Siderowf,
Richard 2,25 |
|
|
86,624
|
|
|
86,624
|
|
|
—
|
|
|
0.00 |
% |
Siebert
Best, Ellen 2 |
|
|
43,311
|
|
|
43,311
|
|
|
—
|
|
|
0.00 |
% |
Siebert,
Lawrence 26 |
|
|
6,318,138
|
|
|
1,163,078 |
|
|
5,155,060 |
|
|
43.33 |
% |
Sive
Paget & Reisel 1 |
|
|
2,055
|
|
|
2,055
|
|
|
—
|
|
|
0.00 |
% |
Smith,
Robin 1,27 |
|
|
119,883
|
|
|
119,883
|
|
|
—
|
|
|
0.00 |
% |
Spatacco,
Jr., Anthony J. 28 |
|
|
89,520 |
|
|
89,520 |
|
|
—
|
|
|
0.00 |
% |
Speer,
Sandy 1 |
|
|
65,468
|
|
|
65,468
|
|
|
—
|
|
|
0.00 |
% |
Spilka,
R. Edward 2,29 |
|
|
313,138
|
|
|
313,138
|
|
|
—
|
|
|
0.00 |
% |
Starboard
Capital Markets, LLC 30 |
|
|
9,604
|
|
|
9,604
|
|
|
—
|
|
|
0.00 |
% |
24 |
Except
for 51,578 shares, the sale of these shares is registered under Chembio’s
Registration Statement on Form SB-2 that became effective with the SEC on
November 4, 2004. The sale of these shares also is included in this
Prospectus so that Chembio can make any future amendments for the
Registration Statement of which this Prospectus is a part, together with
amendments of the 2004 Registration Statement, in a single joint
prospectus. |
25 |
Registered
sales representative with RBC Dain
Rauscher. |
26 |
Except
for 663,078 shares, the sale of these shares is registered under Chembio’s
Registration Statement on Form SB-2 that became effective with the SEC on
November 4, 2004. The sale of these shares also is included in this
Prospectus so that Chembio can make any future amendments for the
Registration Statement of which this Prospectus is a part, together with
amendments of the 2004 Registration Statement, in a single joint
prospectus. |
27 |
Provided
marketing consulting services; affiliated with Wellfleet Partners and
Starobin Partners. |
28 |
Assisted
the Company in fundraising; employee of Starboard Capital Markets
LLC. |
29 |
Stockholder
of Lehman Brothers. |
Selling
security holders (C)
|
|
Number
of Shares of Common Stock Owned Before Offering (A)
|
|
Number
of Shares To Be Offered (B)
|
|
Number
of Shares Owned After Offering
|
|
Percentage
of Shares of Common Stock Owned After Offering
|
|
Starobin
Partners 1,5 |
|
|
110,000
|
|
|
110,000
|
|
|
—
|
|
|
0.00 |
% |
Straightline
Capital Opportunities Fund I, LLC 2 |
|
|
750,195
|
|
|
750,195
|
|
|
—
|
|
|
0.00 |
% |
Talesnick,
Alan L. 2,31 |
|
|
241,088 |
|
|
241,088 |
|
|
—
|
|
|
0.00 |
% |
TCMP3
Partners |
|
|
319,671
|
|
|
319,671
|
|
|
—
|
|
|
0.00 |
% |
Thunderbird
Global Corporation 2,32 |
|
|
1,021,750
|
|
|
1,021,750
|
|
|
—
|
|
|
0.00 |
% |
Total
M.I.S., Inc. 2 |
|
|
560,000
|
|
|
560,000
|
|
|
—
|
|
|
0.00 |
% |
Tyson,
John 2,33 |
|
|
16,250
|
|
|
16,250
|
|
|
—
|
|
|
0.00 |
% |
Vicis
Capital Master Fund 2,34 |
|
|
5,600,000
|
|
|
5,600,000
|
|
|
—
|
|
|
0.00 |
% |
Wachs,
Mark 2 |
|
|
28,219
|
|
|
28,219
|
|
|
—
|
|
|
0.00 |
% |
Weiss,
Gunther 1 |
|
|
28,334
|
|
|
28,334
|
|
|
—
|
|
|
0.00 |
% |
Westbury
Diagnostics, Inc. 2 |
|
|
144,485
|
|
|
144,485
|
|
|
—
|
|
|
0.00 |
% |
TOTALS |
|
|
45,621,364 |
|
|
40,466,304 |
|
|
5,155,060 |
|
|
|
|
PLAN
OF DISTRIBUTION
· Each
selling stockholder (the “Selling Stockholders”) of the common stock (the
“Common Stock”) of the Company and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
|
· |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers; |
|
· |
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction; |
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account; |
|
· |
an
exchange distribution in accordance with the rules of the applicable
exchange; |
|
· |
privately
negotiated transactions; |
|
· |
settlement
of short sales entered into after the date of this
prospectus; |
|
· |
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share; |
|
· |
a
combination of any such methods of sale; |
31 |
Partner
at Patton Boggs LLP, our legal counsel. |
32 |
WSITE
International Foundation (“WSITE”) is the ultimate beneficiary of
Thunderbird Global Corporation. Gustavo Montilla is the Chairman of
WSITE International Foundation and controls the daily affairs of
WSITE. |
33 |
Provides
marketing consulting services. |
34 |
Vicis
Capital Master Fund’s investment manager is Vicis Capital, LLC. Shad
Stastney, John Succo, and Sky Lucas have the ultimate control over the
shares held by Vicis Capital Master
Fund. |
|
· |
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or |
|
· |
any
other method permitted pursuant to applicable
law. |
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the Common Stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In no
event shall any broker-dealer receive fees, commissions and markups which, in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under this prospectus. Each Selling Stockholder has
advised us that they have not entered into any written or oral agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the Common Stock for a period of two business
days prior to the commencement of the distribution. In addition, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of the Common Stock by the Selling
Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
LEGAL
PROCEEDINGS
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. Please refer to the section of this
prospectus entitled “Description of business—Our business following the
merger—Certain legal and intellectual property issues” for a discussion of some
of the legal issues we face. Other than as set forth below, we know of no
material, existing or pending legal proceedings against us, nor are we involved
as a plaintiff in any material proceeding or pending litigation. There are no
proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial shareholder, is an adverse party or has a material
interest to our interest. The outcome of the open unresolved legal proceeding
set forth below is presently indeterminable. We do not believe the potential
outcome from this legal proceeding will significantly impact our financial
position, operations or cash flows.
Saliva
Diagnostic Systems Dispute.
An integral part of our business plan is the manufacture and sale of our Sure
Check™ HIV rapid test product which incorporates a sample collection method that
provides conveniences in terms of ease of use and safety. Until May 2003,
Sure Check™ was known as “Hema Strip.” Hema Strip was manufactured by
Chembio Diagnostic Systems Inc. pursuant to a manufacturing agreement between
Chembio Diagnostic Systems Inc. and Saliva Diagnostic Systems, Inc. The
contract with Saliva Diagnostic was based upon, among other things, a patent
that Saliva Diagnostic owns that was represented by Saliva Diagnostic to cover
the sample collection method employed by the Hema Strip and which patent Saliva
Diagnostic also represented to be valid and enforceable. Saliva Diagnostic
unilaterally terminated the manufacturing agreement and alleged patent
infringement by Chembio Diagnostic Systems Inc. We believe that the
aforementioned patent did not cover the sample collection method used by the
Hema Strip. We also believe that the Saliva Diagnostic patent was not
valid due to the existence of previously uncited prior art.
On March
17, 2004, Saliva Diagnostic made further allegations of patent infringement
against Chembio Diagnostic Systems Inc. In connection with the foregoing,
Chembio Diagnostic Systems Inc. filed a complaint against Saliva Diagnostic in
the United States District Court for the Eastern District of New York on March
18, 2004 (Civil Action No. 04-1149-JS-ETB). The complaint asks the court
for declaratory and other relief that our Sure Check™ HIV test does not infringe
the Saliva Diagnostic patent, that the Saliva Diagnostic patent is invalid, and
that the Saliva Diagnostic patent is unenforceable due to inequitable
procurement. On April 8, 2004, Saliva Diagnostic filed its answer and
counterclaim, alleging that we were infringing on the Saliva Diagnostic
Patent. We filed our Reply to Counterclaim on May 3, 2004, denying the
allegation of infringement of the Saliva Diagnostic Patent. Briefs
regarding the meaning of the claims of the Saliva Diagnostic Patent were filed
February 28, 2005, and oppositions to those briefs were filed on March 9,
2005. A ruling on the meaning of the claim terms will then be issued by
the court. Fact discovery was due to be completed by
March 31, 2005, but was extended and a new date is currently pending a
court hearing on the matter.
DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
Lawrence A.
Siebert (48),
President and Director. Mr. Siebert was appointed President of Chembio
Diagnostics, Inc. and a member of our board of directors upon consummation of
the merger. Mr. Siebert has been Chairman of Chembio Diagnostic Systems Inc. for
approximately 12 years and its President since May 2002. Mr. Siebert’s
background is in private equity and venture capital investing. From 1982 to
1991, Mr. Siebert was associated with Stanwich Partners, Inc, which during that
period invested in middle market manufacturing and distribution companies. From
1992 to 1999, Mr. Siebert was an investment consultant and business broker with
Siebert Capital Corp. and Siebert Associates LLC, and was a principal investor
in a privately held test and measurement company which was sold in 2002. Mr.
Siebert received a JD from Case Western Reserve University School of Law in 1981
and a BA with Distinction in Economics from the University of Connecticut in
1978.
Richard J.
Larkin (48), Chief
Financial Officer. Mr. Larkin was appointed as Chief Financial Officer of
Chembio Diagnostics, Inc. upon consummation of the merger. Mr. Larkin oversees
our financial activities and information systems. Mr. Larkin has been the Chief
Financial Officer of Chembio Diagnostic Systems Inc. since September 2003. Prior
to joining Chembio Diagnostic Systems Inc., Mr. Larkin served as CFO at Visual
Technology Group from May 2000 to September 2003, and also led their consultancy
program that provided hands-on expertise in all aspects of financial service,
including the initial assessment of client financial reporting requirements
within an Enterprise
Resource Planning (Manufacturing) environment through training and
implementation. Prior to joining VTG, he served as CFO at Protex International
Corporation from May 1987 to January 2000. Mr. Larkin holds a BBA in Accounting
from Dowling College and is a member of the American Institute of Certified
Public Accountants.
Avi
Pelossof (42), Vice
President Sales, Marketing and Business Development. Mr. Pelossof joined Chembio
Diagnostic Systems Inc. in 1996 and has been responsible for developing Chembio
Diagnostic System’s marketing strategy and collaborations. From 1991 to 1996, he
was Managing Director and co-founder of The IMS Group, Inc., which provided
strategic marketing advisory services to companies involved in Latin American
markets including Chembio Diagnostics, Inc. Prior to IMS he was a Citibank Vice
President in the International Corporate Finance Group focused on Latin America.
Mr. Pelossof received his MBA in finance and international business from New
York University in 1986 and a BA with Distinction in economics from the
University of Michigan in 1984.
Javan
Esfandiari (38),
Director
of Research & Development. Mr. Esfandiari co-founded, and became a co-owner
of Sinovus Biotech AB where he served as Director of Research and Development
concerning lateral flow technology until Chembio Diagnostic Systems Inc.
acquired Sinovus Biotech AB in 2000. From 1993 to 1997, Mr. Esfandiari was
Director of Research and Development with On-Site Biotech/National Veterinary
Institute, Uppsala, Sweden, which was working in collaboration with Sinovus
Biotech AB on development of veterinary lateral flow technology. Mr. Esfandiari
received his B.Sc. in Clinical Chemistry and his M. Sc. in Molecular Biology
from Lund University, Sweden. He has published articles in various veterinary
journals and has co-authored articles on tuberculosis serology with Dr.
Lyashchenko.
Rick
Bruce (50), Vice
President, Operations. Mr. Bruce was hired in April 2000 as Director of
Operations. He is responsible for production, maintenance, inventory, shipping,
receiving, and warehouse operations. Prior to joining Chembio Diagnostic Systems
Inc., he held director level positions at Wyeth Laboratories from 1984 to 1993.
From 1993 to 1998, he held various management positions in the Operations
department at Biomerieux. From 1998 to 2000, he held a management position at
V.I. Technologies. Mr. Bruce has over 25 years of operations management
experience with Fortune 500 companies in the field of in-vitro diagnostics and
blood fractionation. Mr. Bruce received his BS in Management from National
Louis University in 1997.
Alan
Carus (66),
Director. Mr. Carus was elected to our Board of Directors on April 15, 2005. Mr.
Carus is a co-founder of LARC Strategic Concepts LLC, a consulting firm
dedicated to guiding emerging companies to next stage development. Prior to
co-founding LARC Strategic Concepts LLC, Mr. Carus was Senior Vice President of
Maritime Overseas Corporation (“MOC”) and a senior executive of Overseas
Shipholding Group, Inc. (“OSG”) from 1981 to 1998, when he retired. MOC was
managing agent for OSG, one of the world’s largest ship-owners. Mr. Carus was a
member of OSG’s senior management committee and had senior responsibility in
areas relating to administration, accounting, tax, finance, budgets, long-range
projections, and human resources. He was involved in numerous acquisitions, debt
and equity offerings, complex transaction structuring, and was active in the
management of OSG’s major investments in the cruise industry and other
development stage companies. From 1964 to 1981, Mr. Carus was with Ernst &
Young (including predecessors), the last seven years as a partner. Mr. Carus has
a B.B.A. from the Baruch School of Business of the City College of New
York.
David
Gates (54), VP of
Regulatory Affairs, QA and QC. Dr. Gates joined Chembio in August 2004. His
background includes almost twenty years of in-vitro diagnostic and medical
device experience in R&D, Process Development, Regulatory Affairs and
Quality Management. During that time he has held vice-president level positions
at Metrigenix, director level positions in Quality Management and Regulatory
compliance at BD Diagnostic Systems and a broad range of high-level management
positions at Difco Laboratories. He earned his Regulatory Affairs Certification
in 1991 and has served as an Industrial Representative to the FDA Microbiology
Advisory Panel (1996-2000). He has a PhD from University of Tennessee
(Microbiology) and held a post-doctoral fellowship at State University of New
York at Stony Brook (Molecular/Cellular Biology).
Gary
Meller MD, MBA (55),
Director. Dr. Meller was elected to our Board of Directors on March 15, 2005.
Dr. Meller has been the president of CommSense Inc., a healthcare business
development company, since 2001. CommSense Inc. works with clients in Europe,
Asia, North America, and the Middle East on medical information technology,
medical records, pharmaceutical product development and financing, health
services operations and strategy, and new product and new market development.
From 1999 until 2001 Dr. Meller was the executive vice president, North America,
of NextEd Ltd., a leading internet educational services company in the Asia
Pacific region. Dr. Meller also is a member of the Advisory Board of Crestview
Capital Master LLC, which was the lead investor in our series B preferred stock
private placement. Dr. Meller a graduate of the University of New Mexico School
of Medicine and has an MBA from the Harvard Business School.
Gerald
A. Eppner (65), Director.
Mr. Eppner was elected to our Board of Directors on March 15, 2005. Mr.
Eppner is a partner at Cadwalader, Wickersham & Taft, a law firm based in
New York City, New York. Mr. Eppner has experience in domestic and international
corporate and securities law matters. Mr. Eppner has been in private practice in
New York City since 1966. For more than five years prior to 1966, Mr. Eppner was
an employee of certain agencies and departments of the United States government.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table summarizes certain information as of April 20, 2005 with respect
to the beneficial ownership of our Common Stock by each director, by all named
executive officers, and by all officers and directors as a group, and by each
other person known by us to be the beneficial owner of more than five percent of
our Common Stock. The term “named executive officer” refers to our chief
executive officer and each of our other four most highly compensated executive
officers serving as of December 31, 2004 (we refer to these five
individuals, collectively, as the named executive officers) for the fiscal years
ended December 31, 2004, 2003 and 2002. Unless otherwise indicated, the
address for each person set forth in the table is the address of the Company,
3661 Horseblock Road, Suite A, Medford, NY 11763.
Name
and Address of Beneficial Owner |
|
Number
of Shares Beneficially Owned |
|
Percent
of Class |
|
Lawrence
Siebert (1) |
|
|
1,846,417 |
|
|
24.87 |
% |
Avi
Pelossof (2) |
|
|
498,512 |
|
|
6.81 |
% |
Javan
Esfandiari (3) |
|
|
117,080 |
|
|
1.64 |
% |
Richard
Bruce (4) |
|
|
75,500 |
|
|
1.06 |
% |
Konstantin
Lyashchenko (5) |
|
|
10,500 |
|
|
0.15 |
% |
Dr.
Gary Meller (6) |
|
|
12,000 |
|
|
0.17 |
% |
Gerald
A. Eppner (6) |
|
|
12,000 |
|
|
0.17 |
% |
Alan
Carus (6) |
|
|
12,000 |
|
|
0.17 |
% |
All
officers, directors and director nominees as a group (7) |
|
|
2,584,009 |
|
|
32.68 |
% |
Mark
Baum (8)
580
Second Street, Suite 102
Encinitas,
California 92024 |
|
|
1,554,333 |
|
|
19.68 |
% |
Tomas
Haendler (9)
31
Cogswell Lane
Stamford,
CT 06902 |
|
|
451,820 |
|
|
6.38 |
% |
Thunderbird
Global Corporation (10)
c/o
The Baum Law Firm
820
Second Street, Suite 102
Encinitas,
CA 92024 |
|
|
467,431 |
|
|
6.63 |
% |
Daniel
Gressel (11)
460
E. 79th
Street, Apt. 17B
New
York, NY 10021 |
|
|
462,501 |
|
|
6.52 |
% |
H.C.
Wainwright & Co., Inc. (12)
245
Park Avenue, 44th
Floor
New
York, NY 10167 |
|
|
390,867 |
|
|
5.25 |
% |
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.
This
table does not include convertible securities which, due to contractual
restrictions, are not exercisable within 60 days of the date of this prospectus.
Specifically, at no time may a holder of shares of series A or series B
preferred stock convert shares of the series A or series B preferred stock, or
warrants issued in connection with the purchase of series A or
series B preferred stock, if the number of shares of common stock to be
issued pursuant to the conversion would exceed, when aggregated with all other
shares of common stock owned by that holder at that time, the number of shares
of common stock which would result in that holder beneficially owning (as
determined in accordance with Section 13(d) of the Securities Exchange Act) in
excess of either 4.999% or 9.999% of the then issued and outstanding shares of
common stock outstanding at that time, unless the holder has provided us with
sixty-one (61) days notice that the holder has elected to waive this
restriction. This contractual restriction does not apply to warrants not
obtained in connection with the purchase of series A or series B
preferred stock.
|
(1) |
Includes
170,000 shares issuable upon exercise of options exercisable within 60
days and 207,566 shares issuable upon exercise of warrants. Does not
include 50,000 shares issuable upon exercise of options that are not
exercisable within the next 60 days. Also does not include 1,937,220
shares issuable upon conversion of series A preferred stock, 2,324,666
shares issuable upon exercise of warrants, 81,967 shares issuable upon
conversion of series B preferred stock and 77,868 shares issuable upon
exercise of warrants because conversion of any of those shares of series A
or series B preferred stock or exercise of those warrants would result in
the holder beneficially owning in excess of 4.99% of the then issued and
outstanding shares of common stock outstanding at that
time. |
|
(2) |
Includes
250,000 shares issuable upon exercise of options exercisable within 60
days and 22,555 shares issuable upon exercise of warrants. Does not
include 50,000 shares issuable upon exercise of options that are not
exercisable within the next 60 days. Also does not include 10,078 shares
issuable upon conversion of series A preferred stock and 12,095 shares
issuable upon exercise of warrants because conversion of any of those
shares of series A preferred stock or exercise of any of those warrants
would result in the holder beneficially owning in excess of 4.99% of the
then issued and outstanding shares of common stock outstanding at that
time. |
|
(3)
|
Includes
95,000 shares issuable upon exercise of options exercisable within 60 days
and 2,007 shares issuable upon exercise of warrants. Does not include
50,000 shares issuable upon exercise of options that are not exercisable
within the next 60 days. |
|
(4) |
Includes
70,000 shares issuable upon exercise of options exercisable within 60 days
and 500 shares issuable upon exercise of warrants.
|
|
(5) |
Includes
5,000 shares issuable upon exercise of options exercisable within 60 days
and 500 shares issuable upon exercise of
warrants. |
|
(6) |
Includes
12,000 shares issuable upon exercise of options currently exercisable.
Does not include 24,000shares issuable upon exercise of options that are
not exercisable within 60 days. |
|
(7) |
Includes
all securities covered in footnotes
(1)-(6). |
|
(8) |
Includes
850,000 shares issuable upon exercise of warrants. Does not include
108,333 shares issuable upon conversion of series A preferred stock and
130,000 shares issuable upon exercise of warrants because conversion of
any of those shares of series A preferred stock or exercise of those
warrants would result in the holder beneficially owning in excess of 4.99%
of the then issued and outstanding shares of common stock outstanding at
that time. |
|
(9) |
Includes
38,197 shares issuable upon exercise of warrants. Does not include 44,450
shares issuable upon conversion of series A preferred stock and 53,334
shares issuable upon the exercise of warrants because conversion of any of
those shares of series A preferred stock or exercise of any of those
warrants would result in the holder beneficially owning in excess of 4.99%
of the then issued and outstanding shares of common stock outstanding at
that time. |
|
(10) |
Does
not include 251,963 shares issuable upon conversion of series A preferred
stock and 302,356 shares issuable upon exercise of warrants because
conversion of any of those shares of series A preferred stock or exercise
of any of those warrants would result in the holder beneficially owning in
excess of 4.99% of the then issued and outstanding shares of common stock
outstanding at that time. Gustavo Montilla may be deemed to have voting or
investment control over the shares held by Thunderbird Global Corporation.
|
|
(11) |
Includes
42,065 shares issuable upon exercise of warrants.
|
|
(12) |
Includes
390,867 shares issuable upon exercise of warrants. ZGNY Investments
Limited Partnership may be deemed to have voting or investment control
over the shares held by H.C. Wainwright & Co., Inc. Bryan Zwan may be
deemed to have voting or investment control over ZGNY Investments Limited
Partnership. |
DESCRIPTION
OF SECURITIES
Pursuant
to our articles of incorporation, as amended, we are authorized to issue
50,000,000 shares of common stock, par value $0.01 per share and 10,000,000
shares of preferred stock, par value $0.01 per share. Below is a description of
our common stock, shares of which are being offered in this prospectus and a
description of our preferred stock.
Common
stock
Holders
of the common stock are entitled to one vote for each share held by them of
record on our books in all matters to be voted on by the stockholders. Holders
of common stock are entitled to receive dividends as may be legally declared
from time to time by the board of directors, and in the event of our
liquidation, dissolution or winding up, to share ratably in all assets remaining
after payment of liabilities. Declaration of dividends on common stock is
subject to the discretion of the board of directors and will depend upon a
number of factors, including our future earnings, capital requirements and
financial condition. We have not declared dividends on our common stock in the
past and we currently anticipate that retained earnings, if any, in the future
will be applied to our expansion and development rather than the payment of
dividends. Additionally, pursuant to the certificate of designation authorizing
and creating the series A preferred stock, we are restricted from paying
dividends on the common stock without the approval of holders of at least
three-fourths of the then outstanding shares of our series A preferred
stock.
The
holders of common stock have no preemptive or conversion rights and are not
subject to further calls or assessments. There are no redemption or sinking fund
provisions applicable to the common stock. Our articles of incorporation require
the approval of the holders of a majority of our outstanding common stock for
the election of directors and for other fundamental corporate actions, such as
mergers and sales of substantial assets, or for an amendment to our articles of
incorporation. There exists no provision in our articles of incorporation or our
bylaws that would delay, defer or prevent a change in control of Chembio
Diagnostics, Inc.
Action
Stock Transfer acts as our transfer agent and registrar
Series
A Preferred Stock
Dividends. Holders
of series A preferred stock are entitled to an 8% per annum dividend per share.
The dividend accrues and is payable semi-annually at our option either in cash,
in shares of series A preferred stock or in shares of common stock. Accrued but
unpaid dividends are also payable upon the conversion or redemption of the
shares of series A preferred stock and upon our liquidation, dissolution or
winding up.
Voting
Rights. As long
as any shares of series A preferred stock are outstanding, we cannot take any of
the following actions without the separate class vote or written consent of at
least three-fourths of the then outstanding shares of our series A preferred
stock:
|
· |
amend,
alter or repeal the provisions of the series A preferred stock so as to
adversely affect any right, preference, privilege or voting power of the
series A preferred stock; |
|
· |
repurchase,
redeem or pay dividends on shares of common stock or any other shares of
our equity securities that by their terms do not rank senior to the series
A preferred stock, other than de minimus repurchases from our employees in
certain circumstances; |
|
· |
amend
our articles of incorporation or bylaws so as to affect materially and
adversely any right, preference, privilege or voting power of the series A
preferred stock; |
|
· |
effect
any distribution with respect to any equity securities that by their terms
do not rank senior to the series A preferred
stock; |
|
· |
reclassify
our outstanding securities; |
|
· |
voluntarily
file for bankruptcy, liquidate our assets or make an assignment for the
benefit of our creditors; or |
|
· |
change
the nature of our business. |
In
addition, as long as at least $1,000,000 of series A preferred stock is
outstanding, we cannot, without the affirmative vote or consent of the holders
of at least three-fourths of the shares of the series A preferred stock
outstanding at the time, authorize, create, issue or increase the authorized or
issued amount of any class or series of stock, except for the issuance of shares
of series A preferred stock with respect to the payment of dividends on the
outstanding shares of series A preferred stock.
Except
with respect to items set forth above upon which the series A preferred stock
shall be entitled to vote separately as a class and except as otherwise required
by Nevada law, the series A preferred stock does not have any voting rights. The
common stock into which the series A preferred stock is convertible will have,
upon issuance, all the same voting rights as other issued and outstanding shares
of our common stock.
Conversion. The
series A preferred stock is convertible, at the option of the holders, into
shares of common stock at an initial conversion price of $.60 per share. Based
on its original purchase price of $30,000.00 per share, each share of series A
preferred stock is initially convertible into 50,000 shares of common stock. The
series A preferred stock is issuable in fractional shares. The series A
preferred stock contains adjustment provisions upon the occurrence of stock
splits, stock dividends, combinations, reclassifications or similar events of
our capital stock. The series A preferred stock also provides for adjustment of
the conversion price if the Company sells common stock at a price, or issues a
security convertible into common stock with a conversion price, less than the
then-current conversion price for the series A preferred stock.
Each
share of the series A preferred stock will automatically convert into common
stock on the date that the closing bid price for the common stock exceeds $1.50
for a period of ten (10) consecutive trading days, if the following conditions
are satisfied:
|
· |
such
date is at least one hundred eighty (180) days following the effective
date of this registration statement, and |
|
· |
this
registration statement has been effective, without lapse or suspension of
any kind, for a period of sixty (60) days (or the common stock into which
the series A preferred stock is convertible can be freely traded pursuant
to Rule 144(k) under the Securities Act). |
Redemption. In the
event of:
|
· |
a
consolidation, merger, or other business combination involving Chembio
Diagnostics, Inc., |
|
· |
the
sale of more than 50% of our assets, or |
|
· |
the
closing of a purchase, tender or exchange offer made to and accepted by
holders of more than 50% of our outstanding shares of common
stock, |
each
holder of series A preferred stock has the right to require us to redeem all or
a portion of such holder’s shares of series A preferred stock at a price per
share of series A preferred stock equal to 100% of the then current liquidation
preference amount for the series A preferred stock, plus any accrued and unpaid
dividends; provided that we will have the sole option to pay the redemption
price in cash or shares of common stock. If we elect to pay the redemption price
in shares of common stock, the price per share will be based upon the lesser of
the conversion price for the series A preferred stock or the closing bid price
for the common stock, in each case measured on the day preceding the date of
delivery of the notice of redemption by such holder. In the event we elect to
pay the redemption price in shares of common stock, demand registration rights
will be granted on those additional shares.
Upon the
occurrence of any of the following events:
|
· |
the
lapse or unavailability of this registration statement,
|
|
· |
the
suspension from listing of the common stock for a period of seven (7)
consecutive days, |
|
· |
our
failure or inability to comply with a conversion request from a holder of
series A preferred stock, or |
|
· |
our
material breach of any of our representations or warranties contained in
the series A preferred stock documentation that continues uncured for a
period of ten (10) days, |
each
holder of series A preferred stock has the right to require us to redeem all or
a portion of that holder’s shares of series A preferred stock at a price per
share of series A preferred stock equal to 120% of the then current liquidation
preference amount for the series A preferred stock, plus any accrued and unpaid
dividends; provided that with respect to some of the triggering events
referenced above, we will have the sole option to pay the redemption price in
cash or shares of common stock. If we elect to pay the redemption price in
shares of common stock, the price per share will be based upon the lesser of the
conversion price for the series A preferred stock and the closing bid price for
the common stock, in each case measured on the day preceding the date of
delivery of the notice of redemption by such holder. In the event we elect to
pay the redemption price in shares of common stock, demand registration rights
will be granted on those additional shares.
Rank;
Liquidation Preference. The
holders of our series A preferred stock rank prior to the holders of our common
stock and, unless otherwise consented to by the holders of series A preferred
stock, prior to all other classes of capital stock that we may establish, other
than our series B preferred stock, with respect to the distribution of its
assets upon a bankruptcy, liquidation or other similar event. The liquidation
preference for the series A preferred stock is an amount equal to $30,000.00 per
share plus any accrued and unpaid dividends.
Series
B Preferred Stock
Dividends.
Holders of series B preferred stock are entitled to a 9% per annum
dividend per share. The dividend accrues and is payable semi-annually in cash or
in shares of series B preferred stock, at our option, except with respect to the
holder of the shares purchased by Crestview Capital Master LLC (which represents
$3 million of the $5 million or 60% of the series B preferred stock) who has the
right to elect the form of the dividend as it relates to its series B preferred
stock. Accrued but unpaid dividends are also payable upon the conversion or
redemption of the shares of series B preferred stock and upon a liquidation
event.
Voting
Rights.
As long as any shares of series B preferred stock are outstanding, we
cannot take any of the following actions without the separate class vote or
written consent of all of the then outstanding shares of series B preferred
stock:
|
· |
amend,
alter or repeal the provisions of the series B preferred stock so as to
adversely affect any right, preference, privilege or voting power of the
series B preferred stock; |
|
· |
authorize
or create any class of stock ranking as to dividends, redemption or
distribution of assets upon a liquidation event, senior to or otherwise
pari passu with the series B preferred
stock; |
|
· |
amend
our articles of incorporation or by-laws so as to adversely affect any
rights of the series B preferred stock; |
|
· |
increase
the authorized number of shares of series B preferred stock;
or |
|
· |
enter
into any agreement with respect to the
foregoing. |
Conversion.
The series B preferred stock is convertible, at the option of the holders,
into shares of our common stock at an initial conversion price of $.61 per
share. Based on the original purchase price of $50,000 per share, each share of
series B preferred stock is initially convertible into 81,968 shares of our
common stock. The series B preferred stock is issuable in fractional shares.
The series B preferred stock contains adjustment provisions upon the
occurrence of stock splits, stock dividends, combinations, reclassifications or
similar events of our capital stock. The series B preferred stock also
provides for adjustment of the conversion price if Company sells common stock at
a price, or issues a security convertible into common stock with a conversion
price, less than the then-current conversion price for the series B
preferred stock.
Redemption.
In the event of:
|
· |
a
consolidation, merger, or other business combination involving Chembio
Diagnostics, Inc., |
|
· |
the
sale of all or substantially all of our assets,
|
|
· |
the
acquisition by another person of in excess of 50% of our voting
securities, or |
|
· |
certain
specified triggering events (involving (A) the lapse or unavailability of
a registration statement, (B) the suspension from listing of our common
stock for a period of seven consecutive days, (C) our failure or inability
to comply with a conversion request from a holder of series B preferred
stock, (D) our breach of any of our representations or warranties
contained in the series B preferred stock documentation that continues
uncured for a period of 30 days, or (E) our becoming subject to certain
bankruptcy events), |
each
holder of series B preferred stock has the right to require us to redeem all of
that holder's shares of series B preferred stock at a price per share of series
B preferred stock equal to the sum of (i) the greater of (a) $65,000 or (b) the
product of (x) the daily volume weighted average price of our common stock as
reported on the OTC Bulletin Board on the date immediately preceding such event
by Bloomberg Financial L.P. and (y) the quotient of $65,000 divided by the then
current conversion price for the series B preferred stock, plus (ii) any accrued
but unpaid dividends, plus (iii) all liquidated damages and other amounts due in
respect of the series B preferred stock.
Rank;
Liquidation Preference.
The holders of series B preferred stock rank pari passu to the holders of
our series A preferred stock and prior to the holders of our common stock and,
unless otherwise consented to by the holders of series B preferred stock, prior
to all other classes of capital stock that we may establish, with respect to (i)
the payment of dividends and (ii) the distribution of our assets upon a
bankruptcy, liquidation or other similar event. The liquidation preference for
the series B preferred stock is an amount equal to $50,000 per share plus any
accrued and unpaid dividends and liquidated damages owing thereon.
General
We are a
developer and manufacturer of lateral flow rapid diagnostic tests that detect
infectious diseases. Our products are sold through private distributors as well
as public health and non-governmental organizations. The main products that we
actively market and that are commercially available today are our three HIV
Rapid Tests (Sure Check™ HIV and HIV 1/2 Stat-Pak and HIV 1/2 Stat-Pak
Dipstick).
|
|
|
|
|
HIV
Rapid Tests Commercially Available |
|
Regulatory
Status |
|
Partners
Involved in the Product |
|
|
|
|
|
HIV
Rapid Tests (Sure Check™ HIV; HIV 1/2 Stat-Pak; HIV 1/2 Stat-Pak
Dipstick). Rapid Tests for detection of antibodies to HIV 1 and 2 in
finger-stick whole blood, venous whole blood, serum and
plasma
|
|
We
currently qualify under U.S. FDA export regulations to sell, subject to
any required approval by the importing country, to customers outside the
U.S. To date we have received approval from a number of potential
importing countries, although Brazil is the only country in which we have
significant sales. In December 2004 we completed clinical trials for Sure
Check™ HIV and HIV 1/2 Stat-Pak in the U.S. for FDA approval for sales in
the U.S. with results that we believe will exceed the performance
requirements for U.S. FDA approval. We are pursuing FDA approval for these
products and on February 17, 2005 we submitted our Pre-Marketing
Approval application to the FDA. Our HIV 1/2 Stat-Pak and HIV 1/2 Stat-Pak
Dipstick products were also evaluated by the World Health Organization in
2004. In January 2005 we received a final report that confirms that these
products meet the performance criteria for inclusion in the WHO Bulk
Procurement Scheme, which is a pre-requisite for these products being
eligible for procurements from programs funded by the United Nations and
their partners’ programs. We have also received confirmation from the
United States Agency for International Development that our Sure Check™
HIV and HIV 1/2 Stat-Pak have met the criteria for being eligible for
procurements pursuant to the President’s Emergency Plan for AIDS Relief
|
|
Thirteen-year
supply and technology transfer agreement with FIOCRUZ-Bio-Manguinhos, an
affiliate of the Ministry of Health of Brazil. FIOCRUZ-Bio-Manguinhos will
supply product to Brazilian public health market and potentially other
markets in the region. Other marketing partners are being actively pursued
with a principal focus on those countries that are receiving funding from
the United States pursuant to the Presidential Emergency Plan for AIDS
Relief and from the United Nations programs and partners.
|
A
majority of our revenues historically were from the contract manufacture of
private label pregnancy tests for regional pharmacies, drug stores and mass
merchants in the United States, Europe, Canada, and Central America. However, as
a result of pricing pressures, regulatory changes and potential patent
litigation in this field, we sold substantially all of the business related to
our private label pregnancy test. We believe that this will result in a
substantial reduction of our revenues from these products during 2005 and
beyond. The extent to which we will derive a benefit from sales of these
products is difficult to estimate because of uncertainties in regulatory
changes, product pricing, manufacturing cost changes, and patent litigation.
As
described below, we also have other commercially available products, such as
rapid tests for Chagas disease, Lyme disease and other products, the aggregate
of whose revenues are not material to us.
We also
are involved, as described below under “Research and Development,” in the
development of new products.
HIV
RAPID TESTS: We
believe that our growth will initially come from sales of our rapid HIV
tests. Rapid HIV
tests help address the problem that a large percentage of individuals tested in
public health settings do not return or call back for test results from
laboratory tests as they can take at least several days to process. We believe
that this group comprises a significant amount of all new infections. We are
pursuing FDA approval for these products and on February 17, 2005 we
submitted our Pre-Marketing Approval application to the FDA. We have been
manufacturing and selling these products since 2001, pursuant to FDA export
regulations, to customers in several countries outside the United States.
Subject primarily to satisfactory completion of our manufacturing facility
inspection in accordance with FDA requirements, we believe that FDA approval can
be achieved in 2005.
Our Sure
Check™ HIV rapid test eliminates the need for a separate sample collection
system when used to collect finger-stick whole blood samples. We believe this
improves ease of use and safety. Our HIV 1/2 Stat-Pak and HIV 1/2 Stat-Pak
Dipstick, like other competitive rapid HIV tests, require that the finger-stick
whole blood sample first be transferred to the test device. However, HIV 1/2
Stat-Pak is value priced and more flexible than Sure Check™ for samples of
venous whole blood, plasma and serum. HIV 1/2 Stat-Pak Dipstick is our most
economical format and also flexible as to sample types. All three of our HIV
tests use a standardized test strip which we developed by using patented
materials licensed non-exclusively to us from third parties as well as our own
proprietary know-how and trade secrets.
CHAGAS
RAPID TEST: Chembio
has completed development of a rapid test for the detection of antibodies to
Chagas Disease. This product was developed in collaboration with a consortium of
researchers in Latin America. Chagas Disease is found only in Latin America and
is named after Carlos Chagas, a Brazilian doctor who first described the disease
about 100 years ago. There are estimated to be 16-18 million Chagas Disease
cases globally resulting in 21,000 deaths annually, with an estimated 300,000
new cases each year. It is transmitted by a parasitic bug which lives in cracks
and crevices of poor-quality houses usually in rural areas, through blood
transfusion or congenitally from infected mother to fetus. There is an effective
therapy available to treat the early chronic phase.
Lateral
Flow Technology
All our
current products employ lateral flow technology, which refers to the process of
a sample flowing from the point of application on a test strip to provide a test
result on a portion of the strip downstream from the point of application.
Lateral flow technology is well established and widely applied in the
development of rapid diagnostic tests. The functionality of our lateral flow
tests is based on the ability of an antibody to bind with a specific antigen (or
vice versa) and for the binding to become visible through the use of the
colloidal gold and/or colored latex that we use in our products. The colloidal
gold or the colored latex produces a colored line if the binding has occurred
(the test line), in which case it means there has been a reactive or positive
result. In any case, a separate line (the control line) will appear to confirm
that the test has been validly run in accordance with the instructions for
use.
Our
lateral flow technology allows the development of easy-to-perform, single-use
diagnostic tests for rapid, visual detection of specific antigen-antibody
complexes on a test strip. This format provides a test that is simple (requires
neither electricity nor expensive equipment for test execution or reading, nor
skilled personnel for test interpretation), rapid (turnaround time approximately
15 minutes), safe (minimizes handling of specimens potentially infected),
non-invasive (requires
5-20 microliters of whole blood easily obtained with a finger prick, or
alternatively, serum or plasma), stable (24 months at room temperature storage
in the case of our HIV tests), and highly reproducible.
We can
develop and produce lateral flow tests that are qualitative
(reactive/non-reactive), as in the case of our HIV tests, and we can develop
semi-quantitative tests, reflecting different concentrations of the target
marker(s) using different colored latex test lines for each concentration We can
also develop tests for multiple conditions, using different colored lines. We
have developed proprietary techniques that enable us to achieve high levels of
sensitivity and specificity [see definition below] in our diagnostic tests using
our proprietary latex conjugate and buffer systems. These techniques include the
methods we employ in manufacturing and fusing the reagents with the colored
latex, or colloidal gold, blocking procedures used to reduce false positives,
and methods used in treating the materials used in our tests to obtain maximum
stability and resulting longer shelf life. We also have extensive experience
with a variety of lateral flow devices, including the sample collection device
used in our Sure Check™ HIV rapid test which we believe is easier to use than
other finger-stick whole blood rapid tests. Sure Check™ eliminates the need for
transferring finger-stick whole blood samples from the finger-tip onto a test
device, because the collection of the sample is performed within a tubular test
chamber, which contains the lateral flow test strip. The whole blood sample is
absorbed directly onto the test strip through a small opening in one end of the
test chamber and an absorbent pad positioned just inside this same end of the
test chamber. Please
refer to the section of this prospectus entitled “Legal Proceedings” for a
discussion of the legal issues we face with regard to Sure
Check™.
The
sensitivity of a test indicates how strong the sample must be before it can be
detected by the test. The specificity of a test measures the ability of the test
to analyze, isolate, and detect only the matters targeted by the
test.
Target
Market
HIV
Rapid Tests. Market
growth in the demand for rapid testing for HIV and tuberculosis in affected
developing countries is largely dictated by the availability of donor funds such
as those funds administered and distributed pursuant to the United States
Presidential Emergency Plan for Aids Relief, the Joint United Nations Programme
on HIV/AIDS, and other governmental and non-governmental programs that fund
testing for HIV and tuberculosis. According to the Joint United Nations
Programme on HIV/AIDS 2004 Report on the Global AIDS Epidemic, knowledge of HIV
status is the gateway to AIDS treatment. The Joint United Nations Programme on
HIV/AIDS report further states that a routine offer of HIV testing by health
care providers should be made to all patients in sexually transmitted disease
clinics, maternal and child health clinics, and health care settings where HIV
is prevalent. In 2003 the World Health Organization and the Joint United Nations
Programme on HIV/AIDS announced the “Three by Five” initiative, with the goal of
treating three million people living with HIV/AIDS by the end of 2005. According
to the Global Business Coalition on HIV/AIDS, to achieve having 3 million people
on treatment by 2005, each day 5,000 people need to be brought onto treatment
and kept on it. In order to achieve this, the Global Business Coalition on
HIV/AIDS states that each day about 500,000 people will need to be tested. This
estimate assumes that in high prevalence countries about 50,000 people would
test positive and that 10% of those, approximately 5,000 people, will require
immediate access to life-saving medications.
Tuberculosis
Rapid Tests. Also
according to the Joint United Nations Programme on HIV/AIDS 2004 Report on the
Global AIDS Epidemic, in many countries where AIDS has hit hardest, tuberculosis
is the leading cause of death in people living with HIV. In HIV positive
patients, the reliability of existing diagnostic methods is reduced. The Joint
United Nations Programme on HIV/AIDS report states that intensifying
tuberculosis case-finding in HIV testing and counseling centers and in other HIV
service outlets is essential. Detection of antibodies to active pulmonary
tuberculosis in blood samples has never been achieved to a level of accuracy for
this diagnostic method to be used effectively in countries with prevalence of
this disease. Our efforts are focused on establishing clinical data that show
that our test can detect a statistically meaningful number of patients that are
not detected from the standard sputum smear method. We also intend to develop a
dual parameter HIV/TB test once we establish the clinical performance of our TB
test on a stand alone basis.
Chagas
Rapid Test. Chembio
had developed this test several years ago but the market for the product was not
meaningful as most prevention efforts were made using laboratory tests used for
blood bank screening of blood. However, there has now been a greater interest in
Chembio’s rapid test because of an important publication that demonstrated the
effectiveness of the rapid test in the screening of blood donors (as opposed to
the blood in blood banks), and the need to screen in rural populations. Also,
studies that have been completed at multiple sites in Central and South America
showing sensitivity of between 98.5% and 99.6% and specificity between 94.8% and
99.9%, shows that the test is a good alternative to standard laboratory testing
methods.
Other
Products Under Development. Our
products under development with partners in the areas of mad cow disease, dental
bacteria, veterinary tuberculosis, and cerebral spinal fluid leak detection
reflect our business strategy of leveraging our core competency, which is in the
development and manufacture of lateral flow rapid diagnostic tests, and
diversifying our markets beyond the HIV, human tuberculosis and Chagas Disease
markets, which are primarily donor-funded markets. We do not necessarily have an
expertise in assessing the markets in each of these new product undertakings,
and so we often are relying on the market knowledge and position that our chosen
partners have in these fields.
Distribution
Channels
We seek
to establish product development, exclusive manufacturing and/or technology
transfer collaborations with organizations that are well positioned to access
the markets for these products as well as strong distribution partners as is
warranted.
In
February of 2004 we signed an agreement with FIOCRUZ-Bio-Manguinhos, an
affiliated entity of the Brazilian Ministry of Health. This agreement provides
for a three year period during which Chembio will transfer its know-how for the
production and assembly of its HIV 1/2 Stat-Pak and during which period
Bio-Manguinhos will purchase a minimum of approximately 1 million tests from us.
The know-how transfer process has begun. The tests that will be purchased will
initially be fully completed and assembled at Chembio, but will increasingly
during this three year period have components assembled and manufactured by
Bio-Manguinhos in Brazil. Chembio will receive a royalty of 5% on net sales for
ten years following completion of the technology transfer. Approximately 450,000
tests were purchased through December 31, 2004, and we anticipate receiving
orders for an additional 300,000 units in the first half of 2005.
We are
seeking to leverage the experience we have in Brazil by establishing other local
assembly and technology transfer collaborations for our HIV tests where local
demand and labor conditions justify such ventures. We are also seeking to have
our HIV tests evaluated and used in programs for voluntary counseling and
testing and prevention of mother to child transmission testing. The programs we
are pursuing are overseen and/or led by the United States Centers for Disease
Control Global Aids Program, the United States Agency for International
Development, United Nations-affiliated programs including the World Health
Organization, the health ministries and national AIDS control organizations in
the host countries, and many other local and multi-national non-governmental and
private organizations. The main programs that are administered by these
organizations are the Presidential Emergency Plan for AIDS Relief and the United
Nations Global Fund for HIV/AIDS, TB and Malaria, respectively, and they
constitute a large percentage of the world wide funding for HIV prevention and
treatment programs in the developing world. As a result of evaluations
undertaken in 2004 by these agencies, we have been notified by the United States
Agency for International Development and the World Health Organization that our
HIV rapid tests are eligible for procurements made through their programs. This
eligibility was critical to our actively pursuing participation in these
programs, and we are now actively pursuing such participation. Our distribution
and marketing strategy for our existing HIV rapid tests and for our human
tuberculosis rapid tests under development will include seeking direct purchases
by governmental and non-governmental organizations, commercial relationships
with distributors, and/or partnering for local production and assembly in key
markets.
The
market for the non-human primate tuberculosis test that we have developed, and
for which we will begin clinical testing by the third quarter of 2005, primarily
consists of pharmaceutical research facilities and zoos. This market represents
a small number of total customers. Accordingly, we are considering a direct
marketing strategy as well as considering working with a distributor of products
to this customer base.
In the
case of our mad cow and dental bacteria products that are still under
development (see “Research & Development”), if we are successful in
completing those products in collaboration with others, and if the products
receive the requisite regulatory clearances, then we will have the right to
manufacture them and the collaborating entities will have marketing and
distribution rights.
Competition
The
diagnostics industry is a multi-billion dollar international industry and is
intensely competitive. Many of our competitors are substantially larger and have
greater financial, research, manufacturing, and marketing resources.
Industry
competition in general is based on the following:
|
· |
Scientific and technological
capability; |
|
· |
The ability to develop and market products and
processes; |
|
· |
The ability to obtain FDA or other required regulatory
approvals; |
|
· |
The
ability to manufacture products that meet applicable FDA requirements,
(i.e. FDA’s Quality System Regulations) see Governmental Regulation
section; |
|
· |
Access to adequate capital; |
|
· |
The ability to attract and retain qualified personnel;
and |
|
· |
The availability of patent
protection. |
We
believe our scientific and technological capabilities and our proprietary
know-how relating to lateral flow rapid tests, particularly for HIV and
tuberculosis, are very strong.
Our
ability to develop and market other products is in large measure dependent on
our having additional resources and/or collaborative relationships, particularly
where we can have our product development efforts funded on a project or
milestone basis. We believe that our proprietary know-how in lateral flow
technology has been instrumental in our obtaining the collaborations we have
developed in mad cow disease and dental bacteria.
We have
limited experience with regard to obtaining FDA or other required regulatory
approvals, and no experience with obtaining pre-marketing approval of a biologic
product such as HIV. See “Governmental Regulation” for definition of
pre-marketing approval. For this reason, we have hired employees and consultants
that collectively have that experience with other companies. We believe this
will be very helpful in our obtaining these approvals and in ensuring that we
manufacture our products in accordance with FDA and other regulatory
requirements.
Our
access to capital is much less than that of several of our competitors, and this
is a competitive disadvantage. We believe however that our access to capital may
increase as we get closer to FDA approval of our rapid HIV tests and/or as we
complete the development of, and the requisite regulatory approvals related to,
our other products, including those that we have under development.
To date,
we believe we have been competitive in the industry in attracting and retaining
qualified personnel. Because of the greater financial resources of many of our
competitors, we may not be able to complete effectively for the same individuals
to the extent that a competitor uses its substantial resources to attract any
such individuals. With respect to the availability of patent protection, we do
not have our own portfolio of patents or the financial resources to develop
and/or acquire a portfolio of patents similar to those of our larger
competitors. We have been able to obtain patent protection by entering into
licensing arrangements.
Competitive
factors specifically related to our HIV tests are product quality, price and
ease of use. Product quality for an HIV rapid test primarily means accuracy
(sensitivity and specificity), early detection of cases, time elapsed between
testing and confirmation of results, and product shelf life. We believe that our
HIV 1/2 Stat-Pak, HIV 1/2 Stat-Pak Dipstick, and Sure Check™ HIV rapid tests are
very competitive with the best products in the market on the basis of these
competitive factors.
Significant
direct competitors for our Sure Check™ and HIV 1/2 Stat-Pak rapid HIV tests are
Abbott Diagnostics, Orasure Technologies, Inc. and Trinity Biotech Plc. Orasure
and Trinity have HIV rapid tests that are FDA approved. In addition there are a
number of other companies that have HIV rapid tests, including others based in
the U.S., that are seeking FDA approval.
We
believe that Chembio is in a leadership position as it relates to our rapid
tuberculosis test even though the product is still under evaluation and not
ready for marketing. We are not aware of any rapid whole blood test that has the
sensitivity and specificity levels necessary to replace or complement the
current sputum smear microscopy method being employed in the high incidence
tuberculosis countries; and this is what we believe our rapid tuberculosis test,
when fully developed and evaluated, will be able to do. We are also not aware of
any rapid whole blood test to detect active pulmonary tuberculosis in non-human
primates and/or other animals for which Chembio is developing rapid tuberculosis
tests.
Research
and Development
Our
research and development activities have been in four areas, all related to
lateral flow rapid diagnostic product development: HIV, Bovine Spongeiform
Encephalopathy, which is also known as mad cow disease, dental bacteria, and
tuberculosis. We have also entered into research and development collaboration
with The State University of New York at Stony Brook for the development of a
marker for the detection of Cerebral Spinal Fluid Leak and also have begun other
preliminary collaborations that are related to new lateral flow platforms and
related instrumentation.
We have
collaborated with Prionics AG, Zurich, Switzerland since late 2002 to develop
and produce certain components of a rapid test for mad cow disease to be
marketed by Prionics and/or their distributors under their name. In March 2004
we signed a contract to be one of two contract manufacturers of this product
following Prionics’ transfer of the completed product know-how to us and
approval of the product in Europe. These steps are in process but have not been
completed. The contract is for three years, which begins when the product
approval is granted in Europe. Although we expected that the technology transfer
and European regulatory approval would be completed in 2004, and that initial
sales would occur in 2005, we cannot estimate the timing and extent of these
events as there are many factors that are beyond our control that could delay
this timetable, including delays or changes in regulatory requirements, delays
in the technology transfer or changes to the product specifications. In this
connection, on February 14, 2005, we entered into a license agreement by which
Prionics will license certain technology owned by Chembio. The agreement
provides for certain additional milestones for technology transfer which will
need to be successfully concluded in order for the Supply Agreement to be
maintained in full force and effect, as Prionics has indicated that it needs
Chembio’s technology in order to complete the know-how transfer in a way such
that the product can be manufactured reproducibly.
Moreover,
even once the product is approved in Europe, we do not control the marketing of
the product, and we will have limited information about the marketing and
distribution strategy of Prionics AG, including competitive products, market
size and Prionics’ existing market share, although we do expect to receive
supply requirements forecasts from Prionics if and when the technology transfer
is complete and the product is approved.
In the
dental bacteria test, we have a contract with Ivoclar-Vivadent, Schaan,
Liechtenstein to develop a rapid test that can detect different levels of
bacteria found in saliva samples that have been found to be associated with
tooth decay. The test employs intellectual property developed at the University
of California Los Angeles Dental School for which Ivoclar-Vivadent is the
exclusive licensee. Our contract with Ivoclar-Vivadent provides for a three
phase development program for which we are being compensated a total of
$180,000. We are now in the second phase but have experienced some delays
related to non-specific binding for one of the antibodies provided Chembio. We
are currently discussing next steps with representatives of each of the
aforementioned parties.
If the
development program results in a completed product in accordance with
Ivoclar-Vivadent’s specifications, then we will be the exclusive manufacturer
and Ivoclar-Vivadent will have exclusive marketing and distribution rights. The
contract is for five years and may be renewed by Ivoclar-Vivadent for an
indefinite number of two-year renewals. Our contract with Ivoclar-Vivadent
contemplates that the product development was to be completed in 2004, and that
regulatory approvals and products launch would occur in 2005. However, there are
factors beyond our control that make it impossible to predict the timing, nature
and extent of revenues from this product, if any.
Our
tuberculosis rapid tests for humans are being designed to significantly increase
the accuracy of existing tuberculosis screening methods. Our initial
tuberculosis test was developed pursuant to a Phase I and II Small Business
Innovative Research grant from the National Institute of Health with Public
Health Research Institute, Newark, New Jersey that was in place from 1998 until
2002, and our test was completed in 2003. In 1998 we entered into a license
agreement with Public Health Research Institute which provides for us to pay a
royalty on sales of our antibody detection tuberculosis tests that incorporate
any of the antigens covered by the agreement. A study of our serological test
for active pulmonary tuberculosis in humans by Sumitomo Seiyaku Biomedical of
Japan has shown that sensitivity can increase from 45% to 82% when used in
combination with the sputum smear method (the current standard in high incidence
settings), and from 45% to 91% when used with the two-step confirmatory
combination of sputum smear and culture testing. However, several other studies
have shown less favorable results. We know that serological testing for
tuberculosis is very complex and challenging, and we therefore believe that much
further testing in a variety of geographic settings will be needed in order to
confirm the performance of this test across diverse populations. Our test is
being included in an evaluation being conducted by the Institute of Tropical
Medicine, Antwerp, Belgium on behalf of the World Health Organization during the
first half of 2005. The timing and results of this evaluation cannot be
predicted and therefore the timing and extent of any sales that would be derived
from this product can also not be estimated at this time.
In
addition to our research and development efforts for tuberculosis tests for
humans, we have developed a test for detecting active pulmonary tuberculosis in
non-human primates (monkeys). We submitted this product for approval to the
United States Department of Agriculture during the first quarter of 2005. We are
also engaged in collaborations related to the detection of active pulmonary
tuberculosis in other animals as we can leverage our current technology for
additional species. However, we do not anticipate any material revenues from
these efforts during 2005.
Our HIV
development efforts are on a next generation rapid test that can detect cases
even earlier than all currently marketed rapid tests do without compromising the
specificity of the test. A prototype has been developed and needs to undergo
substantial revision and optimization. No reagent license agreements are in
place with regard to the materials used in this prototype at this time. We do
not anticipate any material sales from this product line in 2005 and most of
2006.
The
foregoing research and development efforts are summarized below:
Existing
or Proposed Product
|
|
Regulatory
Status
|
|
Development
Status
|
|
Partners
involved in the development or marketing of the
products
|
Rapid
test for detection of Bovine Spongeiform Encephalopathy, also known as mad
cow disease, in cattle
|
|
Not
yet submitted for approval
|
|
Under
development
|
|
Prionics
AG, Zurich, Switzerland
|
Dental
Bacteria Test
|
|
Not
yet submitted for approval
|
|
Phase
2 (Optimization of Test) Work has been suspended and discussing new
development plan.
|
|
Ivoclar-Vivadent,
AG, Schaan Liechtenstein
|
Tuberculosis
Stat Pak II- rapid diagnostic test for detection of antibodies to active
pulmonary tuberculosis in human whole blood samples
|
|
Not
yet submitted for approval
|
|
Product
validation completed
|
|
Public
Health Research Institute and Statens Serum Institute
|
TBD
Non-Human Primate Rapid Tuberculosis Test for the detection of antibodies
to active pulmonary tuberculosis in non-human primate whole blood
samples
|
|
Submitted
for approval first quarter of 2005
|
|
Product
validation completed
|
|
Sequella
Corporation, Rockville, Maryland
|
Combination
HIV/Tuberculosis Rapid Test for the detection of antibodies to active
pulmonary tuberculosis and HIV in human whole blood samples using
different color latex test lines
|
|
Not
yet submitted for approval
|
|
Initial
Prototype
|
|
None
|
New
Generation HIV Test
|
|
Not
yet submitted for approval
|
|
Initial
Prototype
|
|
None
|
Cerebral
Spinal Fluid Leak Test
|
|
Not
yet submitted for approval
|
|
Initial
R&D on Monoclonal Antibodies
|
|
State
University of New York at Stony Brook
|
During
2004 and 2003, $1,433,403 and $313,891, respectively, was spent on research and
development activities. A significant portion of these expenditures have been on
our human and non-human primate tuberculosis product development
efforts.
Research
& Development Expenditures
|
|
2004 |
|
2003 |
|
Human
Tuberculosis |
|
$ |
99,675 |
|
$ |
59,491 |
|
Veterinary
Tuberculosis |
|
|
354,473 |
|
|
116,239 |
|
HIV |
|
|
823,596 |
|
|
36,400 |
|
Dental,
Mad Cow, and Other |
|
|
155,659 |
|
|
101,761 |
|
Totals |
|
$ |
1,433,403 |
|
$ |
313,891 |
|
Employees
At
December 31, 2004, we employed 60 people, including 58 full-time employees. In
May 2004, we entered into employment agreements with Lawrence Siebert, President
and Chairman, Avi Pelossof, VP Sales, Marketing and Business Development, and
Javan Esfandiari, Director of research and development. We also entered into an
employment agreement with Mark L. Baum, a member of our board of directors, to
provide advice and guidance with respect to management, marketing, strategic
planning, corporate structure, business operations, expansion of services,
acquisitions and business opportunities, matters related to our public reporting
obligations, and our overall needs.
Governmental
Regulation
All of
Chembio’s existing and proposed diagnostic products are regulated by the FDA,
U.S. Department of Agriculture, certain state and local agencies, and/or
comparable regulatory bodies in other countries. This regulation governs almost
all aspects of development, production, and marketing, including product
testing, authorizations to market, labeling, promotion, manufacturing, and
record keeping. All of Chembio’s FDA - and U.S. Department of Agriculture -
regulated products require some form of action by that agency before they can be
marketed in the United States, and, after approval or clearance, Chembio must
continue to comply with other FDA requirements applicable to marketed products.
Both before and after approval or clearance, failure to comply with the FDA’s
requirements can lead to significant penalties.
Most of
Chembio’s diagnostic products are regulated as medical devices, and some are
regulated as biologics. There are two review procedures by which medical devices
can receive FDA clearance or approval. Some products may qualify for clearance
under Section 510(k) of the Federal Food, Drug and Cosmetic Act, in which the
manufacturer provides a pre-market notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent to
another legally marketed product (i.e., that it has the same intended use and is
as safe and effective as a legally marketed device and does not raise different
questions of safety and effectiveness). In some cases, the submission must
include data from human clinical studies. Marketing may commence when the FDA
issues a clearance letter finding such substantial equivalence. An applicant
must submit a 510(k) application at least 90 days before marketing of the
affected product commences. Although FDA clearance may be granted within that
90-day period, in some cases as much as a year or more may be required before
clearance is obtained, if at all.
If the
medical device does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is
required by statute and the FDA’s implementing regulations to have an approved
application), the FDA must approve a pre-market approval application before
marketing can begin. Pre-market approvals must demonstrate, among other matters,
that the medical device provides a reasonable assurance of safety and
effectiveness. A pre-market approval is typically a complex submission,
including the results of preclinical and clinical studies. Preparing a
pre-market approval is a detailed and time-consuming process. Once a pre-market
approval has been submitted, the FDA is required to review the submission within
a statutory period of time. However, the FDA’s review may, and often is, much
longer, often requiring one year or more, and may include requests for
additional data.
Biologic
products must be the subject of an approved biologics license application before
they can be marketed. The FDA approval process for a biologic product is similar
to the pre-market approval process, involving a demonstration of the product’s
safety and effectiveness based in part on both preclinical and clinical studies.
Chembio’s
HIV rapid tests are considered by FDA to be a biologic and will therefore be
submitted to the biologics division of FDA, the Center for Biologics Evaluation
and Research.
Every
company that manufactures biologic products or medical devices distributed in
the United States must comply with the FDA’s Quality System Regulations. These
regulations govern the manufacturing process, including design, manufacture,
testing, release, packaging, distribution, documentation, and purchasing.
Compliance with the Quality System Regulations is required before the FDA will
approve an application, and these requirements also apply to marketed products.
Companies are also subject to other post-market and general requirements,
including compliance with restrictions imposed on marketed products, compliance
with promotional standards, record keeping, and reporting of certain adverse
reactions or events. The FDA regularly inspects companies to determine
compliance with the Quality System Regulations and other post-approval
requirements. Failure to comply with statutory requirements and the FDA’s
regulations can lead to substantial penalties, including monetary penalties,
injunctions, product recalls, seizure of products, and criminal
prosecution.
The
Clinical Laboratory Improvement Act of 1988 prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
Although a certificate is not required for Chembio, Chembio considers the
applicability of the requirements of the Clinical Laboratory Improvement Act in
the design and development of its products. A Clinical Laboratory Improvement
Act waiver will remove certain quality control and other requirements that must
be met for certain customers to use Chembio’s products, and this is in fact
critical to the marketability of a product into the point of care diagnostics
market.
In
addition, the FDA regulates the export of medical devices that have not been
approved for marketing in the United States. The Federal Food, Drug and Cosmetic
Act contains general requirements for any medical device that may not be sold in
the United States and is intended for export. Specifically, a medical device
intended for export is not deemed to be adulterated or misbranded if the
product: (1) accords to the specifications of the foreign purchaser; (2) is not
in conflict with the laws of the county to which it is intended for export; (3)
is labeled on the outside of the shipping package that it is intended for
export; and (4) is not sold or offered for sale in the United States. Some
medical devices face additional statutory requirements before they can be
exported. If an unapproved device does not comply with an applicable performance
standard or premarket approval requirement, is exempt from either such
requirement because it is an investigational device, or is a banned device, the
device may be deemed to be adulterated or misbranded unless the FDA has
determined that exportation of the device is not contrary to the public health
and safety and has the approval of the country to which it is intended for
export. However, the Federal Food, Drug and Cosmetic Act does permit the export
of devices to any country in the world, if the device complies with the laws of
the importing country and has valid marketing authorization in one of several
“listed” countries under the theory that these listed countries have
sophisticated mechanisms for the review of medical devices for safety and
effectiveness.
Chembio
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 products in certain countries. Approval processes vary from
country to country, and the length of time required for approval or to obtain
other clearances may in some cases be longer than that required for U.S.
governmental approvals. The extent of potentially adverse governmental
regulation affecting Chembio that might arise from future legislative or
administrative action cannot be predicted.
Chembio’s
HIV rapid tests have been evaluated and approved for marketing in several
foreign jurisdictions, including Mexico, India, and other nations in the
developing world. Chembio has received an FDA Investigational Device Exemption
to begin clinical trials for the Sure Check™ HIV and HIV 1/2 Stat Pak rapid
tests and is currently beginning clinical trials as the initial step toward FDA
approval of these products.
In
October of 2004 the Company issued a voluntary recall of approximately 100,000
pregnancy tests. As a precautionary measure, the recall was expanded on November
3, 2004 to include approximately 215,000 additional pregnancy tests. These
recalls resulted from a determination that we made that the seals on some of the
pouches that were used for packaging pregnancy tests during a certain period
from March through August were in many cases deficient, resulting in product
degradation in certain cases. Although our investigation established that some
of the lots pouched within this time period were within specification, we
decided, as a precautionary measure, to recall all of them. The deficiency has
been corrected, we have revalidated our entire pouching operation, and we also
increased final product testing as well. As of
December 31, 2004 the Company has estimated the total impact of this recall to
be approximately $100,000 which includes an accrual of $60,264 as of December
31, 2004.
Environmental
Laws
To date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Subject
to our available financial resources, our intellectual property strategy is: (1)
to pursue licenses, trade secrets, and know-how within the area of lateral flow
technology, and (2) to develop and acquire proprietary positions to reagents and
new hardware platforms for the development and manufacture of rapid diagnostic
tests.
Trade
Secrets and Know-How
We
believe that we have developed a substantial body of trade secrets and know-how
relating to the development of lateral flow diagnostic tests, including but not
limited to the sourcing and optimization of materials for such tests, and how to
maximize sensitivity, speed-to-result , specificity, stability and
reproducibility.
Lateral
Flow Technology and Reagent Licenses
Although
we own no patents covering lateral flow technology, we have obtained a
non-exclusive license from Abbott Laboratories to a portfolio of its lateral
flow patents. The issue of potential patent challenges is ongoing for us as well
as for our competitors, and we continue to monitor the situation, consult with
patent counsel, and seek licenses and/or redesigns of products that we believe
to be in the best interests of Chembio Diagnostics, Inc. and our stockholders.
Because of the costs and other negative consequences of time-consuming
litigation regardless of whether we would ultimately prevail, if we foresee a
significant possibility of patent infringement litigation, our first priority
will be to attempt to obtain a license on reasonable terms. Nevertheless there
is no assurance that Abbott’s lateral flow patents may not be challenged or that
licenses will be available on reasonable terms, if any.
In the
event that it is determined that a license is required and it is not possible to
negotiate a license agreement under a necessary patent, we may be able to modify
our HIV rapid test products and other products such that a license would not be
necessary. However, this alternative could delay or limit our ability to sell
these products in the United States and other markets, which would adversely
affect our results of operations, cash flows and business.
The
peptides used in our HIV rapid tests are patented by Adaltis Inc. and are
licensed to us under a 10-year license agreement dated August 30, 2002. We also
have licensed the antigens used in our tuberculosis and Chagas disease
tests.
Legal
Issues
FTC
Matter
On
February 27, 2001, a “Stipulated Final Order for Permanent Injunction and Other
Equitable Relief” was signed and entered by the United States District Court for
the Eastern District of New York. The stipulation is a settlement agreement
between Chembio Diagnostics, Inc. and the United States Federal Trade Commission
arising out of certain events that occurred in 1999. The events resulted in
allegations by the FTC that Chembio Diagnostics, Inc. misrepresented performance
claims relating to a previous generation of its HIV test kits. Chembio
Diagnostics, Inc. denied these allegations. Nevertheless, due to the nature of
the product and other circumstances, this matter consumed a very substantial
amount of Chembio Diagnostics, Inc.’s resources from mid-1999 through the
beginning of 2001. Because an even greater expense would have had to be incurred
in litigating this matter against an agency with virtually unlimited resources
and because Chembio Diagnostics, Inc. was able to negotiate a settlement that it
deemed acceptable and in Chembio Diagnostics, Inc.’s best interest, the
settlement was concluded. The stipulation requires Chembio Diagnostics, Inc.,
among other things, to not misrepresent product performance claims, to not make
any claims without “competent and reliable scientific evidence” as
substantiation for such claims and to also comply with mandated record keeping,
notification, and monitoring provisions. The settlement agreement further
provides that Chembio Diagnostic Systems Inc. must provide all of its
principals, officers, directors, managers and all other employees of Chembio
Diagnostic Systems Inc. having responsibilities related to Chembio Diagnostic
Systems Inc.’s business with a copy of the settlement agreement and must have
them acknowledge the receipt of the settlement agreement. The settlement
specifically states that Chembio Diagnostic Systems Inc. does not admit that it
made any statements or took any other action that was a violation of law. The
record-keeping, notification and monitoring provisions of the stipulation have a
term of five years from the date of the stipulation, or February 27,
2006.
Our
Business Prior to the Merger
We were
incorporated on May 14, 1999 in the state of Nevada under the name “Trading
Solutions.com, Inc.” We were originally organized to develop a trading school
designed to educate people interested in online investing. We offered courses
for beginners as well as experienced traders, consisting of theory sessions
linked closely with practical hands-on training. We offered individual training,
small group sessions and seminars focusing on online trading and various
computer-related subjects.
We were
not successful with our online trading school and on August 18, 2001, we
entered into an exchange agreement with Springland Beverages, Inc., an Ontario,
Canada corporation. Pursuant to the agreement, we exchanged 15,542,500 shares of
common stock for all the issued and outstanding shares of Springland Beverages,
Inc., making Springland our wholly-owned subsidiary. Concurrent with the
agreement, there was a change in control and we changed our business plan to
focus on developing and marketing soft drinks. Springland Beverages, Inc. was
not able to implement its business plan and failed to achieve profitable
operations. On March 28, 2003, we sold the subsidiary back to its
president, leaving us with no immediate potential revenue sources.
Since the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved in
developing, manufacturing, selling and distributing tests, including rapid
tests, for a number of diseases and for pregnancy.
The
Merger
On
May 5, 2004, Chembio Diagnostic Systems Inc. completed the merger through
which it became our wholly-owned subsidiary, and through which the management
and business of Chembio Diagnostic Systems Inc. became our management and
business. As part of this transaction, we changed our name to Chembio
Diagnostics, Inc.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus and the materials incorporated herein by reference contain
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forwarding-looking words such as “may,” “will,”
“expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue” and other
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, make projections of our future
results of operations or of our financial condition or state other
“forward-looking” information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or control. Our actual results
could differ materially from the expectations we describe in our forward-looking
statements as a result of certain factors, as more fully described in the “Risk
Factors” section of this prospectus and elsewhere in the documents we file with
the SEC that are incorporated herein.
MANAGEMENT’S
DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
This
discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent liabilities at the financial statement date and
reported amounts of revenue and expenses during the reporting period. On an
on-going basis we review our estimates and assumptions. Our estimates were based
on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not believe
such differences will materially affect our financial position or results of
operations. Our critical accounting policies, the policies we believe are most
important to the presentation of our financial statements and require the most
difficult, subjective and complex judgments, are outlined below in‘‘—Critical
Accounting Policies,’’ and have not changed significantly.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or unknown risks,
uncertainties and other factors that may cause the actual results, performance,
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Specifically, 1) our ability to obtain necessary regulatory
approvals for our products; and 2) our ability to increase revenues and
operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continues" or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
OVERVIEW
The
following management discussion and analysis relates to the business of Chembio
Diagnostic Systems, Inc., our 100% wholly-owned subsidiary. Prior to our merger
with Chembio Diagnostics Systems, Inc. in early May 2004, we had no assets or
liabilities and no operations. As a result of the merger, we added the assets,
liabilities and business and operations of Chembio Diagnostics Systems, Inc. We
sold substantially all of the business related to our private label pregnancy
test and we are focusing on developing products and then obtaining applicable
clearances or approvals in the areas of rapid tests for HIV, tuberculosis, mad
cow disease and dental disease. We either have or are pursuing collaborative
agreements that may include distribution arrangements in each of these areas. We
believe that our research and development, manufacturing overhead, selling,
marketing and general and administrative costs will increase as we create the
necessary infrastructure to focus in these new areas.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 AS COMPARED WITH THE YEAR
ENDED DECEMBER 31, 2003
Revenues
were $3,305,932 for the year ended December 31, 2004 as compared with $2,818,351
for the year ended December 31, 2003, representing an increase of $487,581, or
17.3%. Revenues are comprised of $2,749,143 in net sales and $556,789 in grants
and development income for the year ended December 31, 2004 as compared with
$2,542,621 in net sales and $275,730 in grant and development income for the
year ended December 31, 2003. The increase in revenues is primarily attributable
to increased sales of our HIV products ($730,844 increase) as well as increased
income from contracts and grants ($281,059 increase). The increases were
partially offset by reduced pregnancy test kit sales ($383,313 decrease). A
substantial portion of the grant-related income will recur in 2005.
Cost of
goods sold for the year ended December 31, 2004 was $2,485,593, or 90.4% of net
sales, as compared with $2,153,454, or 84.7% of net sales, for the year ended
December 31, 2003. The resulting decrease in gross margin is primarily
attributable to ongoing under-utilization of manufacturing overhead as well as
various charges and costs which were associated with the process of selling our
pregnancy test business during 2004. These costs were higher than anticipated
when we were required to continue to produce to maintain customers that were
being transferred to the buyer after we had transferred labor cost-saving
assembly equipment to the buyer. This occurred because of delays in product
registration by the buyer that were not anticipated. The impact of these factors
was particularly evident in the third quarter when we had very low product sales
volume, an unfavorable product sales mix, and costs associated with the product
line transfer. We also took a $41,000 reserve against certain inventory for
product related to our pregnancy test business at year-end considered obsolete.
In addition, charges aggregating $100,000 were taken in connection with the
voluntary recall of pregnancy tests that we undertook during the fourth quarter.
Finally, we had increased costs due to the creation of separate quality
assurance and quality control departments and the hiring of a new manager to
head up the quality assurance department.
Research
and development expenses for the year ended December 31, 2004 were $1,433,403,
or 43.4% of revenues, compared with $313,891, or 11.1% of revenues, for the year
ended December 31, 2003. Clinical & Regulatory Affairs, which totaled
$846,969 for the year ended December 31, 2004, accounted for most of this
increase. This cost category includes costs incurred for regulatory approvals,
clinical studies, product evaluations and registrations. The HIV rapid test
clinical studies were completed in December 2004 and these costs are expected to
return to substantially reduced levels in the first quarter of 2005. The balance
of the increase in expense and associated percentage of revenues is due
primarily to increased salaries and wages and related costs of each of the
members of the research and development group subsequent to September 30, 2003,
as new grants and development contracts were awarded and also due to the
addition of an R&D Technician hired in late 2003 for the purpose of
fulfilling obligations under grants from the National Institute of Health and
World Health Organization as well as other product development contracts.
Selling,
general and administrative expense increased $1,288,113 to $2,490,298 for the
year ended December 31, 2004 compared with $1,202,185 for the year ended
December 31, 2003. This increase is primarily attributable to $305,198 of
non-cash expenses reflecting the fair value of common stock and options issued
as compensation to employees during the first and second quarters of 2004,
$62,450 for recruiting expenses incurred in the hiring of quality, manufacturing
and regulatory personnel and $186,485 additional costs for marketing
consultants. Also driving this increase were $164,000 in cash salary increases
to employees (the addition of a new Chief Financial Officer as well as general
increased salary to administrative and marketing personnel), and increased legal
and accounting expenses of $188,400 relating to the merger, registration process
and required quarterly SEC filings. Increased commissions relating to the
Bio-Manguinhos contract totaled $271,300. The balance of the increase, or
$110,280, is primarily attributable to increased travel costs related to HIV
rapid test marketing efforts.
Components
of other income and expense include the following; interest expenses decreased
by $17,974 for the year ended December 31, 2004 compared with the year ended
December 31, 2003. This was primarily attributable to the conversion of
$1,332,292 of existing debt of Chembio Diagnostic Systems, Inc, at the time of
the merger which reduced interest expense by $78,624. This was offset by a
non-cash expense related to the issuance of 140,000 warrants to existing debt
holders of Chembio Diagnostic Systems, Inc. which increased interest expense by
$60,650. Additional components of other income and expense include the
retirement and transfer of assets in the fourth quarter of 2004 which resulted
in a loss of $22,469. In addition, approximately $209,000 is attributable to
settlements of old outstanding payables due that were settled during the second
quarter of 2004 are reflected in other income as forgiveness of
debt.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED WITH THE
THREE MONTHS ENDED MARCH 31, 2004
Revenues
are comprised of $346,125 in net sales, $250,000 in license revenue and $135,760
in grants and development income for the three months ended March 31, 2005 as
compared with $493,970 in net sales, no license revenue and $91,342 in grant and
development income for the three months ended March 31, 2004. The decrease in
sales is attributable to decreased sales of our HIV product of $86,022,
decreased sales of our pregnancy test kit of $67,696 and increased other product
sales of $5,873. The increase in license revenue was $250,000 and is due to a
technology transfer agreement. The Company does not expect that this revenue
will continue in the future. The increase in grant and development income was
$44,418 and was due to increased activity in our non-human primate project. A
substantial portion of the grant-related income is expected to recur until the
third quarter of 2005.
Cost of
goods sold for the three months ended March 31, 2005 was $464,550, or 134.2% of
net sales, as compared to $465,402, or 94.2% of net
sales, for the three months ended March 31, 2004. The decrease in gross margin
is primarily attributable to underutilization of manufacturing capacity as sales
volume for the quarter decreased. We also had increased costs due to the
creation of separate quality assurance and quality control departments and the
hiring of a new manager to head up the quality assurance department. Decreased
sales of our HIV products, which were at a higher margin than our other product
lines, contributed to the decreased gross margin. We anticipate that we will
receive significant orders from our customer in Brazil to be delivered over the
next three quarters. These additional sales of our HIV product should generate
increased gross margins for the balance of 2005.
Research
and development expenses for the three months ended March 31, 2005 were
$334,750compared with $138,329for the three months ended March 31, 2004.
Expenses for Clinical & Regulatory Affairs, totaled $138,767 for the three
months ended March 31, 2005, an increase of $125,701 over the three months ended
March 31, 2004, and accounted for most of this increase. This category includes
costs incurred for regulatory approvals, clinical studies, product evaluations
and registrations. These costs are expected to continue in the 2nd quarter of
2005 when the HIV rapid test applications and review will be completed. We
expect this category to be reduced in the third quarter of 2005. Increased
salaries and wages and related costs of the R&D group and recruitment
charges to hire additional staff has contributed to the increase in R&D
costs and the balance is due to hiring of a vice-president of regulatory
affairs.
The
status of each of our major research and development projects is as
follows:
Project
|
Rapid
Test for Mad Cow Disease
|
Current
status
|
We
are waiting for technology transfer from Prionics AG in order to begin
production scale-up, validation and regulatory submission. In February
2005 we entered into a license agreement with Prionics AG related to our
licensing certain technology that Prionics desired in order for Prionics
to complete the technology transfer to Chembio. The agreement provides for
additional contingent payments based upon our attainment of certain
milestones relating to product performance specified in the agreement. If
the milestones are not achieved, there may be a significant reduction or
complete elimination of any additional payments under this license
agreement. Moreover, the manufacturing agreement we signed with Prionics
AG in 2004 would be of no further force or effect.
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
We
should know by the end of the second quarter of this year whether our
technology can overcome changes to the product formulation that Prionics
AG implemented last year. Initial results were unfavorable, though we have
continued to work on this project and have an additional opportunity to
meet the specifications under the agreement. Testing to determine whether
these modifications can meet the agreed-upon specifications will commence
in late May. Assuming a favorable outcome of these tests (Milestone 2),
one additional milestone (training) would be required before the maximum
payments under the agreement will be due and payable and before the
Manufacturing & Supply Agreement would remain in effect. Assuming that
to be the case, the timing of production scale-up and validation is
anticipated to be approximately three to six months from the date of the
completion of the technology transfer. Thereafter, we will incur costs to
establish the production capacity required for this product, which we
presently anticipate to be approximately $100,000.
|
Anticipated
completion date
|
Not
known
|
Risks
and uncertainties associated with completing development on schedule, and
the consequences to operations, financial position and liquidity if not
completed timely
|
We
are relying on technology and product specifications developed by
Prionics, including certain changes they have made to their formulation
since the product underwent a successful evaluation. As stated above,
there is therefore a risk that the technology transfer from Chembio will
not be completed and that the Manufacturing agreement will be of no
further force and effect. The risks associated with the product involve
regulatory and technology risks. We had anticipated that we would start to
see revenues form this program in 2005. This is now in substantial doubt.
The Manufacturing Contract provides for a minimum purchase of one million
units during the first year following approval in the EU. We understand
that the product has in fact been approved in the EU based upon the
above-referenced evaluation but because of the problems described herein,
Prionics has been unable to complete the production specifications for
this product.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project will
commence due to the uncertainties associated with the completion of the
product, regulatory submissions, and the nature and timing of Prionics’
distribution network
|
Project
|
Dental
Bacteria Test
|
Current
status
|
We
expected to complete Phase 2 of the Project Plan (Optimization of Test)
and move into Phase 3 (Scale Up of Production and validation) in 2005.
However, one of the monoclonal antibodies has sensitivity and specificity
problem with lateral flow test system. We are therefore discussing
strategies in order to overcome this technical problem. We are also
considering another detection system, which could be applied instead of
the lateral flow system. Such a system could be based on antibodies
labeled with fluorescence markers. However, a correspondent reader would
have to be used for an analysis of the risk of caries (dental
decay).
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
In
April 2004, Chembio received 80% of the Phase 2 project funding of
$65,000, or $52,000 and this reflected the estimate of the costs
anticipated to be incurred to complete Phase 2 during a three to five
month period. It is now assumed that Phase 2 will not be satisfactorily
completed and that any additional funding from Ivoclar-Vivadent will be
pursuant to a new development contract, which is under discussion. Chembio
has completed the level of effort needed to earn the 80%
funded.
|
Anticipated
completion date
|
It
is not known at this time whether or how long it will take to develop the
product or obtain regulatory approvals in the US, Europe, Japan and other
potential markets.
|
Risks
and uncertainties associated with completing development on schedule, and
the consequences to operations, financial position and liquidity if not
completed timely
|
Technical
challenges remain that must be overcome in order for this product to meet
the performance specifications that Ivoclar-Vivadent had set forth in the
Agreement. If we do not achieve the performance specifications, the
product will not be completed.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project will
commence due to the uncertainties associated with the completion of the
product, regulatory submissions, and the nature and timing of
Ivoclar-Vivadent’s distribution network and strategy.
|
Project
|
Rapid
Test for the detection of antibodies to active
pulmonary
tuberculosis in non-human primate whole blood
samples
|
Current
status
|
Product
validation completed.
|
Nature,
timing and estimated costs of the efforts necessary to
complete
|
We
submitted the initial documentation required to commence our application
to the United States Department of Agriculture (USDA) for the approval of
the product and of our facility where it will be manufactured.
|
Anticipated
completion date
|
We
anticipate that we could have USDA approval by the end of
2005.
|
Risks
and uncertainties associated with completing development on schedule, and
the consequences to operations, financial position and liquidity if not
completed timely
|
The
requirements for clinical testing and the outcomes of such clinical
testing can not be known at this time, and this information poses
substantial risk and uncertainty as to whether or when this product will
contribute to the operations, financial position and
liquidity.
|
Timing
of commencement of expected material net cash inflows
|
It
is not known or estimable when net cash inflows from this project will
commence due to the uncertainties associated with the completion of the
product, regulatory submissions, and without further progress on a
distribution strategy.
|
The other
tuberculosis products that are under development, as well as the combination
HIV/tuberculosis rapid test and the New Generation Rapid HIV Test, are either at
an early stage of research and development, have a limited amount of resources
being applied, and/or involve a substantial amount of uncertainty as to the
completion of the product. There is no expectation of material revenues in 2005
from any of these products.
Selling,
general and administrative expense increased $200,338 to $556,061 in the three
months ended March 31, 2005 compared with the same period in 2004. This increase
was attributable to $15,000 of recruiting expenses incurred in the hiring of
sales and marketing personnel, $34,550 for marketing consultants (including
$17,986 non-cash amortization of options issued to consultants), costs relating
to investor relations of $50,000 (including $15,000 non-cash Common Stock issued
to consultant), insurance coverage for Directors & Officers of $10,812 and
increased legal and accounting expenses of $103,780 relating to patent
applications, patent litigation, the filling of a registration statement and
other required year-end filings.
LIQUIDITY
AND CAPITAL RESOURCES
We began
to improve our liquidity and capital resources position during the first quarter
of 2004 as a result of the completion of a $1,000,000 convertible bridge note
offering in March in anticipation of our merger. As a result of the completion
of the merger, $328,000 of the $1,000,000 of convertible bridge notes was
converted into 826,741 shares of common stock at $.40 per share, and the balance
of $672,000 was converted into 33.83682 shares of series A preferred stock.
Simultaneous with that conversion, 73.33330 shares of series A preferred stock
were issued for $2,200,000 in cash, and an additional $1,332,292 of debt to our
note holders was converted into 44.40972 additional shares of the series A
preferred stock. The values mentioned above for the series A preferred stock
have been allocated between the series A preferred stock and the detachable
warrants. Together, before accounting for costs and expenses associated with
these transactions, these events resulted in recording new redeemable preferred
stock and equity capital of approximately $4,532,292 ($2,200,000 cash,
$1,000,000 from converted bridge debt and $1,332,292 from converted existing
debt). In addition on December 29, 2004 the balance of debt to our note holders,
$361,559, was converted into 12.05199 shares of the series A preferred
stock.
During
the year ended December 31, 2004, we used $2,647,807 cash in operations, $60,552
to acquire fixed assets, $55,410 to fund capital lease payments, and $67,434 to
fund obligations to our bank existing as of December 31, 2003. The cash was
funded primarily from the $1,000,000 of convertible notes issued during March,
the accrual of interest on all debt due for both term debt and convertible debt,
discounts from the settlement of accounts payable of $209,000, the sale of
$2,200,000 of series A preferred stock and the issuance of common stock and
options to some of our employees that had a value of $305,198.
We had a
working capital deficiency of $730,738 at December 31, 2003 and a working
capital deficiency of $452,136 at December 31, 2004. This decrease in our
working capital deficiency is due to the completion of the convertible note
offering as well as the completion of the series A offering. Our current assets
increased 56.7% to $1,211,060 at December 31, 2004 from $772,680 at December 31,
2003. This increase is also primarily attributable to the completion of the
convertible note offering in March and the series A preferred offering in May.
Compared
with corresponding balances at December 31, 2003, current liabilities as of
December 31, 2004 increased 10.6% to $1,663,196, long-term liabilities decreased
85.9% to $287,217, and total liabilities decreased 45.0% to $1,950,413. The
increase in current liabilities is due to the classification of $120,000 of
accrued interest as short term. This is due to the agreement subsequent to the
balance sheet date to pay $10,000 of this accrued amount monthly. The decrease
in long-term liabilities is attributable primarily to the completion of the
merger where $1,332,292 of debt was converted into series A preferred stock and
the additional conversion of $361,559 of debt into series A preferred stock at
the end of December 2004.
We had a
working capital surplus of $3,488,559 at March 31, 2005 and a working capital
deficiency of $452,136 at December 31, 2004. On January 28, 2005, we completed a
private placement offering which raised $5,047,500 before costs in the form of
9% Convertible Series B Preferred Stock and associated warrants (“Series B
Offering”). The proceeds from the Series B Offering will be used primarily for
general corporate purposes including for sales and marketing, research and
development, and intellectual property, and also for working capital, investor
relations, and capital expenditures.
Subsequent
to March 31, 2005 we currently have paid for or committed to purchasing fixed
assets aggregating $26,600. This equipment will allow us to save labor cost and
improve efficiencies. In addition, we are considering additional fixed asset
purchases for the future, but we have no firm commitments at this
time.
We
anticipate that the funds from the Series B Offering will be enough to fund our
needs at least through the third quarter of 2005. We anticipate this based upon
our recently completed operating budget which assumes significant new
expenditures this year that are intended to help us increase revenues and cash
flow, and to achieve a variety of other corporate objectives that are aimed to
increase shareholder value. The Company is considering alternatives to provide
for its capital requirements for late 2005 and beyond. There are no assurances
that it will be successful in raising sufficient capital.
Our
liquidity will ultimately depend on several factors. These factors primarily
include (1) whether we can generally achieve revenue growth; (2) the extent to
which, if any, that revenue growth improves operating cash flows; (3) our
investments in research and development, facilities, marketing, regulatory
approvals, and other investments we may determine to make, and (4) the
investment in capital equipment and the extent to which it improves cash flow
through operating efficiencies.
Our cash
requirements depend on numerous factors, including product development
activities, penetration of the direct sales market, market acceptance of new
products, and effective management of inventory levels in response to sales
forecasts. We expect to devote capital resources to improve our sales and
marketing efforts, continue our product development, expand manufacturing
capacity and continue research and development activities. We will examine other
growth opportunities, including strategic alliances, and we expect any such
activities will be funded from existing cash and cash equivalents, as well as
utilization of the funds provided from the Series B Offering.
The
following table lists the future payments required on our debt and any other
contractual obligations as of March 31, 2005:
OBLIGATIONS |
|
Total |
|
Less
than
1
Year |
|
1-3
Years |
|
4-5
Years |
|
Greater
than
5
Years |
|
Long
Term Debt(1) |
|
$ |
303,160 |
|
$ |
120,000 |
|
$ |
183,160 |
|
$ |
- |
|
$ |
- |
|
Capital
Leases (2) |
|
$ |
111,443 |
|
$ |
46,868 |
|
$ |
64,575 |
|
|
-
|
|
|
-
|
|
Operating
Leases |
|
$ |
198,450 |
|
$ |
98,000 |
|
$ |
100,450 |
|
|
-
|
|
|
-
|
|
Other
Long Term Obligations(3) |
|
$ |
863,250 |
|
$ |
478,167 |
|
$ |
247,583 |
|
$ |
25,000 |
|
$ |
112,500 |
|
Total
Obligations |
|
$ |
1,476,303 |
|
$ |
743,035 |
|
$ |
595,768 |
|
$ |
25,000 |
|
$ |
112,500 |
|
|
(1) |
This
represents accrued interest which is currently being paid out at the rate
of $10,000 per month. |
|
(2) |
This
represents capital leases used to purchase capital
equipment. |
|
(3) |
This
represents contractual obligations for licenses and employment
contracts. |
CHEMBIO’S
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During
2004 and to date in 2005, we successfully completed several important milestones
that we believe were fundamental to our being able to achieve significant growth
from our HIV products. These milestones include:
|
· |
Completion
of clinical trials for our HIV rapid tests in the United States and
submission of this data with our Pre-Marketing Approval application to the
United States Food and Drug Administration. |
|
· |
Grant
of “waiver” status by the United States Agency for International
Development for our rapid HIV tests for procurements being made under the
Presidential Emergency Plan for AIDS Relief which enables our products to
be procured pending FDA approval. |
|
· |
Qualification
under the World Health Organization Bulk Procurement Scheme for our HIV
rapid tests. This provides United Nations funded programs and their
beneficiary countries with the ability to purchase our
products. |
|
· |
Submission
of our initial application documentation for our Non-Human primate TB test
to the USDA. |
|
· |
Completion
of the License and Technology Transfer Agreement with Prionics
AG. |
|
· |
Completion
of the Series B Five Million Dollar Private Placement of Convertible
Preferred Stock. |
|
· |
Appointment
of three independent members to our Board of Directors who will stand for
election to our board at our annual meeting.
|
Our
efforts are focused on one or more of our three rapid HIV tests becoming part of
the testing protocols used by various governmental and non-governmental
organizations in the implementation of voluntary counseling and testing (VCT),
pre-natal testing for mother to child transmission, and other programs that are
taking root globally. A significant portion of the capital currently available
to us will be used to provide the marketing and business development resources
needed to achieve wider distribution of our products for these programs.
We also
are working on our non-human primate Tuberculosis test which we expect will
begin to produce revenues in 2006, and we are investing additional resources to
improve our human Tuberculosis test.
Our
license to Prionics AG of certain of our technology has not resulted in their
being able to complete for us the specifications for the manufacture of their
rapid test for Mad Cow Disease, and this development will likely result in their
being unable to complete this product which we were to manufacture for them.
As stated
above, we believe that our current cash balances, and cash generated from future
operations, will be sufficient to fund operations at least through the end of
the third quarter of 2005. Therefore, we do expect that we will be required to
sell additional equity or obtain additional credit facilities during the fourth
quarter of 2005. Our financing requirements will depend on our progress in
growing our product revenues and on our expense levels, and are expectations for
those same factors in 2006 as well.
We
believe that our plan of operation will build long-term value if we are able to
demonstrate clear progress toward our objectives, particularly penetrating
international markets with our HIV rapid tests. We also expect to obtain FDA
approval of our Sure check™ and HIV Stat Pak products by the end of 2005 and we
believe that this will represent significant value. We believe that our
international sales efforts for our HIV tests will succeed based upon the market
need, the performance of our products, their competitive pricing, the
distribution and marketing channels we are pursuing, and the quality of our
professional staff.
USDA
approval of our non-human primate tuberculosis test, and results from new
research and development would also likely lend credibility to our plan to
become profitable. We anticipate that we will hire several new members to our
sales, marketing, research and development, regulatory and administrative staff
during the course of 2005 in order to fully implement our plans for
growth.
Critical
Accounting Policies and Estimates
The
preparation of our 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 our 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
our procedures related to these policies, are described in detail
below.
Revenue
Recognition -
We sell
our products directly through our sales force and through distributors. Revenue
from direct sales of our product is recognized upon shipment to the customer. We
recognize income from research grants when earned. Grants are invoiced after
expenses are incurred. Some grants are funded up front; these funds are then
deferred until earned.
Research
& Development Costs -
Research
and development activities consist primarily of new product development,
continuing engineering for existing products, regulatory and clinical trial
costs. Costs related to research and development efforts on existing or
potential products are expensed as incurred. Research and development costs for
2004 increased 357% over 2003. This increased costs by over $1,000,000, a
majority of this increase was due to clinical trails which are not expected to
recur at the levels incurred in 2004.
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 if we
considered another 10% of reserve for inventory as slow moving or obsolete, we
would have taken an additional charge of approximately $60,000 based on December
31, 2004 balances.
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. Our
current allowance is approximately 10% of accounts receivable, we hope to be
able to reduce this percentage in future periods.
Income
Taxes
-
We
account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” SFAS
No. 109 requires the asset and liability method of accounting for deferred
income taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. For example, if we do not become profitable we may be unable
to utilize our deferred tax asset, which approximates $4,700,000 at December 31,
2004.
SFAS 109
also requires that a valuation allowance be established when it is more likely
than not that all or a portion of a deferred tax asset will not be realized. A
review of all available positive and negative evidence needs to be considered,
including a company’s current and past performance, the market environment in
which the company operates, length of carryback and carryforward periods and
existing contracts that will result in future profits.
Forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative objective evidence such as cumulative losses in recent years.
Cumulative losses weigh heavily in the overall assessment. As a result, we
determined that it was appropriate to establish a valuation.
The above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles, generally accepted in the United
States of America, with no need for management’s judgment in their application.
There are also areas in which management’s judgment in selecting any viable
alternative would not produce a materially different result. See our audited
financial statements and notes thereto which contain accounting policies and
other disclosures required by accounting principles, generally accepted in the
United States of America.
DESCRIPTION
OF PROPERTY
Our
administrative offices and research facilities are located in Medford, New York.
We lease approximately 14,000 square feet of industrial space for $7,224 per
month. The space is utilized for R&D (approximately 1,500 square feet),
offices (approximately 2,700 square feet) and production (approximately 9,800
square feet). The lease term expires on April 30, 2005. We are completing a new
lease for two years with an option for two more years. The rent in this new
lease is expected to be $8,167 per month. We believe the space is adequate for
our immediate needs. Additional space may be required as we expand our research
and development activities. We do not foresee any significant difficulties in
obtaining any required additional facilities.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Mark L.
Baum, our former president prior to the merger and a director of Chembio
Diagnostics, Inc. until April 2005, entered into a nine-month employment
agreement with Chembio Diagnostics, Inc., effective upon the closing of the
merger, pursuant to which Mr. Baum received 400,000 shares of our common stock
as well as a warrant to acquire 425,000 shares of common stock at $.60 per share
and a warrant to acquire an additional 425,000 shares of common stock at $.90
per share. The warrants expire five years after the date of grant. Pursuant to
the employment agreement, Mr. Baum was to advise Chembio Diagnostics, Inc.
concerning management, marketing, strategic planning, corporate structure,
business operations, expansion of services, acquisitions and business
opportunities, matters related to our public reporting obligations, and our
overall needs through February 5, 2005. Mr. Baum also invested $65,000 in
the private placement of series A preferred stock, pursuant to which he received
2.167 shares of series A preferred stock convertible into 108,350 shares of
common stock, and a warrant to purchase 130,020 shares of common stock. Mr. Baum
also owns 300,000 shares of our common stock in addition to the stock and
warrants described above. In November of 2004 as payment of dividends on the
series A preferred he received 4,333 shares of common stock. Prior to the
merger, Mr. Baum was the sole director and officer of Chembio Diagnostics,
Inc. On March 18, 2005, as compensation for Mr. Baum’s service on the Board of
Directors of Chembio Diagnostics, Inc., the exercise price of Mr. Baum’s warrant
to acquire 425,000 shares of common stock at $.90 per share was reduced to $.75
per share. Mr. Baum receives no other compensation for his services on the Board
of Directors.
Lawrence
A. Siebert, the president and chairman of the board of directors of Chembio
Diagnostics, Inc. beginning at the time of and after the merger, and the
president and chairman of Chembio Diagnostic Systems Inc. since May 2002, held
two promissory notes issued by Chembio Diagnostic Systems Inc. One note was
issued on August 1, 1999 in the original principal amount of $338,125, bearing
interest at a rate of 11% per annum. The other was issued on April 25, 2001 in
the original principal amount of $795,937, bearing interest at a rate of 12% per
annum. Mr. Siebert converted the entire outstanding principal amount of the 11%
note and $561,875 principal amount of the 12% note into 30 shares of Chembio
Diagnostics, Inc.’s series A preferred stock, together with warrants to acquire
1,800,000 shares of common stock at $.90 per share, pursuant to Chembio
Diagnostics, Inc.’s private placement of its series A preferred stock on
May 5, 2004. The shares of series A preferred stock held by Mr. Siebert are
convertible into 1,547,100 shares of Chembio Diagnostics, Inc.’s common stock.
The remaining debt of $234,062 held by Mr. Siebert was exchanged on December 29,
2004 into 7.80208 shares of Chembio Diagnostics, Inc.’s series A preferred
stock, together with warrants to acquire 468,125 shares of common stock at $.90
per share, pursuant to the terms of Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. Approximately
$236,852 of accrued interest on the debt is also due to Mr. Siebert, but is not
accruing interest. The accrued interest will be paid out according to the terms
of Chembio Diagnostics, Inc.’s private placement of its series B preferred stock
on January 28, 2005. Mr. Siebert also invested $50,000 in our series B preferred
stock private placement pursuant to which he received 1 share of series B
preferred stock convertible into 81,967 shares of common stock and a warrant to
purchase 77,868 shares of common stock.
Mr.
Siebert also invested $18,700 in Chembio Diagnostic Systems Inc. pursuant to a
private placement of convertible notes on March 22, 2004. Mr. Siebert
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .942 shares of Chembio Diagnostics, Inc.’s
series A preferred stock, together with warrants to acquire 56,520 shares of
common stock at $.90 per share, pursuant to Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. In November of
2004 as payment of dividends on the series A preferred he received 61,884 shares
of common stock. Mr. Siebert exercised a warrant to purchase 66,869 shares of
common stock on December 30, 2004 at a price of $0.45 per share. These shares
were gifted by Mr. Siebert to a third party.
Mr.
Siebert prior to March 22, 2004 had either advanced funds to Chembio
Diagnostic Systems, Inc. or paid vendors directly on Chembio Diagnostic Systems,
Inc.’s behalf. The total amount so paid or advanced and not repaid totaled
$183,720 as of December 31, 2004.
Richard
J. Larkin, the Chief Financial Officer of Chembio Diagnostics, Inc., invested
$10,000 in Chembio Diagnostic Systems Inc. pursuant to the March 22, 2004
private placement of convertible notes. Mr. Larkin converted the entire
principal amount of the note that he received, together with accrued interest
thereon, into .504 shares of Chembio Diagnostics, Inc.’s series A preferred
stock, together with warrants to acquire 30,240 shares of common stock at $.90
per share, pursuant to Chembio Diagnostics, Inc.’s private placement of its
series A preferred stock on May 5, 2004. In November of 2004 as payment of
dividends on the series A preferred he received 1,007 shares of common
stock.
Avi
Pelossof, the vice president of sales and marketing of Chembio Diagnostics,
Inc., invested $4,000 in Chembio Diagnostics, Inc. pursuant to the
March 22, 2004 private placement of convertible notes. Mr. Pelossof
converted the entire principal amount of the note that he received, together
with accrued interest thereon, into .202 shares of Chembio Diagnostics, Inc.’s
series A preferred stock, together with warrants to acquire 22,555 shares of
common stock at $.90 per share, pursuant to Chembio Diagnostics, Inc.’s private
placement of its series A preferred stock on May 5, 2004. In November of
2004 as payment of dividends on the series A preferred he received 403 shares of
common stock.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol “CEMI.” Prior
to May 14, 2004, our common stock was traded on the OTC Bulletin Board
under the symbol “TSUN.” For the periods indicated, the following table sets
forth the high and low bid prices per share of our common stock. These prices
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions. We completed a 1 for 17
reverse stock split on March 12, 2004, and all of the prices in this table
have been adjusted to reflect this split.
Fiscal
Year 2005 |
High
Bid |
Low
Bid |
First
Quarter |
$0.90 |
$0.50 |
Fiscal
Year 2004 |
High
Bid |
Low
Bid |
First
Quarter |
$3.00 |
$0.34 |
Second
Quarter |
$2.00 |
$1.00 |
Third
Quarter |
$1.54 |
$1.01 |
Fourth
Quarter |
$1.29 |
$0.55 |
|
|
|
Fiscal
Year 2003 |
High
Bid |
Low
Bid |
First
Quarter |
$0.34 |
$0.17 |
Second
Quarter |
$0.51 |
$0.17 |
Third
Quarter |
$0.34 |
$0.17 |
Fourth
Quarter |
$1.36 |
$0.17 |
|
|
|
Trades of
our common stock are subject to Rule 15g-9 of the Securities and Exchange
Commission, known as the Penny Stock Rule. This rule imposes requirements on
broker/dealers who sell securities subject to the rule to persons other than
established customers and accredited investors. For transactions covered by the
rule, brokers/dealers must make a special suitability determination for
purchasers of the securities and receive the purchaser’s written agreement to
the transaction prior to sale. The Securities and Exchange Commission also has
rules that regulate broker/dealer practices in connection with transactions in
“penny stocks.” Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in that security is provided by the
exchange or system). The Penny Stock Rules requires a broker/ dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker/dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker/dealer
and its salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer’s confirmation. These disclosure requirements have the effect
of reducing the level of trading activity in the secondary market for our common
stock. As a result of these rules, investors may find it difficult to sell their
shares.
Holders
As of May
2, 2005, there were approximately 108 record owners of our common
stock.
Dividends
We have
never paid cash dividends and have no plans to do so in the foreseeable future.
Our future dividend policy will be determined by our board of directors and will
depend upon a number of factors, including our financial condition and
performance, our cash needs and expansion plans, income tax consequences, and
the restrictions that applicable laws, our current preferred stock instruments,
and our future credit arrangements may then impose.
Currently
under Nevada law, a dividend may not be made by a corporation if, after giving
it effect:
|
· |
the
corporation would not be able to pay its debts as they become due in the
usual course of business; or |
|
· |
except
as otherwise specifically allowed by the corporation’s articles of
incorporation, the corporation’s total assets would be less than the sum
of its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of distribution, to satisfy
the preferential rights upon dissolution of stockholders whose
preferential rights are superior to those receiving the
distribution. |
The
certificates of designation authorizing our series A and series B preferred
stock also prohibit us from making any distribution with respect to any equity
securities that by their terms do not rank senior to the series A or series B
preferred stock.
EXECUTIVE
COMPENSATION
The
following table summarizes the annual compensation paid to Chembio Diagnostics,
Inc.’s named executive officers for the three years ended December 31,
2004, 2003 and 2002:
|
|
|
|
Annual
Comp |
|
Long-Term
Compensation
Awards—Securities
Underlying |
|
Name
and Position |
|
Year |
|
Salary |
|
Stock
Options |
|
Lawrence
A. Siebert, President, CEO, Chairman of Board of Chembio Diagnostic
Systems Inc. (1)
|
|
|
2004
2003
2002 |
|
$
|
182,789
103,846
63,000 |
|
|
160,000
—
— |
|
Avi
Pelossof, Vice President of Chembio Diagnostic Systems, Inc. (2)
|
|
|
2004
2003
2002 |
|
|
154,635
83,077
80,500 |
|
|
250,000
—
— |
|
Javan
Esfandiari, Vice President of Chembio Diagnostic Systems, Inc.
(3)
|
|
|
2004
2003
2002 |
|
|
129,323
88,269
83,224 |
|
|
110,000
—
— |
|
Rick
Bruce, Vice President of Chembio Diagnostic Systems Inc. (4) |
|
|
2004
2003
2002 |
|
|
114,286
110,326
106,240 |
|
|
35,000
—
— |
|
Konstantin
Lyashchenko, Research Director of Chembio Diagnostic Systems,
Inc.(5)
|
|
|
2004
2003
2002 |
|
|
106,365
77,885
75,500 |
|
|
2,500
—
— |
|
Mark
L. Baum, President, Secretary and Director of Chembio Diagnostics, Inc.
(6) |
|
|
2004
2003
2002 |
|
|
40,000
—
— |
|
|
—
—
— |
|
|
(1) |
Mr.
Siebert currently is a director, the President and Chief Executive Officer
of Chembio Diagnostics, Inc., and the President of Chembio Diagnostic
Systems Inc. The compensation information represents compensation earned
while employed by Chembio Diagnostic Systems Inc. In 2004, Mr. Siebert
received, prior to the merger, 50,000 options exercisable at $0.75 and
10,000 options exercisable at $1.00. In addition as part of his contract
signed in May 2004, Mr. Siebert received 50,000 options with an exercise
price of $1.20 per share, becoming exercisable in May 2005 and 50,000
options with an exercise price of $1.50 per share becoming exercisable in
May of 2006. |
|
(2) |
Mr.
Pelossof currently is a Vice President of both Chembio Diagnostics, Inc.
and Chembio Diagnostic Systems, Inc. The compensation information
represents compensation earned while employed by Chembio Diagnostic
Systems Inc. In 2004, Mr. Pelossof received, prior to the merger, 40,000
options exercisable at $0.75 and 10,000 options exercisable at $1.00. In
addition as part of his contract signed in May 2004, Mr. Pelossof received
100,000 options exercisable at $0.60 per share, becoming exercisable in
May 2004, 50,000 options exercisable with an exercise price of 0.90 per
share, becoming exercisable in May 2005 and 50,000 options with an
exercise price of $1.35 per share becoming exercisable in May of 2006.
|
|
(3) |
Mr.
Esfandiari currently is a Vice President of Chembio Diagnostics, Inc. and
Chembio Diagnostic Systems, Inc. The compensation information represents
compensation earned while employed by Chembio Diagnostic Systems Inc. In
2004, Mr. Esfandiari received, prior to the merger, 30,000 options
exercisable at $0.75 and 5,000 options exercisable at $1.00. In addition
as part of his contract signed in May 2004, Mr. Esfandiari received 25,000
options exercisable at $0.90 per share, becoming exercisable in May 2005,
25,000 options with an exercise price of $1.20 per share, becoming
exercisable in May 2006 and 25,000 options with an exercise price of $1.50
per share becoming exercisable in May of 2007.
|
|
(4) |
Mr.
Lyashchenko currently is a Research Director of Chembio Diagnostic
Systems, Inc. The compensation information represents compensation earned
while employed by Chembio Diagnostic Systems Inc. In 2004, Mr. Lyashchenko
received, prior to the merger, 2,500 options with an exercise price of
$1.00. |
|
(5) |
Mr.
Bruce currently is a vice president of Chembio Diagnostic Systems Inc. The
compensation information represents compensation earned while employed by
Chembio Diagnostic Systems Inc. Mr. Bruce received, prior to the merger,
20,000 options exercisable at $0.588, 10,000 options exercisable at $0.75
and 5,000 options exercisable at $1.00. |
|
(6) |
The
compensation information represents compensation earned while employed by
Chembio Diagnostics, Inc. |
The
following table sets forth certain information regarding stock options granted
to the named executive officers as of December 31, 2004.
|
|
Individual
Grants |
|
|
|
Name |
|
|
Number
of Securities Underlying Options/SARsGranted(#) |
|
|
Percentage
of Total Options/SARs Granted to Employees in Fiscal
Year |
|
|
Exercise
or Base Price($/Sh) |
|
|
Expiration
Date |
|
Lawrence
A. Siebert |
|
|
50,000 |
|
|
6.75 |
% |
|
1.20 |
|
|
5/27/11 |
|
Lawrence
A. Siebert |
|
|
50,000 |
|
|
6.75 |
% |
|
1.50 |
|
|
5/27/11 |
|
Lawrence
A. Siebert |
|
|
50,000 |
|
|
6.75 |
% |
|
0.75 |
|
|
5/04/11 |
|
Lawrence
A. Siebert |
|
|
10,000 |
|
|
1.35 |
% |
|
1.00 |
|
|
5/04/11 |
|
Avi
Pelossof |
|
|
100,000 |
|
|
13.51 |
% |
|
0.60 |
|
|
5/27/11 |
|
Avi
Pelossof |
|
|
50,000 |
|
|
6.75 |
% |
|
0.90 |
|
|
5/27/11 |
|
Avi
Pelossof |
|
|
50,000 |
|
|
6.75 |
% |
|
1.35 |
|
|
5/27/11 |
|
Avi
Pelossof |
|
|
40,000 |
|
|
5.40 |
% |
|
0.75 |
|
|
5/04/11 |
|
Avi
Pelossof |
|
|
10,000 |
|
|
1.35 |
% |
|
1.00 |
|
|
5/04/11 |
|
Javan
Esfandiari |
|
|
25,000 |
|
|
3.38 |
% |
|
|