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CEMI > SEC Filings for CEMI > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for CHEMBIO DIAGNOSTICS, INC.


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The terms "Chembio", "Company,", "we", "us", and "our" refer to Chembio Diagnostics, Inc. and its subsidiary as a consolidated entity, unless the context suggests otherwise.

Overview

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. The 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 generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our estimates and assumptions. Our estimates are 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 from December 31, 2012.

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 are dependent upon our ability to develop and sell our products, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

All of the Company's future products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology. The Company has completed development of several products that employ the DPP® technology, three of which will be marketed under Chembio's label (DPP® HIV 1/2 Screening Assay, DPP® Syphilis Screen & Confirm, and DPP® HIV 1/2 -Syphilis Assay) and several others that have been developed specifically related to private label agreements with The Oswaldo Cruz Foundation ("FIOCRUZ") for the Brazilian public health market, as explained below.

All of the Company's products other than its lateral flow tests are based on the Company's patented Dual Path Platform (DPP®) technology. The Company has had very active research and development programs and has significantly increased its spending on research and development during the last three years. Third-party funding from research and development contracts and grants have offset a significant portion of these increased research and development expenses. The Company has a number of products under development that employ the DPP® technology. The principal product development activities are described below.

DPP® Hepatitis-C (HCV) Multiplex Test - Development work on our DPP® HCV point-of-care rapid test continues. Our development activity has been focused on creating a differentiated product that is capable of identifying active infection versus one that only identifies a simple antibody response, which is all the currently available point-of-care test is able to do. This is because of the fact that up to 30% of patients that are HCV antibody-positive don't have an active infection. We have in fact identified a possible method for doing this in our DPP® point-of-care technology, and we hope to make progress on combining this method with our system during the second and third quarters. If we are able to achieve this then we could complete product development during the first quarter of 2014.


In July 2012, the U.S. Centers for Disease Control finalized the recommendations for testing all individuals in the United States between the ages of 45 and 65 for HCV, which age cohort represents a substantial portion of the estimated over three million individuals in the United States that are infected with HCV infection but unaware. With a number of new anti-retroviral therapies approved, and even more pending approval in the years ahead by the FDA, we believe that over time these new recommendations will be implemented. However, it is unclear how much of these recommendations will be funded by public health programs or under the Affordable Care Act. Regardless if these recommendations are implemented, we believe that they will take time to be funded.

DPP® HIV Multiplex Antigen-Antibody Test - We have begun development work on a DPP® HIV multiplex test that is being designed to detect acute (early stage) HIV infection by means of detecting P24 antigen, as well as antibodies, to HIV1/2, in whole blood samples. There are no FDA-approved point-of-care tests that detect acute HIV infection, although there are two FDA approved laboratory tests with such claims. However neither of those products differentiates between P24 antigen and antibodies. We believe that development of such a test in our patented DPP® point-of-care platform may help identify HIV infections that cannot currently be identified by any of the currently FDA-approved rapid HIV tests and thus serve an unmet market need and may help to maintain and potentially grow the already strong position our products have in the U.S. rapid HIV test market.

Other Potential Products and Collaborations - We are currently completing development of certain other products for single parameter and multiplex tests, utilizing our patented DPP®. We also are discussing exclusive collaborations for these products, or proprietary components thereof, with certain potential international partners that, if consummated, would provide us with local assembly and distribution, a co-branded DPP® product in the designated market, and a more meaningful stake in the success of the distribution program.

Sponsored Research & Development

Multiplex Influenza Immunity Test - In July 2012 we entered into a follow-on, milestone-based development agreement of up to $480,000 based on our previous successful initial development of a multiplex rapid point-of-care ("POC") influenza immunity test utilizing our patented Dual Path Platform (DPP®) technology. The agreement contemplates a period of approximately six months in which the follow-on development activity is to be completed. In the first quarter of 2013 we completed the requirement of this agreement, and we anticipate an additional development agreement will be entered in 2013.

We entered this agreement with a private contracting organization that is engaged to enter into, implement and provide technical oversight of agreements relating to pandemic preparedness on behalf of its client, the United States Centers for Disease Control and Prevention ("CDC").

DPP® Tuberculosis - In February 2011, we were awarded a three-year $2.9 million, Small Business Innovative Research (SBIR) Phase II grant from the United States National Institutes of Health (NIH) to continue our successful Phase I grant work to develop a simple, rapid, accurate, and cost-effective serological test for active tuberculosis that can be utilized in resource-limited settings. During 2012, several additional antigens were identified to enhance antibody detection by the DPP® test prototype designed in our Phase I studies. Antigen reagents have been finalized and test prototype evaluation using well-characterized clinical specimens is in progress. Funding for the third and final year of this Phase II grant was confirmed with a reduction of approximately 1%.

In addition to the above-mentioned research and development work sponsored by governmental agencies and/or their contractors for the influenza and tuberculosis projects, we are discussing additional opportunities for sponsored research and development activity. We endeavor to select sponsored research projects where we believe there is an identifiable commercial opportunity and/or where other benefits to the Company are anticipated in connection with these projects.

In general, we are considering certain new DPP® product opportunities, either as OEM development projects and/or as Chembio-branded products. These products are being identified based upon our assessment of opportunities in the market and upon whether they can be addressed with our proprietary technology, along with our development and manufacturing capabilities and experience. We are also identifying and assessing additional technologies that we believe could provide us with additional products and capabilities, and thereby provide additional revenue streams, although there is no assurance that we will be able to obtain or utilize any of them profitably.


Regulatory Activities

CE Mark for FDA-approved HIV tests - We were audited by our notified body in September and our technical file is being reviewed. We had an additional meeting concerning this in March during which we believe substantial progress was made. We expect a decision on CE Marking of these products soon.

FDA Approval for DPP® HIV 1/2 Screening Assay for Use with oral fluid or blood samples - We received FDA approval of our Pre-Marketing Application (PMA) for this product on December 19, 2012 as we previously announced. We are now working towards a CLIA waiver with the expectation that it will be granted before the end of 2013. As we have reported, we initiated the CLIA study in April, and our plan is still to have the submission into the FDA by July, and to receive a CLIA waiver during the fourth quarter.

DPP® Syphilis Screen & Confirm -
In late February we received a response from the FDA that will enable us to pursue the regulatory pathway that we outlined in our submission. However there were some questions that we have concerning the FDA response and we intend to have those clarified in a meeting being scheduled in May 2013. While we confirm our intended study approach with the FDA, we are completing our protocol, have identified three clinical sites with the expectation that we will commence the studies, and expect to have an FDA clearance by mid-2014.

DPP® HIV-Syphilis - We have submitted this product for evaluation by the CDC, and the WHO has accepted this product to be evaluated for pre-qualification in its global procurement scheme. Other international registrations are pending. We have received very encouraging results thus far. We recently submitted a guidance request to the FDA for determining the pathways for getting this multiplex combination product approved/cleared by the FDA. We plan to initiate the syphilis studies (the HIV component of this test is already approved pursuant to the PMA approval received in December 2012), upon receiving feedback from the FDA on our study design protocols.

SURE CHECK® HIV OTC Study - We completed the self-testing study to meet the requirements for submitting an IDE ("Investigational Device Exemption") application in order to commence clinical trials for this product in 2013. The IDE application can be filed now and we plan to do this soon. Thereafter, assuming the IDE is granted, the Phase II observed user clinical trials could be commenced during 2013 and the pivotal trial could be completed during 2014. This would enable a PMA approval by late-2015.

However, we believe that the development of this market will take time, and that its development will likely require OraSure to invest significantly in its development, as it is now. Orasure's first two quarters of results for this product did nothing to change this expectation. Although we still believe that Chembio is the only other company that for all practical purposes has a product that can participate in this new market, we have serious reservations about the size of the opportunity, particularly in relation to the significant investment of funds required in order to achieve regulatory approval and then commercialize the product. Nevertheless, because OraSure's product was approved with lower sensitivity than was previously expected by the FDA, this provides an opportunity for Chembio's product(s) to achieve improved performance - either with its blood and/or oral fluid HIV tests. We believe it is critical to go to this market with a substantially improved sensitivity and comparable specificity to OraSure's product, and a lower price (which would include lower packaging and distribution costs as compared with Orasure), and our current efforts are focused in this direction.

There can be no assurance that any of the aforementioned Research & Development and/or Regulatory products or activities will result in any product approvals or commercialization, nor that any of the existing research and development activities, or any new potential development programs or collaborations will materialize or that they will meet regulatory or any other technical requirements and specifications, and/or that if continued, will result in completed products, or that such products, if they are successfully completed, can or will be successfully commercialized.

Recent Events

In April of 2013, the Company closed an underwritten public offering of 1,200,000 shares of its common stock. The price per share of common stock sold in the offering was $5 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other estimated offering expenses payable by the Company, was approximately $5,450,000.

On April 19, 2013, the Company and its Chief Executive Officer (CEO) agreed to extend the term of the CEO's employment contract from May 2013 to May 2014 with the annual salary remaining the same.


On April 30, 2013, the Company entered into a new demand loan agreement ("Demand Note") with a commercial bank. The Demand Note allows the Company to draw on the line from time to time an amount up to an aggregate of $2,000,000 outstanding at any one time. The accrued interest on the Demand Note is payable monthly at an interest rate equal to one-quarter percent above prime per annum. The Company can repay any or all of the principal balance outstanding at any time. This is a demand note for which the bank lender can demand repayment of the entire loan, with accrued interest, at any time. The loan is subject to annual reviews, as well as an annual 30-day clean-up, during which there can be no amounts outstanding.

The Security Agreement contains covenants that place restrictions on the Company's operations, including covenants relating to mergers, debt restrictions, capital expenditures, tangible net worth, net profit, leverage, fixed charge coverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, restrictions on lease payments to affiliates, restrictions on changes in business, asset sale restrictions, restrictions on acquisitions and intercompany transactions, and restrictions on fundamental changes in the Company and in its business.

Critical Accounting Policies and 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. For a summary of our significant accounting policies, which have not changed from December 31, 2012, see our Annual Report on Form 10-K for the twelve months ended December 31, 2012, which was filed with the SEC on March 7, 2013.


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AS COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2012

Income:

Income before income taxes for the three months ended March 31, 2013 decreased to $488,000 from $719,000 for the three months ended March 31, 2012. Net Income decreased from $433,000 for 2012 to $317,000 for 2013. The decrease in net income is primarily attributable to increased cost of products sold. In 2013, as a result of a .79% decrease in Net Product sales and a 25.8% increase in non-product revenues along with a 20% increase in cost of products sold, the Company had a $639,000, or 19%, decrease in its gross margin, to $2,694,000. This decreased gross margin was partially offset by decreased operating expenses, the most significant of which was a decrease in clinical trial expenses of $386,000 as well as a decrease in commissions of $130,000, due to the decreased sales in Brazil.

Revenues:

Selected Product
Categories:                  For the three months ended
                        March 31, 2013        March 31, 2012         $ Change          % Change
Lateral Flow HIV
Tests and Components   $      4,934,154      $      3,675,022     $    1,259,132            34.26 %
DPP Tests and
Components                    1,142,835             2,518,913         (1,376,078 )         -54.63 %
Other                           236,201               169,217             66,984            39.58 %
Net Product Sales             6,313,190             6,363,152            (49,962 )          -0.79 %
License and royalty
revenue                               -                     -                  -           100.00 %
R&D, milestone and
grant revenue                   364,963               290,100             74,863            25.81 %
Total Revenues         $      6,678,153      $      6,653,252     $       24,901             0.37 %

Revenues for our lateral flow HIV tests and related components during the three months ended March 31, 2013 increased by approximately $1,259,000 from the same period in 2012. This was attributable to increased sales to South America, excluding Brazil, of $1,388,000 and increased sales to Alere from $2,504,000 during the three months ended March 31, 2012 to $2,590,000 during the three months ended March 31, 2013, these increases were partially offset by decreased sales to Africa of $230,000. Revenues for our DPP® products during the three months ended March 31, 2013 decreased by approximately $1,376,000 over the same period in 2012, a decrease of 55%, which decrease is attributable to the delayed launch of programs in Brazil for our DPP® products. The increase in R&D, milestone and grant revenue was due to revenue from certain development projects granted in the fourth quarter of 2012. R&D revenues include funds, recognized on an "as expenses are incurred" basis, from a Phase II NIH grant for Leptospirosis, which was effective as of June 1, 2009, and from a Phase II grant for Tuberculosis which was effective March 1, 2011 as well as a development contract with Battelle entered into in the fourth quarter of 2012.

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