JM dutton cemi report 060508

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Dutton Associates 3721 Douglas Blvd., Suite 350 Roseville, CA 95661 Phone (916) 960-0623

Stephen L. Handley

[email protected]

Chembio Diagnostics, Inc. June 5, 2008

x - - - - - - x2010 - - -N/A - - -

Date Assigned:

Price at Rating:Original Price Target:Time Frame:

Shares Outstanding:

Inside Ownership:Institutional Ownership:Equity Market Value:

60.5

14%70%$8.5

Cash Equivalent:

Working Capital:Long-Term Liabilities:Shareholders' Equity:

$1.8

$2.1$0.6$3.6

4/19/06

$0.95$1.0012-18 Mths

$6.5$9.2

$11.0- - -

($0.80)($0.57)($0.03)

- - -0.8 x- - - x

1.3 x0.9 x

2008

2009

- - - x- - - x- - - x- - - x

Balance Sheet Data (mil) 03/31/08

AAE

N/A

Ownership and Valuation (mil)

Target Price (12-18 Months)Avg. Daily Vol. (3 mo.):

$0.1452-Week Price Range:

REVS PSRFiscal Year Ending: DecemberCEMI

Healthcare, Biotechnology & Pharmaceutical

$0.08 - $0.65

Symbol (OTCBB)

2006

2007

Year EPS P/E

Current Rating History

$0.50112,386

Industry:Recent Price:

Note 1: (a) As of April 14, 2008, 36.2 % owned by Crestview Capital Master, LLC; 8,8% held by Inverness MedicalInnovations, Inc.; 7.6% owned by Vicis Capital Master Fund; and 6.5% held by Millenium 3 Opportunity Fund,LLC.

Update Report

Rating: Strong Speculative Buy

Investment Opinion

Chembios stock has declined significantly in recent months, from a high of $0.30 in February, with the result that theCompanys equity is now capitalized in the stock market at only about $7 million. We believe this represents a grosundervaluation for a promising early stage company that, we estimate, is likely to post sales in excess of $10 million thi

year, achieve initial profitability by year end, and has the potential to become a significant factor in several attractivniches of the diagnostics market.

We judge that the stocks decline reflects a combination of factors, including: (1) an uncertain stock market climate thain general, is neglecting microcap companies in favor of financially strong, proven growth companies; (2) Chembio

capital restructuring in late December, even though this greatly simplified Chembios capital structure by eliminating th

convertible preferred stock (which was quite expensive to maintain) and improved the liquidity of the common stock

However, the conversion of preferred stock into common stock and the concurrent exercise of warrants also served tprovide liquidity for holders of these instruments, and apparently their selling has caused at least a temporary imbalance ithe stocks supply/demand ratio; and (3) recognition that Chembios cash position is modest, which leads to the concer

that in the current stock market environment it could be difficult to raise substantial additional capital without seriousldiluting existing investors. However, the Company has a number of existing and prospective affiliations with othe

companies who logically could become investors or otherwise provide needed capital, such as through milestone o

royalty payments, with much less dilution.

The positive outlook, to which we subscribe, is that Chembio clearly has strong positive momentum and, in particular, w

believe that it will benefit increasingly from Inverness Medicals rising sales of the Companys products as well as from


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Chembio Diagnostics, Inc.


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additional external agreements associated with its patented DPP technology. We are therefore retaining our StronSpeculative Buy rating.

As we have noted in previous reports, meaningful price targets for very low priced stocks are always difficult t

determine, but large and rapid percentage price increases are nevertheless quite possible. Admittedly the stock hasignificantly under-performed our recent expectations (as has the overall stock market) and we acknowledge that ou

revised target of $0.50 per share, by the end of 2009, is quite conjectural. This would represent a large percentage advancfrom currently depressed levels. Nevertheless, at that price the market capitalization would be about $30 million and asuch would still undervalue the Company, in our opinion, assuming a profitable annual revenue run rate at that tim

approaching $20 million. We also note that the stock was trading at $0.60 per share a year ago, and that management ha

been a recent buyer and in coming months is likely to become more active in explaining the Company to prospectiv

investors. Incidentally, we note that another firm recently adopted a 12-month price target of $0.75 per share foChembio, but this appears to be based importantly on a take-out multiple of projected revenues. In contrast, our targe price does not consider what valuation a possible acquirer would place on Chembio; instead, we focus on Chembio

growth prospects in point-of-care, a market that should do well in the drive to contain health care costs while improvingpatient care.

Overview

As discussed in greater detail in our report of December 17, 2007, Chembio is a small company that developsmanufactures, and markets rapid diagnostic tests that aid in the detection of infectious diseases and other conditionsCurrent revenues are predominantly generated from rapid point-of-care (POC) tests for HIV. These tests compete in larg

worldwide markets and offer differentiated features from the HIV tests offered by others. Secondly, a U.S. patent issue

in 2007 for a new POC platform, the Dual Path Platform (DPP), is likely to provide significant upside to this growinrevenue base.

During the two years that we have been following the Company, several major milestones have strengthened and advanceit toward meaningful profitability. These include:

A revised capital structure This increased the outstanding common shares from 14.3 million to 60.5 million

Management reasoned that this new structure would boost the stocks liquidity and ultimately help broaden investointerest.

FDA approvals for two HIV tests Also, marketing approvals were followed by waivers under the ClinicaLaboratory Improvement Act (CLIA) of 1988 to expand the usage stetting of the tests to public health clinicphysicians offices, and other venues where point of care (POC) testing is particularly useful.

Important marketing partnerships Thus far, the most important of these is with Inverness Medical Innovations, Incwith Inverness obtaining rights to market Chembios approved HIV tests. Inverness is now believed to be makinsteady inroads into the U.S. market, as noted later.

Dual Platform Technology Business Development In March 2007 Chembio was granted a U.S. patent on a rapidtest platform known as DPP, which represented its first non-licensed patent. This platform produces higher level

of product performance and the Company is using DPP to develop a number of new tests, including an oral fluid

HIV test and a syphilis test which would be sold under a Chembio brand. Further, since mid 2007 the Company haentered into five externally funded Research and Development, or feasibility, agreements with various entities, a

related to potential applications for POC tests employing the DPP technology.

ISO 13.485 Certification This certification, received during the third quarter of 2007, confirmed the quality of thCompanys systems as well as its ability to produce POC diagnostics in accordance with widely accepted globa

quality standards. Chembio also received United States Department of Agriculture manufacturing and marketin


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licenses for a line of niche products for veterinary tuberculosis. This license should also enable the Company tpursue other opportunities of interest in the growing market for veterinary POC diagnostics.

Encouraging Revenue Growth The Company remains small but is experiencing impressive growth. Specificallyrevenues rose from $3.9 million in 2005 to $6.5 million in 2006, and then to $9.2 million in 2007. The latter reflectea 79% jump in sales of rapid HIV products, to $7.9 million, due primarily to expanding acceptance in Africa and

Mexico and entry into the U.S. market through Inverness. Concurrent with this revenue growth, there has been steady improvement in gross margins, from 32.4% of net sales in Q1 2007 to 44.9% of net sales in Q1 2008. Thi

reflects higher average selling prices stemming from entry into the U.S. market though Inverness as well as operatinimprovements.

Chembio has a history of losses and, based on our projected sales and expenses, to become profitable we believe that i

will need to generate annual revenues of between $12 million and $15 million. We judge that modest profits (or at leas positive cash flow from capitalized license payments) will be attained late in 2008, boosted by meaningful sales to th

high-margined U.S. market for rapid HIV tests as well as increased sales of other products. In short, although Chembio ia small company with limited resources, we believe it is positioned to be a respectable supplier of rapid tests to detecselected diseases. A significant point is that the Company is being aided in this effort by encouragement and funding from

several entities dedicated to addressing HIV, Chagas disease, and certain other infectious diseases that particularly afflic

populations in less-developed countries.

Products

Chembios main commercial products are three rapid tests for the detection of HIV antibodies in whole blood, serum, an

plasma samples, all of which employ single path lateral flow technology. The Company also has a rapid test for Chaga

disease as well as a line of rapid tests for veterinary tuberculosis, the first one of which is USDA approved.

Products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmentaorganizations, medical professionals, and retail establishments. They are sold under Chembios own registered trademarkor under the private labels of its marketing partners such as is the case with the premium Clearview brand under which

Inverness Medical Innovations sells Chembios HIV tests in the United States.

Table 1. Chembios Current Revenue Base

Products Partner Status

Rapid HIV Test In U.S.: Inverness Medical under 2 tests launched by Inverness

Market in U.S. and Mexico Inverness Clearview brand in first quarter 2007

In Mexico: B io-Rad Laboratories Sales to U.S./Mexico

under Chembio Sure Check brand

Developing World President's Emergency Plan for Sales to Africa

Rapid HIV Test Market AIDS Relief (PEPFAR), Global

Fund, Clinton Foundation

Seeking CE Mark and FDAChagas Disease WHO, PAHO, Regional Distributors clearance to broaden market

opportunities

Veterinary TB Specialized Distributors Initial Products USDA approved

Source: Chembio Diagnostics, Inc.


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The Companys HIV tests have been endorsed by the World Health Organization (WHO) and the Presidents EmergencPlan for AIDS Relief (PEPFAR) amongst various other agencies and organizations. Africa and other foreign markets ar

attractive for the Company, despite relatively low prices, because it has three rapid HIV test formats that can be producedat low costs. Although the United States market is characterized by lower unit volume, prices are dramatically higher an

there is a strong trend toward increased HIV testing.

The Companys other diagnostic tests include tests for Chagas disease and tuberculosis (TB). The first veterinary TB tesfor testing in nonhuman primates (of interest to pharmaceutical research facilities, zoos, and primate-research centers), habeen approved by the United States Department of Agriculture and launched. Considerable work has also been done o

developing commercially more important TB tests for a broader range of animals (e.g., cattle and deer) and for humans

for which there is a very large unmet global need that is even greater than for HIV tests.

The theoretical annual potential for HIV testing is believed to approximate several hundred million tests, for it is estimatethat over 30 million people are infected with HIV/AIDS worldwide. It is estimated that during 2007 there were about 3million HIV antibody tests done within the United States in clinical settings, of which rapid tests accounted for an

estimated 5 million. Both numbers are expected to increase substantially over the next year. It is estimated that as man

as 30% of those infected with the virus in the U.S. are not aware of their status, thereby hampering prevention efforts, andthis percentage exceeds 80% in the hardest hit regions in the developing world. Rapid tests, which enable immediat

counseling and referral, are expected to increase dramatically as global relief efforts focus increasingly on counseling antesting and, in particular, the 2006 recommendation for routine HIV testing by the CDC. The possible availability of ovethe counter (OTC) HIV tests could further drive market growth for these tests. However, there are a number of marketin

and other issues related to whether the OTC market will in fact be available as well as attractive, and so currently we ar

not assuming that this will become a source of meaningful revenues for the industry.

Competitive Dynamics in HIV Tests

With Chembios rapid HIV tests, blood from a pinprick to the finger is applied to a test strip that has been treated withspecial reagents, and this allows the healthcare worker to visually detect the presence of HIV antibodies on the strip. Th

tests can be stored at room temperature and have a 24-month shelf life from the date of manufacture; this makes them idea

in places with slow distribution and little access to refrigeration. Also, since no blood is drawn intravenously, the risk ooccupational exposure for healthcare workers is minimized.

The Companys rapid HIV tests are offered in three formats, each utilizing the same technology but differing in thprocedure for sample collection: Sure Check HIV, a completely self-contained barrel test, which is ideal for finger

stick whole blood since the sample does not need to be transferred to the testing strip; HIV STAT-PAK; and HIV

STAT-PAK Dipstick (a packet of 30 tests). The latter two products, like other competitive rapid HIV tests, require thathe finger-stick whole-blood sample first be transferred to the test device. All tests are for the detection of antibodies tHIV-1 and HIV-2 (HIV-2 is licensed to Chembio by the U.S. government and Bio-Rad Laboratories, Inc.) in finger-stic

whole blood, venous blood, serum, and plasma. The first two tests are marketed in the U.S. by Inverness MedicaInnovations, but all three tests are sold outside the U.S. The dipstick version is aimed at the donor-funded developin

countries requiring large volumes of tests. (The dipstick test has no plastic housing, and because it therefore requires mor

handling of the test strip, it is less attractive to the U.S. market.)

Comparative features of rapid tests are shown in table 2. Although HIV-2 is rarely seen in the U.S., it is more prevalent i

West Africa, and there is some view that in some cases where the person is HIV-positive, that might not be detecte

without HIV-2 detection capability.


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Table 2: Comparison of Chembios Tests to Other CLIA-Waived Tests

Chembio OraSure* Trinity Biotech

No. of Test Formats 2 1 1

Sensitivity 99.7% 99.6% 100.0%

Specificity 99.9% 99.9% 99.7%

Analyte(s) HIV 1 & 2 HIV 1 & 2 HIV 1

Samples Whole BloodWhole Blood & Oral

FluidsWhole Blood

U.S. Pricing $7-$13 $11-$14 $7.50-$13

Estimated U.S. Market Share 10% 75% 10%

U.S. Marketing Partner Inverness Abbott & Direct Direct

True IgG Control Yes Yes No

Shelf Life 24 mos. 6 mos. 18 Months

*OraSure data is for whole blood; oral fluid sensitivity and specificity are lower. In non-U.S. markets, Trinity'soverseas version is used to detect both HIV 1 and HIV 2, and it may be stored for up to 18 months. Trinity alsonotes that although it does not have a true IgG control, the addition of whole blood to the sample port acts as a

control (i.e., the user is told that the port has a red color after the addition of the sample).

Source: Chembio Diagnostics, except that Dutton Associates has increased the indicated shelf life of Trinitys product from 12months to 18 months.

OraSure has thus far been the dominant factor in the U.S. market, but we believe that Trinitys Uni-Gold test an

Chembios tests (marketed by Inverness) are likely to capture a significantly increased share.

Outside the U.S., the accepted practice for rapid testing involves what is known as a testing algorithm, in which an initia

rapid test is performed, and then a second (also rapid) test is used to confirm any positive result. In the rare case that thfirst two tests produce conflicting results, a third tiebreaker test is given. (We understand that there has been somdiscussion about adopting algorithmic testing using rapid tests with the United States, which could be helpful to Chembio

as a new entrant, in capturing market share.)

Research and Development

Products under development are consistent with managements strategy of leveraging its core competency th

development and manufacture of lateral-flow rapid diagnostic tests. In addition, management is seeking to diversify itmarkets beyond the HIV, human TB, and Chagas disease markets, which are primarily donor-funded markets.

There are several new tests being development based on Chembios patented Dual Path Platform (DPP). This platform

reportedly produces improved sensitivity as compared with lateral flow assays. In addition, management believes that itexisting HIV test strip know-how and regulatory experience will permit it to accelerate regulatory submission for a nextgeneration rapid HIV test incorporating oral fluids. Similar increases in both clinical and analytical sensitivity have bee

observed in several applications of it in antibody and antigen detection prototypes, including but not limited to th

detection of low levels of bacteria. Management believes it can extend this technology to many other applications withithe infectious disease field, as well as to other medical fields. In short, the DPP platform is creating multiple long term

revenue opportunities across many potential POC testing applications.

Externally Funded DPP Projects

While the Company has confirmed that its DPP platform technology has potential application to a broad range of POC

products and markets, it is apparent that significant additional resources would be required to further develop an


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commercialize this technology. Managements strategy is therefore to leverage its intellectual property, producdevelopment, and manufacturing know-how by collaborating with organizations that have significant sales, marketing, an

distribution capabilities. If such collaborations progress to commercialization, Chembio could be an exclusivdevelopment and long term manufacturing partner to such companies, who would also acquire an exclusive license t

DPP to market products in specific fields of interest. Successful execution of this strategy will subsidize the Company plan of building core products, such as its new DPP syphilis and HIV tests, under a Chembio brand. OEM project

which have to date resulted in funding from third parties are summarized in Table 3 below.

Table 3: OEM DPP Product Pipeline

Product U.S. Market Status

(Estimate Inmillions)

Multiplex $33 Contract R&D for Pall Corporation

Multiplex Product $10 Contract R&D for Bio-Rad Laboratories

Screening & Confirmatory Tests $84Three Products for Brazilian Ministry of Health

Affiliate; Sales Begin 2nd Half 2008

Enteric Multiplex Test $25 Early Stage Development

Several additional OEM opportunities in discussion in infectious diseases, women's health andveterinary diagnostics

Source: Chembio Diagnostics, Inc.

Collaboration with Pall Corporation Chembio reports that this is proceeding well. In December the Companannounced the completion of the feasibility studies that had been funded by Pall in connection with an OEM multipleproduct opportunity; and during the first quarter of 2008 it was agreed that Chembio would perform additional studie

that were funded by Pall and which Chembio completed satisfactorily in April. Discussions are currently underwaabout the additional studies that will be necessary to determine product configuration and design. Thereafter it

contemplated that a product development, licensing and manufacturing agreement with Pall would be finalized.

Collaboration with Bio-Rad Laboratories In mid April, 2008, Chembio announced a new development agreemen

with Bio-Rad, one of the worlds leading in vitro diagnostic and life science companies. This agreement is for thdevelopment of a new multiplex product that would be developed on DPP and which would be marketedexclusively by Bio-Rad under a limited license.

Collaboration with Bio-Manguinhos This is a unit of the Oswaldo Cruz Foundation of Brazil and is the largesproducer of vaccines and kits for diagnosis of infectious and parasitic diseases in Latin America. Also, it is affiliatewith the Brazilian Ministry of Health. In January, 2008, three new technology transfer, supply, and licens

agreements were signed with this entity for products Chembio is completing development of on DPP. Two of th

products being developed will be used in screening programs funded by Brazils Ministry of Health for the control aneradication of Leishmaniasis and Leptospirosis, respectively, which are both blood-borne infectious diseases that arendemic to Brazil. A third test under development is for the confirmation of HIV-1 in patients who have teste

positive with a screening test. The DPP screening tests will complement the current Bio-Manguinhos nation

program, which currently uses only laboratory-based technologies. Management expects to receive a mileston

payment of $500,000 before the end of 2008 which would also coincide with the expected initiation of commercisales, flowing Brazilian regulatory approval.

Other Collaborations Several other collaborations are being pursued for additional OEM products with prospectivcustomers who have identified specific market opportunities. These could be linked to other technologies thaChembio is seeking to incorporate into its DPP products, such as fluorescence and reader technologies. Th

Company believes that POC testing will increasingly incorporate reader and information technologies that can cost

effectively improve the reproducibility of results and in other ways become valued diagnostic tools.


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DPP Products Under Chembio Brands

As mentioned earlier, the Company is also developing its own branded products that management believes would addres

significant global market opportunities that it has identified in POC testing. These products include but are not limited tthe two tests mentioned below, which are being developed pursuant to a Cooperative Research & Development Agreemenin collaboration with the U.S. Centers for Disease Control.

DPP HIV Oral Fluid Test Management believes that there is an important market opportunity for an improveoral fluid HIV test. The goal is to develop such a test that is capable of testing on all blood matrices (i.e., finger sticwhole blood, venous whole blood, serum, and plasma). Chembio has developed a prototype of this test and recentl

made progress in finalizing this products design features. A pre-clinical study is being completed in known HIVpositive patients that are expected to be followed by clinical trials to support a Pre-Marketing Approval by the FDA

Management expects to finalize the design of this product soon.

DPP Syphilis Screen and Confirm Multiplex Test Chembio has completed development of a prototype of a newsyphilis test. Among its positive features, it would use a single whole blood sample and provide results in a hand-hel

reader within 20 minutes. (Currently the FDA approved POC rapid screening tests in the U.S. cannot use wholblood, thereby limiting their ability to be used in a POC setting where the use of a finger stick blood would be mo

appropriate. Another point is that other POC rapid screening tests, none of which are marketed in the U.S., are unabl

to distinguish between current and past infection.) Chembios most recent data show that the DPP Syphilis Combtest can achieve a high level of performance (i.e., sensitivity and specificity) compared to the reference testsAdditional work is required to optimize the performance of this test, but management believes that its developmenwill be completed and that the product can be validated within six months.

Recent Results

During 2007, revenues rose 42%, to $9.23 million, fueled by a $3.5 million or 79% jump in sales of rapid HIV products

This number was boosted by the fact that two of the Companys three HIV tests were launched in the U.S. during February by the Companys marketing partner, Inverness Medical Innovations. This overall gain was achieved despite a $1.1million decline in sales of the Chagas product because the major order received in 2006 was not repeated. The net los

was $2.6 million, but after preferred stock dividends as well as a non-recurring deemed dividend stemming from th

Companys reorganized capital structure the net income available to common shareholders was a loss of nearly $8.million, or $0.57 per share.

During the first quarter of 2008, ended March 31, total revenues, including research grant income, rose 16%, to $2.3

million, although product sales increased only 10.5%, to $2.24 million. The latter increase was restrained by the absencof sales to Mexico, which were $1.09 million in the year-earlier quarter. This illustrates the fact that sales keyed t

government funding can be quite uneven and, in this instance, there reportedly was a funding issue related to HIV testingManagements current assumption is that there could be some modest renewed sales to Mexico during the final quartebut this possibility is unclear. Because there were no sales to Mexico during the first quarter, worldwide sales of HIV test

in this period increased only 6.1%, to $1.9 million. Regarding other products, sales of tuberculosis products increase

249%, to $95,000, while all other sales rose nearly 19%, to $222,000. The net loss in the quarter was $798,000, or $0.0

per share.

Sales to Africa highlighted the quarter. The increase was 249%, to $1.29 million, with $850, 000 derived from NigeriaHowever, sales to Nigeria are expected to begin decreasing later in the year because Nigeria has changed the designatioof Chembios HIV test from that of a screening test to that of a confirmatory test. This is related to the fact that Nigeria i

moving from a parallel to a serial testing algorithm by year end. Sales to other markets, both included and not included i

the U.S. PEPFAR program, could offset this decrease. PEPFAR is anticipated to increase from $15 billion in the last fivyears to $50 billion in the next five years; the full House and the U.S. Senates foreign relations committee have approvedidentical versions.


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Outlook

Chembios business is now divided into two distinct business components:

I. The first component is the Companys base of growing revenues derived from the rapid tests developed using lateraflow technologies. This primarily consists of the Companys rapid HIV tests, but also includes its currently markete

rapid tests for veterinary and human tuberculosis and for Chagas Disease. Virtually all of the product revenue growth habeen from the rapid HIV tests, although in the first quarter there were some revenues from the niche line of veterinartuberculosis tests.

Demand for rapid HIV tests is expected to increase in the U.S., as well as globally, and Chembio is believed to be we

positioned to participate in this growth. Gross margins associated with sales of HIV tests in the U.S. are very attractivparticularly in comparison with margins available from the sale to developing countries, which have become increasingl

competitive. As a partial offset, management is pursuing strategies to outsource at least some of its manufacturing in ordeto more effectively participate in these lower priced markets.

II. The emerging DPP business, established last year after receipt of the patent covering this technology, has becom

Chembios second business component. There is an OEM business strategy and an emerging Chembio branded produc

line that is being developed, as discussed earlier.

Agreement with Bio-Manguinhos: Once the three products under these agreements are approved for sale in Braziwhich management anticipates before year end 2008, Chembio will receive approximately $500,000 in royaltpayments and will also begin to receive purchase orders during the succeeding 12-month period of at least $2 millio

based upon the aggregate minimum purchase amounts. Initial DPP product revenues are expected this year, anthereafter, following this 12 month period the agreement allows for production of the products to be transferred toBrazil, subject to certain royalty payments.

Agreement with Bio-Rad Laboratories, Inc.: As discussed previously, this agreement involves a new multiple product that would be developed at Chembio on DPP and which would be marketed exclusively by Bio-Rad. Onc

certain milestones are reached, management anticipates being able to provide additional information concerning thicollaboration.

Discussion with Pall Corporation: Chembio is currently discussing with Pall Corporation additional studies that arnecessary to determine product configuration and design. Upon completion of those studies, a product developmenlicensing, and manufacturing agreement is expected to be finalized. Several other OEM product opportunities are alsunder discussion.

Chembio Branded Products: The pre-clinical studies for the DPP HIV test are expected to be completed shortly anit is then expected that the Company will move forward on clinical studies in support of an FDA Pre-MarketinApproval application. Management also believes that there will be significant interest for the marketing of i

combination Syphilis Screen and Confirm test, and it is therefore focused on commercializing this product anidentifying potential marketing strategies, both in the U.S. and globally. It is believed that these products may be ablto contribute meaningful revenues in 2009. In addition, sales of Chembios USDA approved products for veterinar

tuberculosis have grown and if this growth continues it will provide a source of meaningful cash flow since w

understand that these products carry attractive gross margins.

With these future revenue opportunities in place, management believes that its ability to raise additional capital fromstrategic investors (or other investors, if necessary) will be improved.


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Table 4: Income Statements

(U.S. dollars in millions)

2004 2005 2006 2007 2008E

HIV TestsForeign Markets 1.2$ 2.4$ 4.4$ 5.5$ 5.2$U.S. -- -- -- 2.4 2.9

Other Infectious Disease Tests -- -- -- --

Tuberculosis (human & veterinary)-- -- 0.1 0.1 0.4

Chagas Disease -- 0.1 1.2 0.1 0.0Other, including DPP in 2008 0.7 0.5 0.3 0.5 1.4

Pregnancy Tests 0.9 0.4 0.3 0.2 0.1Total Sales 2.7 3.4 6.3 8.8 10.0Res.Grants, Development & LicensingRev's

0.6 0.6 0.2 0.5 1.0

Total Revenue 3.3$ 3.9$ 6.5$ 9.2$ 11.0$Gross Profit 0.8 1.3 2.0 3.9 5.5

As a % of Revenues 24% 31% 32% 42% 50%Research & Development 1.4 1.4 1.4 1.9 2.5

Selling General & AdministrativeExpenses 3.5 (a) 3.3 5.2 4.8 4.8

Other Income (0.2) -- 0.2 0.2 0.2Pretax Income (3.1) (3.3) (5.0) (2.6) (1.6)Net Income (3.1) (3.3) (5.0) (2.5) (1.6)Preferred Stock Dividends (b) 1.9 3.5 3.2 5.6 --

Net Available to Common Shareholders (5.0) (6.7) (8.2) (8.3) (1.6)EPS (0.83) (0.88) (0.80) (0.57) (0.03)

Avg. No. Shares Outstanding (million) 6.0 7.7 10.3 14.6 60.5

(a) Including $0.2 million income from forgiveness of debt.

(b) Including dividend accreted to preferred stock for associated costs and a beneficial

conversion feature and in 2007, non-recurring deemed dividend of $4.26 million. Source: SEC filings for 2004-2007, and Dutton Associates estimates for 2008E.

In summary, we expect sales of HIV products to continue to increase as a result of both sales to the U.S. through itmarketing agreement with Inverness Medical Innovations and the international marketing strategies that werimplemented in 2006. Additional revenues should be generated from the veterinary line of rapid tests and from th

patented DPP technology.


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Finances

Table 5. Financial Position as of March 31, 2008

(U.S. dollars in thousands)

3/31/2008

Current Assets

Cash 1,765$Accounts Receivable 952

Inventories 1,505

Prepaid Expenses &

Other Assets315

4,538$

Fixed Assets 933

Other Assets 1,144

Total Assets 6,615$

Current Liabilities

Accounts Payable &

Accrued Liabilities1,992$

License Fee Payable 375Other 49

2,416$

Other Liabilities

Obligations Under

Capital Leases75

License Fee Payable 500

Stockholders' Equity 3,624

Total Liabilities &

Stockholders' Equity6,615$

(a) 60,537,534 shares outstanding

Source: Quarterly 10Q Report

Working with its investment banking advisor, Collins Stewart LLC, in late 2007 Chembio devised a plan to simplify it

capital structure, involving the conversion of all of the outstanding Series A, B, and C convertible preferred stock intshares of common stock and the exercise of a significant portion of the Companys outstanding warrants, either for cash o

cashless. This was designed to substantially reduce the amount of equity-linked securities as well as to make th

Companys common stock more attractive to prospective investors, in part by increasing the stocks trading liquidity b

boosting the outstanding common shares from 14.3 million to 60.5 million.


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Senior Management and Directors

Lawrence A. Siebert (51), Chairman and CEO: Mr. Siebert has been Chairman of Chembio Diagnostics, Inc. foapproximately 14 years and its President since 2002. His 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 middlemarket manufacturing and distribution companies. From 1992 to 1999, he was an investment consultant and busines

broker with Siebert Capital Corp. and Siebert Associates LLC, and was a principal investor in a privately held test anmeasurement company that was sold in 2002. Mr. Siebert received a J.D. from Case Western Reserve University Schoo

of Law in 1981 and a B. A. with Distinction in economics from the University of Connecticut in 1978.

Javan Esfandiari (41), Senior VP of Research and Development: Mr. Esfandiari co-founded and became a co-owne

of Sinovus Biotech AB, where he served as Director of Research and Development concerning lateral flow technolog

until Chembio Diagnostics Inc. acquired Sinovus in 2000. From 1993 until 1997, he was Director of research an

development with On-Site Biotech/National Veterinary Institute, Uppsala, Sweden; which was working in collaboratiowith Sinovus Biotech AB on development of veterinary lateral flow technology. Mr. Esfandiari received his B.S. iClinical Chemistry and his M. S. in Molecular Biology from Lund University, Sweden. He has published articles i

various veterinary journals and has co-authored articles on tuberculosis serology.

Robert Aromando (52), Senior Vice President, Commercial: Mr. Aromando joined Chembio Diagnostics in 2007following 30 years of business development and marketing experience with a broad range of diagnostics anpharmaceutical companies. These include Roche, Bracco Diagnostics, American Home Products, and Covance.

Richard J. Larkin (51), Chief Financial Officer: Mr. Larkin has been CFO since 2003, and oversees the financia

activities and information system. Prior to joining Chembio he served as CFO at Visual Technology Group (VTG) fromMay 2000 until September 2003, and also led its consultancy program. The program provided hands-on expertise in aaspects of financial service, including the initial assessment of client financial reporting requirements within an enterpris

resource planning (manufacturing) environment through training and implementation. Prior to joining VTG he served aCFO of Protex International Corporation from May 1987 to January 2000. Mr. Larkin holds a B.B.A. in accounting from

Dowling College and is a member of the American Institute of Certified Public Accountants.

Alan Carus (69), Director: Mr. Carus was elected to Chembios Board of Directors in 2005. He is a co-founder oLARC Strategic Concepts LLC, a consulting firm dedicated to guiding emerging companies to next stage developmen

Prior to founding that company he was Senior Vice President of Maritime Overseas Corporation (MOC) and a senio

executive of Overseas Shipholding Group, Inc. (OSG) from 1981 to 1998, when he retired. MOC was managing agenform OSG, one of the worlds largest ship owners. Mr. Carus was involved in numerous acquisitions, debt and equit

offerings, complex transaction structuring, and was active in the management of OSGs major investments in the cruisindustry and other development stage companies. From 1964 to 1981 he was with Ernst & Young (includinpredecessors), the last seven years as a partner. Mr. Carus has a B.B.A. from the Baruch School of Business of the Cit

College of New York.

Katherine Davis (51), Director: Ms. Davis was elected to the Companys Board of Directors in May 2007. She presently the owner of Davis Design Group LLC, a company that provides analytical and visual tools for public polic

design. Previously she served as the CEO of Global Access Point, a start-up company with products for data transpordata processing and data storage network and hub facilities. From October 2003 to January 2005 Ms. Davis helleadership; positions with agencies and programs in the State of Indiana, including State Budget Director, Secretary o

Family & Social Services Administration, and Deputy Commissioner of Transportation. From 1982 to 1989 she helsenior positions with Cummins Engine. Ms. Davis led the startup of initial investments by a $50 million Indiana stattechnology fund and she serves on numerous non-profit boards. She has a MBA from Harvard Business School and a B

in Mechanical Engineering from the Massachusetts Institute of Technology.


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Dr. Gary Meller (57), Director: Dr. Meller was elected to the Board of Directors in 2005. He has been the president oCommSense Inc., a healthcare business development company, since 2001. CommSense works with clients throughou

the world on medical information technology, medical records, pharmaceutical product development and financing, healtservices operations and strategy, and new product and new market development. From 1999 until 2001 Dr. Meller was th

executive vice president, North America, of NextEd Ltd., a leading internet educational services company in the AsiPacific region. Dr. Meller also is a limited partner and a member of the Advisory Board of Crestview Capital Master LLC

which is Chembios largest stockholder. He is a graduate of the University of New Mexico School Of Medicine and haan MBA from Harvard Business School.

James Merselis (54), Director: Mr. Merselis was elected to the Companys Board of Directors in March 2008. From

2002 to 2007, he served as President, CEO and Director of Hemosense, Inc., a company that develops, manufactures, and

sells handheld blood coagulation monitoring systems. From 1998 to 2002, Mr. Merselis served as President, CEO anDirector of Micronics, Inc., a Redmond Washington based company that develops in-vitro diagnostic products for diseasdiagnosis, prognosis and treatment monitoring. From 1976 to 1998 he held multiple positions at Boehringer Mannheim

including serving as Managing Director of the British affiliate of that company. Mr. Merselis holds an AdvanceManagement Program Certificate from the Harvard Business School and a Bachelor of Science degree in Biology from

Nebraska Wesleyan University.


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Analyst: Stephen L. HandleyMr. Handley has been engaged as an investment research analyst since 1961, and his career has encompassed broad experience aseveral Wall Street firms. This has included extensive experience on both the BUY and SELL sides of the Street. His research coveraghas focused on many industries and special situations, and in particular virtually all sectors of the healthcare industry. Mr. Handlegraduated from Stanford University with a B.S. in Chemical Engineering, and obtained an MBA from Stanford Business SchooThereafter, he joined Morgan Guaranty Trust's investment research department in New York. Then at White Weld & Co., he followe

chemical and drug companies. From 1968 - 1979, he was associated with F. Eberstadt & Co., becoming a partner in 1969. The laseight years at Eberstadt involved Eberstadt Asset Management (manager of the Chemical Fund and other assets), where he was aanalyst and Director of Research. From 1979 - 1985, Steve was a health care analyst at L.F. Rothschild, where he became a SpeciLimited Partner, and subsequently was a personal financial consultant to the Chairman of a major Wall Street firm. In 1986, Steve joineSmith Barney, where he initially followed special situations and then was a dedicated health care analyst focusing primarily on smamarket cap stocks.

Analyst Certification:I, Stephen L. Handley, hereby certify that the views expressed in this research report accurately reflect my personal views about thsubject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to threcommendations or views expressed in this research report.

Chembio Diagnostics, Inc., 3661 Horseblock Road, Medford, NY 11763, Phone (631) 924-1135.

Dutton Associates, John M. Dut ton, President, 3721 Douglas Blvd., Suite 350, Roseville, CA 95661.Phone (916) 960-0623, Fax (916) 960-0641.

Information, opinions or recommendations contained in Dutton Associates' research reports or research notes are submitted solelfor advisory and information purposes. The information used and statements of fact made have been obtained from sources considerereliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subjecto change without notice. A Dutton Associates research report or note is not intended as an offering or a solicitation of an offer to buy osell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of ancompany covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, whiccurrently costs US $35,000 prepaid for 4 Research Reports, typically published quarterly, and requisite Research Notes. DuttoAssociates received $51,000 from the Company for 6 Research Reports with coverage commencing on 02/07/2006. Reports arperformed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid iadvance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on thCompany at www.DuttonAssociates.com.

The views expressed in this research report or note accurately reflect the analyst's personal views about the subject securities or issuerNeither the analyst's compensation nor the compensation received by Dutton Associates is in any way related to the specifrecommendations or views contained in this research report or note.

Periodic Research Reports and Research Notes on this Company are available at our web site: www.DuttonAssociates.com.

Copyright 2008, by Dutton Associates

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