CHEMBIO DIAGNOSTICS, INC. - Quarter Report: 2017 March (Form 10-Q)

  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

_______________________________

 

FORM 10 - Q

 

_______________________________

 

 

For the quarterly period ended March 31, 2017

 

For the transition period from: ______ to ________

(Commission File Number)

(Exact name of registrant as specified in its charter)

3661 Horseblock Road

(Address of principal executive offices including zip code)

(631) 924-1135

(Registrant's telephone number, including area code)

(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No □

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒  No □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes □ No □

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes □ No ☒

As of May 5, 2017, the Registrant had 12,299,122 shares outstanding of its $.01 par value common stock.

Quarterly Report on FORM 10-Q

For The Quarterly Period Ended

March 31, 2017

Table of Contents

Chembio Diagnostics, Inc.

PART I

Item 1. FINANCIAL STATEMENTS

See accompanying notes to condensed consolidated financial statements

See accompanying notes to condensed consolidated financial statements

See accompanying notes to condensed consolidated financial statements

NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (the "Company" or "Chembio") and its wholly-owned subsidiaries, Chembio Diagnostic Systems Inc., and RVR Diagnostics Sdn Bhd ("RVR"), develop, manufacture, and market rapid diagnostic tests that detect infectious diseases. The Company's main lateral flow products are three rapid tests for the detection of HIV antibodies in whole blood, serum and plasma samples, two of which were approved by the FDA in 2006; the third is sold for export only. In addition, the Company has several products based on its patented Dual Path Platform (DPP®) technology, including a HIV test approved by the FDA in 2013 and CLIA-Waived in 2014. Lateral Flow Rapid HIV tests represented 30% of the Company's product revenues in the first three months of 2017. The Company's products based on its DPP® platform represented approximately 41% of the Company's product revenues in the first three months of 2017. The Company also has other rapid tests and components that together represented approximately 29% of product sales in the first three months of 2017. The Company's products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are sold under the Company's STAT PAK®, SURE CHECK®, STAT-VIEW® or DPP® registered trademarks, or under the private labels of its marketing partners. All of the Company's products that are currently being developed are based on its patented DPP®, which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology.

NOTE 2 — ACQUISITION OF RVR DIAGNOSTICS SDN BHD:

On January 9, 2017, pursuant to a stock purchase agreement (the "Stock Purchase Agreement), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd ("RVR"), a Malaysia corporation ("RVR"), for $3,231,000, utilizing some of the proceeds from the funds raised by the Company in August 2016, the issuance of Chembio's common stock, and a contingent consideration, as described below, related to RVR reaching a milestone based on revenues that was valued at $148,000.  RVR is a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays.  The Company acquired RVR to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.

Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding common stock and other equity interests of RVR for (i) a cash payment of $1,400,000, of which $550,000 was paid as a deposit in December 2016 and (ii) 269,236 shares of Chembio's common stock, with a value at closing of $1,683,000, of which 7,277 shares are being held back to satisfy certain potential claims under the Stock Purchase Agreement and will become issuable to the sellers, if at all, on the one-year anniversary of the closing.

In addition, the Stock Purchase Agreement provides that the sellers may become entitled to receive certain milestone payments based on the achievement of performance goals related to sales by RVR during the 12 months ending December 31, 2017. RVR's actual sales during that period will be used to determine the "Milestone Proration Amount," which is a fraction that (i) the numerator of which is the positive amount, if any, by which actual sales for calendar year 2017 are greater than $2,250,000, up to a maximum overage of $250,000, and (ii) the denominator of which is $250,000. Based on the actual sales achieved by RVR, the Sellers will be entitled to receive (i) a cash milestone payment equal to $100,000 multiplied by the Milestone Proration Amount, for a maximum cash milestone payment of $100,000, and (ii) a stock milestone payment equal to 21,830 shares of Chembio common stock multiplied by the Milestone Proration Amount, with a maximum stock milestone payment of 21,830 shares of Chembio common stock.  As of March 31, 2017 the Company accrued $148,000 for the milestone.  This amount is the estimated value of the common stock of $85,000 based on the assumption of reaching the milestone of 74.5% and discounted by 15%, as well as the cash portion of the milestone payment valued at $63,000.

As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,162,000 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets, which results largely from the addition of RVR's intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce. Our Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 include $25,000 of transaction costs related to the RVR acquisition, which are reflected as general administrative expenses.

The acquisition was accounted for using the purchase method of accounting.  The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:

 

* Total consideration includes the $1,400,000 paid in cash, $1,683,000 in shares of common stock and $148,000 in contingent consideration.

The Company calculated the fair value of the fixed assets based on the net book value of RVR as those approximate fair value.  The intellectual property, customer contracts and trade names were based on assumption by discounted cash flow using management estimates.  The order backlog was based on an order that RVR had at the closing, which was shipped in the first quarter of 2017, and valued at an estimated net income.  In addition, the Company is evaluating the impact of taxes on its preliminary intangible assets which could result in additional goodwill and a deferred tax liability.

As indicated, the allocation of the purchase price and estimated useful lives of property, plant and equipment, and intangible assets shown above is preliminary, pending final completion of valuations. The Company is currently assessing the tax impact, including deferred tax liabilities related to intangible assets as well as an amount of tax net operating loss carryforwards available to the Company.  Upon completion of this analysis, an adjustment may be required to goodwill.

For the period from January 10, 2017 to March 31, 2017, net sales and income before income taxes from the acquisition was approximately $1,392,000 and $155,000, respectively, which have been included in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2017.  The following represents unaudited pro forma operating results as if the operations of RVR had been included in the Company's Condensed Consolidated Statements of Operations as of January 1, 2016:

The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $240,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a)

Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of March 31, 2017 and for the three-month periods ended March 31, 2017 and 2016, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the SEC on March 7, 2017.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company's condensed consolidated financial position as of March 31, 2017, its condensed consolidated results of operations for the three-month periods ended March 31, 2017 and 2016, respectively, and its condensed consolidated cash flows for the three-month periods ended March 31, 2017 and 2016, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

b)

Revenue Recognition:

The Company recognizes revenue for product sales in accordance with ASC 605, which provides that revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.

For certain contracts, the Company recognizes revenue from non-milestone payments and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. Deferred revenues not earned were $116,668 and $392,517 as of March 31, 2017 and December 31, 2016, respectively.

The Company follows Financial Accounting Standards Board ("FASB") authoritative guidance ("guidance") prospectively for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.

c)

Inventories:

Inventories consist of the following at:

Inventories are stated net of reserves of approximately $245,000 as of March 31, 2017 and December 31, 2016.

d)

Earnings Per Share:

Basic earnings per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities, presented on a common share equivalent basis for the three-month periods ended March 31, 2017 and 2016, have been included in the earnings per share computations:

No additional securities, are presented on a common share equivalent basis for the three-month periods ended March 31, 2017 and 2016, as each period has a loss and any additional shares would be anti-dilutive.

There were 674,795 and 655,672 options outstanding as of March 31, 2017 and 2016, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended March 31, 2017 and 2016, respectively, because the effect would have been anti-dilutive.

e)

Employee Stock Option Plan:

Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), initially with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, non-incentive stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of March 31, 2017, there were 470,724 options exercised, 264,177 options outstanding and 15,099 options or shares still available to be issued under the SIP.

Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("2014-SIP"), with 800,000 shares of Common Stock available to be issued. Under the terms of the 2014-SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, non-incentive stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee at the time of the initial stock option grant. As of March 31, 2017, there were 12,000 options exercised, 203,750 options outstanding and 584,250 options or shares still available to be issued under the 2014-SIP.

The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the three-month periods ended March 31, 2017 and March 31, 2016, was $5.72 and $5.64 per share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon the historical volatility of our stock. The expected term is based on historical information.

The assumptions made in calculating the fair values of options granted during the periods indicated are as follows:

The Company's results for the three-month periods ended March 31, 2017 and 2016 include share-based compensation expense totaling approximately $135,900 and $53,600, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($8,500 and $-, respectively), research and development ($53,100 and $7,500, respectively), and selling, general and administrative expenses ($74,300 and $46,100, respectively). The income tax benefit has been recognized in the statement of operations for share-based compensation arrangements.

Stock option compensation expense for the three-month periods ended March 31, 2017 and 2016 is based on the estimated fair value, at the date of issuance, of options outstanding, which is being amortized on a straight-line basis over the requisite service period for each vesting portion of the award, except for those that vested immediately and for which the estimated fair value was expensed immediately.

The following table provides stock option activity for the three months ended March 31, 2017:

As of March 31, 2017, there was $432,452 of net unrecognized compensation cost related to stock options that have not vested, which is expected to be recognized over a weighted average period of approximately 2.37 years. The total fair value of stock options vested during the three-month periods ended March 31, 2017 and 2016 was $239,988 and $174,371, respectively.

f)

Geographic Information:

U.S. GAAP establishes standards for the manner in which business enterprises report information about operating segments in financial statements and requires that those enterprises report selected information. It also establishes standards for related disclosures about products and services, geographic areas, and major customers.

The Company produces only one group of similar products known collectively as "rapid medical tests".  In addition, the Company generates revenue from R&D, milestone and grant revenue and from license and royalties, all of which are currently earned in the U.S.  Management believes that it operates in a single business segment. Net product sales by geographic area are as follows:

g)

Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consist of:

h)

Goodwill and Intangible Assets:

 

Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired in our acquisition of RVR in January 2017. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair values of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit's fair value, we perform the second step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit's goodwill and intangible assets with the respective carrying values.

 

We didn't perform an impairment assessment as the value of goodwill was determined as of March 31, 2017, see note 2.  If actual future results are not consistent with management's estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal first quarter, or sooner if a triggering event occurs. As of March 31, 2017, we believe no indicators of impairment exist.

In addition, the Company added certain intangible assets as part of the RVR acquisition.  See note 2 for a full listing of the intangible assets which totaled approximately $1,800,000.  The Company amortized approximately $240,000 for the three months ended March 31, 2017.

i)

Recent Accounting Pronouncements Affecting the Company:

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018.  The Company has conducted a preliminary analysis of its sales contracts which are based on the shipment of goods to the customer, and currently this new accounting standard will not have a material impact on its consolidated financial statement for its sales contracts.  The Company has conducted a preliminary analysis of its current R&D contracts which are currently based on "as expenses are incurred" basis, and currently this new accounting standard will not have a material impact on its consolidated financial statement for current R&D contracts.

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for Chembio beginning in 2018, with early adoption permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will change certain aspects of accounting for share-based payments to employees.  ASU 2016-09 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016.  The Company adopted the provisions of ASU 2016-09 on January 1, 2017.  The Company evaluated this standard and the adoption of it did not have a material impact on its consolidated financial statement.

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04 Intangibles - Goodwill and Other (Topic 350) which would eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, the amount of an impairment charge would be recognized if the carrying amount of a reporting unit is greater than its fair value. ASU 2017-04 is effective for public companies for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company is currently evaluating the impact of the provisions of ASU 2017-04.

NOTE 4 — COLLABORATIVE RESEARCH AND DEVELOPMENT ARRANGEMENTS:

a)

Brain Injury agreement:

In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000 and a follow-on agreement in December 2016 for $350,000. The Company earned $117,000 and $62,000 for the three-month periods ended March 31, 2017 and 2016, respectively, from this agreement. The Company earned $883,000 from this grant from inception through March 31, 2017.

b)

Malaria agreement:

In April 2016, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $678,000.  The Company earned  $159,000 for the three-month period ended March 31, 2017 from this agreement.  The Company earned $678,000 from this grant from inception through March 31, 2017.

c)

Fever Panel agreement:

In October 2015, the Company entered into a technology development agreement with the Paul G. Allen Ebola Program for $2,118,000 and a follow-on agreement in February 2016 for $550,000. The Company earned none and $572,000 for the three-month periods ended March 31, 2017 and 2016, respectively, from this agreement. The Company earned $2,668,000 from this grant from inception through March 31, 2017.

d)

BARDA Zika agreement:

In August 2016, the Company was awarded a grant for $5,934,000 from BARDA, which is part of the U.S. Department of Health And Human Resources. The Company earned $412,000 for the three-month period ended March 31, 2017 from this agreement. The Company earned $885,000 from this grant from inception through March 31, 2017.

e)

USDA Bovid:

In September 2016, the Company entered into a Phase II agreement with the USDA for an additional $600,000 to develop a Bovid TB assay.  The Phase I agreement was for  $70,000.  Revenue for these agreements are being recognized under a proportional performance method. The Company earned $101,000 for the three-month period ended March 31, 2017 from these agreements. The Company earned $153,000 from these agreements from inception through March 31, 2017.

f)

FIND agreement:

In March 2017, the Company entered into a technology development agreement with FIND  for $999,000. The Company earned $0 for the three-month period ended March 31, 2017 from this agreement. The Company didn't start work on this agreement until after  March 31, 2017.

NOTE 5 — RIGHTS AGREEMENT:

In March 2016, the Company entered into a Rights Agreement dated as of March 8, 2016 (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2016, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.

Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date, which is defined below. Until a Right is exercised, the holder thereof, in his capacity as a holder of Rights, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.

Separation and Distribution of Rights. The Rights will be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 20% or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 20% or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").

NOTE 6 — COMMON STOCK, WARRANTS AND OPTIONS:

During the first quarter of 2017, options to purchase 10,969 shares of the Company's common stock were exercised on a cashless basis into 3,039 shares of common stock at an exercise price of $4.00 by surrendering options and shares of common stock already owned.

The Company entered into an employment agreement, effective as of March 13, 2017 (the "CEO Employment Agreement"), with John Sperzel to serve as the Company's Chief Executive Officer, for an additional term of three years through March 5, 2020. Pursuant to the Employment Agreement, the Company issued to Mr. Sperzel incentive and non-qualified stock options to purchase 20,000 shares of the Company's common stock. These options vest on the third anniversary or March 13, 2020. The exercise price for these options was equal to the volume weighted trading price for the Company's common stock on March 31, 2017, which was $5.3666 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Sperzel's employment with the Company or (b) the seventh anniversary of the effective date of the grant.

During the first quarter of 2017, the Company issued options to purchase 5,000 shares of common stock to each of six members of the executive team.  The options became exercisable on the date of issue.  The options issued have an exercise price of $5.25 per share, which was  the last traded price of the common stock on the day issued.  The options expire five years from date of issue.

During the first quarter of 2017, the Company issued options to purchase 36,000 shares of common stock to a newly-hired vice-president of operations. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $6.30 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.

During 2016, options to purchase 191,804 shares of the Company's common stock were exercised on a cashless basis into 98,599 shares of common stock at exercise prices ranging from $2.80 to $5.56 by surrendering options and shares of common stock already owned.

During the fourth quarter of 2016, the Company issued options to purchase 36,000 shares of common stock to a newly-hired president of the EMEA and APAC regions. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued have an exercise price of $7.15 per share, which was the last traded price of the common stock on the day issued. The options expire five years from date of issue.

The Company closed an underwritten public offering of 2,300,000 shares of its common stock on August 3, 2016. The price per share of common stock sold in the offering was $6.00 per share. The net proceeds of the offering, after deducting the underwriters' discounts and other offering expenses payable by the Company, was approximately $12,493,000.  The Company intends to use the net proceeds for business expansion and working capital, including product development, operational improvements, clinical trials, and sales and marketing.

During the second quarter of 2016, the Company issued options to one of its directors pursuant to the Company's compensation policy for directors.  The director was issued options to purchase 46,875 shares of common stock.  The options become exercisable in five equal annual installments starting on the date of issue.  The options issued have an exercise price of $8.86 per share, which was  the last traded price of the common stock on the day issued.  The options expire five years from date of issue.

The Company entered into an employment agreement, effective as of March 5, 2016 (the "Employment Agreement"), with Javan Esfandiari to serve as the Company's Chief Scientific and Technical Officer, for an additional term of three years through March 5, 2019. Pursuant to the Employment Agreement, the Company issued to Mr. Esfandiari incentive and non-qualified stock options to purchase 60,000 shares of the Company's common stock. Of these stock options, options to purchase 20,000 shares vest on each of the first three anniversaries of March 11, 2016 which is the date on which the Employment Agreement was entered into. The exercise price for these options is equal to the trading price for the Company's common stock on March 11, 2016, which was $5.64 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Mr. Esfandiari's employment with the Company or (b) the fifth anniversary of the effective date of the grant.

NOTE 7 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

a)

Economic Dependency:

The following table discloses product sales the Company had to each customer that purchased in excess of 10% of the Company's net product sales for the periods indicated:

(*) Product sales did not exceed 10% for the period indicated.

Note that sales include product sales only while accounts receivable reflects the total due from the customer, which includes freight.

The following table discloses purchases the Company made from each vendor that sold to the Company in excess of 10% of the Company's total purchases for the periods indicated:

(*) Purchases did not exceed 10% for the period indicated.

The Company currently buys materials which are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms as the vendors shown in this table. A change in suppliers, however, could cause a delay in manufacturing, either from the logistics of changing suppliers or from product changes attributable to new components, which could result in a possible loss of sales, and which could adversely affect operating results.

b)

Governmental Regulation:

All of the Company's existing and proposed diagnostic products are regulated by the United States Food and Drug Administration, United States Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping, are subject to regulatory review. After marketing approval has been granted, Chembio must continue to comply with governmental regulations. Failure to comply with these regulations can result in significant penalties.

c)

Employment Agreements:

The Company has employment contracts with five key employees: CEO John J. Sperzel III; President Americas Sharon Klugewicz; CSTO Javan Esfandiari; Managing Director of RVR Magentiren Vajuram; Vice-President of RVR Dr. Avijit Roy. The contracts call for salaries presently aggregating $1,265,000 per year. The Sperzel contract expires in March 2020, the Klugewicz contract expires in May 2017, the Esfandiari contract expires in March 2019, and the Vajuram and Roy contracts expire January 9, 2018. In connection with the Sperzel contract that expires in March 2020, the Company issued, in March 2017, options to purchase 20,000 common shares of stock, which vest on the third anniversary of the grant. In connection with the Klugewicz contract that expires in May 2017, no options were issued; however in connection with the prior Klugewicz contract that expired in May 2015, the Company issued, in May 2013, options to purchase 5,000 shares of common stock, with one-half vesting on each of the first and second anniversaries of the grant. In connection with the Esfandiari contract that expires in March 2019, the Company issued, in March 2016, options to purchase 60,000 shares of common stock, with one-third vesting on each of the first, second and third anniversaries of the grant.

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 subsidiaries 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, 2016, with the exception of goodwill.

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 which are currently marketed under Chembio's label (DPP® HIV 1/2 Screening Assay and DPP® HIV 1/2 –Syphilis Assay, which latter assay is not yet approved to be marketed in the U.S.), or which may be marketed pursuant to private label license or distribution agreements such as those with the Oswaldo Cruz Foundation ("FIOCRUZ"), Labtest, RVR and Bio-Rad.

Research and development ("R&D"), milestone, and grant revenues for the three months ended March 31, 2017 increased to $0.80 million from $0.66 million in the prior-year period, which was primarily the result of increased R&D project revenues in 2017.

R&D expenses in the three months ended March 31, 2017 were $2.25 million, compared with $1.63 million in the prior-year period. Development work continues on several assays utilizing Chembio's DPP® platform, including the DPP® HIV multiplex tests that are designed to detect various infectious diseases such as Zika, Malaria, Dengue and other fever diseases partially funded by projects and grants.

Sexually Transmitted Disease

 

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DPP® HIV-Syphilis Assay: The DPP® HIV-Syphilis Assay is a rapid, point-of-care (POC), multiplex test for the simultaneous detection of antibodies to HIV and to Treponema Pallidum (TP) bacteria (the causative agent of syphilis). This novel combination assay was developed to address the growing concern among public health officials regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product received approval by the Mexican regulatory agency (Cofepris) in 2014, received approval by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA) in 2015, and received CE mark approval in 2017. We are developing a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, which was initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed.  As a result, Chembio is in discussion with the FDA regarding the timing of filing the Premarket Approval Application with the FDA.

 

Fever & Tropical Disease

 

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DPP® Malaria Assay: The DPP® Malaria Assay is a rapid, POC, multiplex test for the simultaneous detection of plasmodium falciparum, and other plasmodium infections. In January 2015, we received a grant from the Bill & Melinda Gates Foundation to expedite the development and feasibility testing of a POC DPP® Malaria Assay. The Company completed this project, which compared the new DPP® Malaria Assay to the world's leading currently-available POC malaria assay with favorable results: a ten-fold improvement in sensitivity.  In April 2016, we received a second Malaria grant from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world's first oral fluid/saliva POC diagnostic test to simply and accurately identify individuals infected with all species of malaria. We recently completed the feasibility, and plan to deliver DPP® Malaria Assays to a partner of the Bill & Melinda Gates Foundation during the second quarter of 2017, to commence field evaluation.

 

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DPP® Zika Assay: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development the DPP® Zika Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million ($5.9 million to develop DPP® Zika Assay and obtain U.S. regulatory approval). The Company filed the following regulatory submissions: U.S. Food And Drug Administration Emergency Use Authorization (EUA), World Health Organization EUA, Brazil's regulatory agency ANVISA, Mexico's regulatory agency Cofepris, and CE mark. The Company obtained CE mark in July 2016, and then began selling in the Caribbean region via its distribution partner, Isla Lab, LLC. In September 2016, the Company received a contract award from CDC, to initiate a Zika surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika IgM/IgG Assay to CDC for field testing purposes during the first quarter of 2017. The Company received ANVISA approval (Brazil) for the DPP® Zika IgM/IgG Assay in November 2016, and is working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader.

 

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DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system related to the DPP® Dengue Fever Assay. We completed verification and validation studies, and production of pilot lots, to support preclinical studies. Also during 2016, we initiated registration to begin initial commercialization in Southeast Asia, and we initiated sales of our DPP® Dengue Assay in Southeast Asia during Q1 2017.

 

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DPP® Chikungunya Assay: The DPP® Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Chikungunya Assay.

 

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DPP® Zika/Dengue/Chikungunya Assay: The DPP® Zika/Dengue/Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika/Dengue/Chikungunya Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika/Dengue/Chikungunya Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million (including an option of $7.3 million to develop DPP® Zika/Dengue/Chikungunya Assay and obtain U.S. regulatory approval). In September 2016, the Company received a contract award from CDC, to initiate a Zika, Dengue, and Chikungunya surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika/Dengue/Chikungunya IgM/IgG Assay to CDC during the first quarter of 2017.

 

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DPP® Fever Panel Assay (1): The DPP® Fever Panel Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa, and Marburg. In October 2015, we received a $2.1 million grant from the Paul G. Allen Ebola Program to develop the DPP® Fever Panel Assay and a $0.55 million follow-on grant to add a test for the detection of Zika virus. We completed the development of the DPP® Fever Panel Assay in 2016, including the addition of Zika, and we supplied 10,000 tests to FIND, which initiated field evaluation in Peru and Nigeria.

 

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DPP® Fever Panel Assay (2): The DPP® Fever Panel Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. In April 2017, the Company announced collaboration with FIND, to develop the DPP® Asian Fever Panel Assay.

 

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DPP® Ebola Assay and DPP® Malaria-Ebola Assay: The DPP® Ebola Assay is a rapid POC test for the detection of Ebola, and the DPP® Malaria-Ebola Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria and Ebola. In October 2014, we announced plans to develop, validate, and commercialize POC DPP® Assays for Ebola and Febrile Illness. We completed the development of the DPP® Ebola Assay and submitted it for Emergency Use Authorization (EUA) with the Food & Drug Administration (FDA) and World Health Organization (WHO), and we are actively engaged with these regulatory agencies. During the third and fourth quarters of 2015, we sold DPP® Ebola and DPP® Malaria-Ebola Assays to the Centers for Disease Control & Prevention (CDC) for field studies in West Africa, which is ongoing.

 

Technology Collaboration

 

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DPP® Cancer Assay: The DPP® Cancer Assay is a rapid, POC, multiplex test for the early detection and monitoring of a specific type of cancer. In October 2014, we entered into collaboration with an international diagnostics company to develop a POC diagnostic test for a specific type of cancer. This program is fully funded by this partner. However, under the terms of the agreement, neither Chembio's partner nor the specific type of cancer is being disclosed. The cancer project represents an application of the DPP® technology outside of the infectious disease field, and the scope of the agreement involves product development of a quantitative, reader-based cancer assay for two cancer markers, utilizing Chembio's DPP® technology and DPP® Micro Reader. During the third quarter of 2015, we completed successful feasibility, and our partner agreed to fund continued development of the DPP® Cancer Assay, which development and verification is ongoing.

 

 

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DPP® HIV-Syphilis Assay: We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, which was initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed.  As a result Chembio is in discussion with the FDA regarding the timing of filing the Premarket Approval Application with the FDA.

 

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DPP® Zika IgM/IgG System:  In July of 2016 Chembio obtained a CE Mark for the DPP® Zika IgM/IgG Assay.  The DPP® Zika IgM/IgG System, which includes an assay utilizing the patented DPP® technology as well as a digital reader (DPP® Micro Reader), is now cleared for commercialization in European countries as well as the majority of the Caribbean nations, not including U.S. territories. In November of 2016, we received approval from ANVISA, Brazil's regulatory Agency, and we are working with our Brazilian partner, Bio-Manguinhos, to obtain ANVISA approval for the DPP® Micro Reader. We have also filed regulatory submissions to FDA (Emergency Use Authorization), the World Health Organization (Emergency Use Assessment and Listing), and Cofepris (Mexico), and we are actively engaged with these organizations.

 

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.

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, goodwill, and income taxes. For a summary of our significant accounting policies, which have not changed from December 31, 2016, see our Annual Report on Form 10-K for the twelve months ended December 31, 2016, with the exception of goodwill, which was filed with the SEC on March 7, 2017.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2017 AS COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2016

 

 

Income:

 

 

For the three months ended March 31, 2017, Loss before income taxes was $1,616,000 compared to $466,000 for the three months ended March 31, 2016. Net Loss for the 2017 period was $1,616,000 as compared to $304,000 for 2016. The increase in Net Loss is primarily attributable to an increase in operating expenses, a decrease in product revenues, and decreased product gross margin, partially offset by increased R&D revenues of $136,000. Product gross margin decreased in the three months ended March 31, 2017, as compared with the three months ended March 31, 2016, by $273,000 or 11.01%.

Revenues for our lateral flow HIV tests and related components during the three months ended March 31, 2017 decreased by approximately $1,425,000 from the same period in 2016. This was primarily attributable to decreased sales to North America of approximately $1,240,000, decreased sales to Africa of approximately $438,000, and decreased sales to Asia of approximately $44,000, partially offset by increased sales to Europe of approximately $325,000. Revenues for our DPP® products during the three months ended March 31, 2017 decreased by approximately $439,000 over the same period in 2016, primarily due to decreased sales in Brazil.  Revenues for our other products during the three months ended March 31, 2017, increased by approximately $1,374,000, primarily as a result of sales from our Malaysia subsidiary.  The increase in R&D, and in milestone and grant revenue, was primarily due to increased R&D project revenues in 2017.

Management is now focused on sales by region more than on sales by product types.  To make the transition easier for the reader we are providing the following table which shows sales by region and by product type.

The overall gross margin dollar decrease of $60,000 included a $273,000 decrease in gross margin from product sales and was partially offset by a $214,000 increase in non-product revenues. The decrease in net product sales gross margin of $273,000 is primarily attributable to the reduction in sales compared to 2016. The net product sales gross margin decrease is primarily affected by two components, one is the decrease in product sales of $490,000, which, at the 41.9% margin percentage for March 31, 2016, contributed $205,000 to the decrease, and the other is the decreased change in margin percentage of 1.25%, which contributed $68,000 to the balance of the decrease in our net product sales gross margin.

Research and development expenses include costs incurred for product development, regulatory approvals, clinical trials, and product evaluations.

Expenses for Clinical & Regulatory Affairs for the three months ended March 31, 2017 increased by $423,000 as compared to the same period in 2016. This was primarily due to the increase in clinical trial expenses of $421,000.

R&D expenses other than Clinical & Regulatory Affairs increased by $190,000 in the three months ended March 31, 2017, as compared with the same period in 2016. The increases were primarily related to an increase in material and supplies, in order to support the increase in our sponsored research.

Selling, general and administrative expenses for the three months ended March 31, 2017, increased by $489,000 as compared with the same period in 2016, a 24.5% increase. This increase resulted primarily from increases in wages and related costs due to an increase in sales staff, stock-based compensation, marketing material, travel, entertainment and trade shows, and other expenses which were partially offset by decreases in commissions, primarily due to decreased sales to Brazil,  and decreases in consulting, professional fees, and investor relations expenses.

Other income for the three months ended March 31, 2017 increased to $13,382, from an income of $2,564 in the same period in 2016, primarily as a result of interest income received as a result of more cash to invest.

The Company recorded a full valuation allowance during the three months ended March 31, 2017, on its deferred tax assets.

MATERIAL CHANGES IN FINANCIAL CONDITION

Cash decreased by $4,972,000 from December 31, 2016, primarily due to cash used in operating activities and cash used in investing activities, primarily for the acquisition in RVR, for the three months of 2017. In addition, there were increases in accounts receivable of $2,298,000 (primarily due to a large customer as described under "Liquidity And Capital Resources"), inventories of $419,000, prepaid expenses, net of amortization, of  $70,000, net fixed assets of $192,000, deposits on manufacturing equipment of $142,000, an increase in accounts payable and accrued liabilities of $385,000, and increases in goodwill and intangible assets of $1,162,000 and $1,560,000, respectively due to the RVR acquisition.  We experienced a decrease in deposits and other assets of $559,000, primarily from reducing the deposit paid for the RVR acquisition, and a decrease in deferred revenue of $276,000.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash decreased as of March 31, 2017 by $4,972,000 from December 31, 2016, primarily due to cash used in operating activities, and net cash used in investing activities, primarily for the RVR acquisition, for the first three months of 2017.

The cash used in operations in the first three months of 2017 was $3,872,000, which consisted primarily of an increase in accounts receivable of $2,298,000, an increase in prepaid expenses of $114,000 (net of amortization), increase in inventories of $419,000, a decrease in deferred revenue of $276,000, and a net loss net of non-cash items of $1,002,000, partially offset by cash provided by an increase in accounts payable and accrued liabilities of $237,000. Net loss net of non-cash items includes loss before income taxes of $1,616,000 reduced by non-cash expenses of $478,000 in depreciation and amortization, and of $136,000 in share-based non-cash compensation. The use of cash from investing activities is primarily due to the acquisition of RVR for $1,400,000 in cash, of which $850,000 was paid in the three months ended March 31, 2017, and partially offset by reduction in deposit for RVR investment of $550,000 for a deposit paid in December of 2016.

The Company currently has positive working capital.  It has used approximately $5.0 million in cash for the three months ended March 31, 2017, primarily due to cash used in operating activities. Approximately $2.8 million of the total $5.7 million of accounts receivable is related to one customer, and the Company has a high degree of confidence that this account receivable is collectible from this customer.

Fixed Asset Commitments

As of March 31, 2017, the Company had $173,499 in deposits on equipment, and $191,400 in commitments for additional equipment purchase obligations.

RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS

 

Subsequent to the first quarter of 2017, Chembio had another important development in the fever disease business, as the Company entered into a new collaboration with FIND to develop a POC test that can identify multiple life-threatening acute febrile illnesses common in the Asia Pacific region. Over the next twelve months, Chembio and FIND will endeavor to develop a simple, rapid, and cost-effective test, based on Chembio's proprietary DPP^® technology platform, to detect multiple diseases simultaneously.  Developing such a test, to address the most common causes of fever in Asia Pacific, is aligned with the Company's growth strategy and affirms Chembio's commitment to the development of new and innovative POC diagnostic tests for life-threatening febrile illnesses.

It is important to note that nearly all of the Company's fever and tropical disease products are being developed through collaborations and/or funding from world-leading health organizations including, the Bill & Melinda Gates Foundation, the Paul G. Allen Family Foundation, the CDC, FIND, the U.S. Department of Health And Human Services (HHS), the Office of the Assistant Secretary for Preparedness and Response, and the Biomedical Advanced Research And Development Authority (BARDA).

In addition to the progress the Company achieved with its programs, Chembio had two important corporate/operational advances during the first quarter of 2017.

As part of Chembio's global commercialization strategy, the Company appointed three new international sales executives. Javier Gutman joined the Company as Regional Director, Latin America, Kenneth Burns joined the Company as Regional Director, Africa, and Mohan Anasalam joined the Company as Regional Director, Asia Pacific.  The newly appointed sales executives will focus on increasing product sales, strengthening and expanding the Company's distribution channels, and providing local support to customers and commercial partners in their respective regions.

Also in January 2017, the Company completed the acquisition of RVR Diagnostics Sdn Bhd (RVR), a Malaysia, privately-held manufacturer and distributor of POC diagnostic tests for infectious diseases.  Since the beginning of Chembio's alliance with RVR in 2014, RVR successfully built a manufacturing facility capable of producing DPP® Assays and obtained ISO 13485 certification for the plant.  RVR also received regulatory approval to market and sell products in certain Southeast Asia countries, provided funding to accelerate the development of Chembio's DPP^® Dengue Assay, and was granted an important Dengue tender award in Malaysia.   Chembio made the decision to acquire RVR as a result of the considerable progress made by RVR over the last two years, and to further support the Company's global product and commercialization strategy. As a subsidiary of Chembio, RVR is an important base of operations, providing additional revenue, a strategically located and cost-effective manufacturing facility, and a path to regulatory access in Southeast Asia.

Overview of Chembio's Global Sales

Within a number of geographic regions, Chembio had several notable sales successes during the first quarter of 2017. In Asia Pacific, the Company achieved $1.4 million in product sales, driven by key tender wins in Malaysia, representing the first time Chembio has achieved meaningful sales in Asia. In the U.S., the Company achieved $1.1 million in product sales, and a number of HIV tenders, which were won during the last two quarters and much of which the Company expects to realize over the next 18 months. In Latin America, Chembio achieved product sales of $2.1 million driven by sales to Brazil and, as noted, the Company secured a large order in the HIV testing market, which we expect to positively impact our business in Brazil during the remainder of 2017. And, in Europe and Africa, the Company achieved $0.8 million in combined product sales, largely driven by HIV sales in the HIV self-testing and professional HIV testing segments.

The advances during the first quarter of 2017 significantly changed the Chembio organization and strengthened its global sales and marketing organization.  During the first quarter, Chembio established a new operational base in Southeast Asia that will provide the Company with important manufacturing efficiencies, a successful turnkey commercialization organization, and access to regulatory approvals in the region.  It also brings a strong revenue stream.

In the sexually transmitted disease business, the Company received an important CE mark for the DPP^® HIV-Syphilis combination assay, clearing it to be marketed and sold within the member states of the European Union and in the Caribbean region, except for Puerto Rico.  As Chembio continues to advance the DPP^® HIV-Syphilis combination assay for the U.S. market, we are encouraged to have another important region validate the importance of this combination diagnostic.

In our fever disease business, based on the success Chembio has already demonstrated with the development of its DPP^® Fever Panel – Africa, the Company entered into a new collaboration for the development of the DPP^® Fever Panel – Asia with FIND, a world-leading organization dedicated to the delivery of high-quality, affordable diagnostics to communities in need around the world.  The new DPP^® Fever Panel is being developed to test for nine infectious diseases that are specific to the Asia region.

And lastly, to support each of these advances and the Company's growth objectives, Chembio appointed three seasoned and successful sales executives to manage and expand the Chembio sales footprint worldwide.

We believe the advances made during the first quarter of 2017 demonstrate Chembio's commitment to continue expanding its global commercial channels, strengthening its core business in the sexually transmitted disease market, and building a strong position in the high-growth fever and tropical disease market.

ITEM 4.

CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of March 31, 2017 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

EXHIBITS INDEX

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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