Chembio Diagnostics, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to your Chembio Diagnostics 2017 Third Quarter Financial Results Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, John Sperzel Chief Executive Officer. Sir, the floor is yours.

[John Sperzel:]

Good afternoon. And thank you for participating in today’s call. Joining me today is Rich Larkin, our Chief Financial Officer. Before we begin, I’d like to caution that comments made during this conference call today, November 8, 2017, will contain forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs of the company, which involve a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. During the third quarter of 2017, the company continued to execute its strategy with a focus on three key areas

[Rich Larkin:]

Thanks, John. In conjunction with my comments, I’d like to recommend that participants review Chembio’s 10-Q filing for additional details. First, I will review the financial information for the third quarter of 2017. Our total revenues for the third quarter of 2017 of $7.6 million increased 102.5% compared to $3.7 million in the prior year period. Product sales in the 2017 third quarter of $6.1 million increased 145.1% compared with $2.5 million in the prior year period. R&D milestone grant and royalty revenues in the 2017 third quarter of $1.5 million increased 16.9% compared with $1.2 million in the prior-year period. Gross margin dollars for the third quarter of 2017 of $3.5 million increased 80.5% compared with $2 million in the prior-year period, due primarily to increased product revenues. Our product gross margin dollars in the 2017 third quarter of $2.1 million, increased 192.2% compared with $0.7 million in the prior-year period, again was also due primarily to the increase in our product revenues. Research and development expenses for the third quarter of 2017 of $1.8 million decreased 20.2% compared to $2.3 million in the prior-year period. Selling, general and administrative expenses for the third quarter of 2017 of $2.3 million increased 25.8% compared with $1.8 million in the prior-year period, largely due to investments made to scale up our sales and marketing organization globally and commissions, which were due to increased sales in Brazil. Operating loss for the third quarter of 2017 was $0.6 million compared with an operating loss of $2.1 million in the prior-year period. Net loss for the third quarter of 2017 was $0.6 million or $0.05 per diluted share compared with a net loss of $2.1 million or $0.19 per diluted share in the prior-year period. Now, I will review the financial information for the first 9 months of 2017. Our total revenues for the first 9 months of 2017 of $18 million increased 32.4% compared to $13.6 million in the prior-year period. Product sales in the 2017 first 9 months of $14.5 million increased 38.3% compared with $10.5 million in the prior-year period. R&D milestone grant and royalty revenues in the 2017 first 9 months of $3.6 million increased 13.1% compared with $3.2 million in the prior-year period. Gross margin dollars for the first 9 months of 2017 of $8.5 million increased 27.5% compared with $6.7 million in the prior-year period, due primarily to the increase in product sales. The amount of product gross margin in the 2017 first 9 months of $5 million increased 40.4% compared with $3.5 million in the prior-year period. Research and development expenses for the first 9 months of 2017 of $6 million decreased 3.7% compared with $6.3 million in the prior-year period. Our selling, general and administrative expenses for the first 9 months of 2017 of $6.9 million increased 27.1% compared with $5.4 million in the prior-year period, largely due to investments made to scale up our sales and marketing organization globally, also commissions and professional fees. Operating loss for the first 9 months of 2017 was $4.4 million compared with an operating loss of $5 million in the prior-year period. The net loss for the first 9 months of 2017 was $4.4 million or $0.36 per diluted share compared with a loss of $10.8 million or $1.06 per diluted share in the prior year period. The net loss in the 2016 period includes a tax provision for the recording of a valuation allowance on the company's deferred tax asset of $5.8 million. Lastly, the company had cash and cash equivalents of $1.9 million as of September 30, 2017, compared with $10.6 million as of December 31, 2016. The decrease was primarily due to cash used in operating activities of $7.2 million. Our working capital decreased by $4.9 million from $14.7 million as of December 31, 2016 to $9.8 million, largely due to increased SG&A expenses and primarily, again, due to our global organization scale up and the acquisition of CDM earlier this year, CDM being Chembio Diagnostics Malaysia, formerly known as RVR. Our accounts receivable net of allowance of $5.8 million as of September 30 compared with $3.4 million as of December 31, 2016. And our cash and accounts receivable combined as of September 30, 2017 was $7.6 million as compared to $13.9 million as of December 31, 2016. That concludes the financial review and I will turn the call over to John.

[John Sperzel:]

Thanks, Rich. As previously noted, we're focused on three key areas; strengthening our core sexually transmitted disease business, building a broad tropical and fever disease portfolio, and building a global commercial team. I'll provide an overview of the achievements during the third quarter of 2017 for each of these areas as well as a few operational achievements. To strengthen our core sexually transmitted disease business, we're focused on several key initiatives. The first key initiative is to sell our high quality HIV assays to more countries and more customers. We made very good progress on this initiative during the third quarter of 2017 as our total HIV product sales increased 273% compared with the prior year period, including HIV sales increases in the United States, Latin America, Europe, and Africa. As previously noted, we regained our position in Brazil's National HIV Testing Algorithm, which resulted in a $5.8 million order from Brazil during the second quarter. During the second and third quarters, we shipped $4.4 million of the $5.8 million order and we expect to ship the remaining $1.4 million during the fourth quarter of 2017. Early indications from Brazil's Ministry of Health indicate strong demand for our DPP HIV and other products in 2018. The second key initiative is to prioritize our DPP HIV Syphilis Assay in response to the global concerns related to HIV and Syphilis co-infection and mother to child transmission. We expect to complete the US clinical trial for our DPP HIV Syphilis Assay by year end in preparation for the FDA submission, which we believe keeps us on track to be first to market a combination HIV Syphilis in the United States. Outside the United States, in early 2018, we plan to initiate a DPP HIV Syphilis Multicenter Study in 10 countries in collaboration with the World Health Organization. The third key initiative is to expand the use of our CE Mark DPP Syphilis Screen & Confirm Assay, which has been successfully deployed in several pilot programs in Africa in collaboration with the Centers for Disease Control and Prevention, or CDC. This is a unique product as it's the only rapid test that can detect both active and past treated Syphilis infections simultaneously, taking advantage of DPP's multiplexing capability. The final key initiative is to expand our international HIV self-test business. During 2017, we've seen growth in our HIV self-test business, which is the major driver of the 219% year-over-year growth we've achieved in Europe through the first nine months of 2017. Our HIV products, including DPP and SURE CHECK Brands are well suited for the international HIV self-test markets, which we believe offer significant growth potential. Shifting gears, to build a broad tropical and fever disease portfolio, we're leveraging our patented DPP technology platform to develop point of care tests for some of the world's most significant global health threats, including malaria and Dengue, which collectively account for approximately 600 million cases per year. At the beginning of 2017, we communicated our intent to develop and commercialize multiple tropical and fever disease products during the year and we have made excellent progress. First, let's discuss malaria. According to the World Health Organization, nearly 1/2 of the world's population is at risk of malaria. Over 200 million people are infected annually and approximately 425,000 annual deaths are attributed to malaria. With prior funding from the Bill and Melinda Gates Foundation, we developed a DPP Malaria assay with superior sensitivity compared to competitive malaria tests. Our DPP Malaria assay has been evaluated by a Gates Foundation partner. We're satisfied with the performance results and we plan to begin commercialization of our DPP Malaria assay during 2018. Second, let's discuss Dengue. According to the Centers for Disease Control and Prevention, nearly 1/3 of the world's population is at risk of Dengue. Nearly 400 million cases occur each year and approximately 12,500 annual deaths are attributed to Dengue. As mentioned during the last quarterly update, we've initiated sales of our DPP Dengue assay and we previously initiated a pilot program with the CDC for our DPP Dengue/Zika/Chikungunya combination assay in 4 countries

[Operator:]

Thank you. The floor is now open for questions [Operator Instructions]. Our first question comes from Kevin. Please state your question.

[Kevin Ellich:]

Good afternoon. Hey, John, welcome back. Glad to have you on the call again.

[John Sperzel:]

Thanks Kevin.

[Kevin Ellich:]

Starting off with the FDA emergency use authorization for DPP Zika, I guess can you give us some color as to how the initial uptake has been for the test? What sort of impact should we see and how much revenue do you think you'll be able to drive for the remainder of the year and into 2018? And have follow after that as well.

[John Sperzel:]

Sure. First, I'd like to say we're really pleased with our progress on the DPP Zika Assay. I think it started with the $5.9 million in funding from Health and Human Services, or BARDA. We developed DPP Zika Assays that have excellent sensitivity and specificity. We achieved a number of regulatory approvals during 2017. And as I mentioned in my prepared remarks, we believe we're well positioned to capture meaningful Zika sales during 2018. I'll comment, a little bit, Kevin, on a regional basis as far as what we're doing and starting in the U.S. because you asked about FDA emergency use authorization. Following the granting of the EUA, we launched the DPP Zika Assay via our U.S. sales team with a focus on state departments of health, local public health departments, and certain OBGYN offices. I think as you know, there have been algorithms developed while prior Zika assays. There are PCR tests or laboratory based ELISA tests were developed. And we're working on how to integrate the first FDA/EUA approved rapid Zika test into the algorithms. And we've had very positive feedback from the public health departments and the state health departments that we've spoken with thus far. But we do not have any meaningful sales to report in the U.S. market. Outside the U.S., I'd like to comment a little bit on what we're doing in the various regions. In the Caribbean region, where we launched our CE Mark product via our exclusive distribution partner, Isla Lab, which is based in Puerto Rico, we have had initial sales uptake. We're not prepared to discuss the details of what that is but we can say that we have started selling in the Caribbean region. In Brazil, following the recent approval of the DPP Zika System, including the DPP Microreader, we completed a study comparing our DPP Zika Assay with the competitive Zika product produced in Brazil and we confirmed the superiority of our product. We're hopeful that we can develop sales of our Zika Assay in Brazil during 2018 but we have not yet in 2017. And I think most notably, in Africa, we're pursuing a Zika contract award from UNICEF. And for those folks who aren't familiar with UNICEF's Zika Test Initiative, in February of this year, UNICEF launched an RFP, Request For Proposal, for the supply of Zika Virus Diagnostics for testing and point of care between let's say the end of 2017, which is essentially 2018 now, through 2019. That RFP is supported by a $10 million advanced purchase commitment from USAID and UNICEF is collaboration with partners such as WHO and Pan American Health Organization or PAHO, to make those tests available in Africa. We believe that we are very well positioned to get a contract award from UNICEF given the fact that we're the only rapid Zika test to have FDA emergency use authorization and we're one of two companies that had previously been engaged with WHO, which was one of the criteria for participating in the initial RFP. So that's what I can say about it so far, Kevin. We think we're really well positioned in Latin America, in the US and the Caribbean to take advantage of Zika selling opportunities.

[Kevin Ellich:]

Going back to the UNICEF contract, which was actually part -- that was another question I had -- when will we find out in terms of who's going to get that $10 million and could that be split up amongst a couple -- you and someone else?

[John Sperzel:]

So when we will find out is the question of the day. We had hoped that we would find out by now. The fact that it's been delayed does not deter our confidence at all because again, we believe that the decision is going to be data driven based on the performance of the assays and the fact that we're an only company with an FDA EUA approved product puts us in a very good position not only with WHO, who is part of the process here, but also with UNICEF. And generally speaking, I think it's fair to say that UNICEF awards tend to be split and so all things being equal, that is if there were more than product that performed similarly, I think it's fair to say that the award would be split. Again, given the fact that we're probably in a preferred position with respect to the regulatory approvals, we're hoping that we get more than our fair share of that, but we can't make any guarantees at this point.

[Kevin Ellich:]

Sure, understood. Going back to BARDA, the $5.9 million contract, the funding, I think in the press release you guys had talked about the potential for another $13 million or additional funding if BARDA were to exercise all of their options. What's the status there? Do we have any updates?

[John Sperzel:]

So let me just clarify a little bit the funding from BARDA. The contact award was up to $13.2 million and it was split. The first piece, which was a guarantee for Zika was $5.9 million. The second piece was $7.3 million and that was an option that was in the agreement, and it's BARDA's option to fund a DPP Zika/Dengue/Chikungunya Combination Assay. So just maybe a little more color about those. The funding of the $5.9 million was to develop a DPP Zika Assay to get emergency use authorization for that assay and then to take the product through the FDA 510(k) process and CLIA Waiver process. So we have checked two of those boxes. We have successfully developed a test. The performance is outstanding, on par with the ELISA assays, and we have also obtained the FDA emergency use authorization. We are now working on the 510(k) process and then we'll subsequently work on the CLIA Waiver application. The $7.3 million, we've always looked at that as if there is a demand for a Zika/Dengue/Chikungunya combination test, which we believe there is, and we successfully deliver on our promises to BARDA on the DPP Zika initiative, which we have shown great progress, then we believed that we would be in good standing to capture that $7.3 million for the combination assay. But again, it's BARDA's option.

[Kevin Ellich:]

One last question then I'll hop back in queue. John, in your prepared remarks, you mentioned the automated manufacturing line for DPP. Did I hear you right that -- did you say that it will increase your output by 500 million tests a year?

[John Sperzel:]

That's 5 million tests a year running two shifts.

[Operator:]

And our next question comes from Ross Taylor. Please state your question.

[Ross Taylor:]

I'll also add my congratulations, John, for your return. Sharon did a great job in your absence but it is nice to have you back in the saddle.

[John Sperzel:]

Thanks, Ross.

[Ross Taylor:]

Your presentation and your filings basically show that the scientific side of your business has really proven out. You guys have performed in stark contrast to some of your competitors in the space. At the same time, having listened to a number of your competitors' conference calls, who I listen to reference weakness in the U.S. AIDS and HIV market, it seems that their problem might more have been Chembio than the weakness in the market. But can you talk about now that you've gotten these scientific hurdles or you're getting these scientific hurdles starting to fall by the wayside, can you talk about how we're going to turn the investment you've made in your sales force, what kind of ramp we should expect to see on the revenue side of this business. Because it seems that you're kind of on the cusp of being able to break out and go from operating cash flow negative losing money to one would expect you should be able to generate potentially some meaningful profits in the year ahead.

[John Sperzel:]

Let me take those in pieces, Ross. First, I also listened to our competitors' earnings calls, so I would like to make a couple of comments about that if it's okay. I know that one of our competitors stated that their U.S. HIV business declined 25% for the quarter and 25% on a year to date basis. One of the others indicated that their U.S. HIV business declined 14% for the quarter and their Africa business declined 4% for the quarter. The explanations for those declines range from ordering patterns, to competition, to CDC recommendations, to bad weather. I won't comment on bad weather having impact on HIV product sales, but I will confirm that they were targeting OraSure and Trendy HIV customers. As I previously mentioned, our HIV business increased 32% in the U.S. and our Africa business increased 100% for the quarter so I'm sure you can fill in the blanks on what's happening competitively. As far as the scientific hurdles are concerned, we feel great about the fact that we are systematically getting regulatory approvals for our products around the world because that's the best endorsement of our technology. We can be champions of the technology. We can have key customers but when very stringent regulatory agencies give us approval, give us emergency use authorization for our products, that's probably the best endorsement that we can get. Now, as you said, what we need to do is we need to translate those regulatory approvals into commercial success and that's what we're doing. In my prepared remarks, I obviously said that the commercial organization that our investors had helped us fund is beginning to show signs of progress. These don't sell themselves, as we've discussed in the past. We need to have experienced diagnostics people out in these markets helping us get registrations, helping us establish distribution channels, and enabling sales. And we saw really good progress with that in the third quarter. If we continue to ramp revenue the way we did in the third quarter, and we were pretty close to cash flow break even, we can get there and that's one of our primary objectives.

[Ross Taylor:]

And can you talk, one of the most exciting segments of this company to me and to my organization, is the fever disease area. Can you talk more about the ramp we can hope to see or should see in Dengue, malaria, and in the multiple disease assays?

[John Sperzel:]

So we made some declaratory type statements earlier in the year and one of them was that we were going to commercialize multiple fever assays during 2017. The other one was that we were going to introduce our Dengue assay, and today, I made another declaratory statement, which was we're going to introduce our DPP Malaria Assay in 2018. So we talked about this in the past we’re focusing on where there are significant market opportunities, particularly with malaria and Dengue, whereas I said in the prepared remarks, there are more than 600 million cases annually. So, we expect to ramp sales in those two areas both malaria and dengue in particular. Now, some of the other more we call episodic type diseases, like Zika or Chikungunya or Ebola, we believe that we’re going to be well positioned for the next outbreak where we have not been in the past because we hadn’t developed those tests. So, we expect our fever assays, whether its standalone assays like malaria or dengue, or fever panel assays like the one we’re developing under the Paul Allen Family Foundation Funding, or the FIND funding to have impact during 2018 starting with malaria and Dengue.

[Ross Taylor:]

So, if Dengue and malaria are 600 million cases in the course of a year. How many tests and what kind of market potential does that result in?

[John Sperzel:]

So, our understanding is that in malaria, there are approximately 200 million rapid diagnostic tests used. It’s -- sorry the market leader has approximately 200 million tests that they sell at an average price of around $0.50. So, they have a $100 million malaria business they have about 50% market share. In Dengue, it’s, I would say underreported according to the experts and the number of diagnostic tests do not come close to the usage with malaria. So, we believe there’s significant growth potential in Dengue.

[Ross Taylor:]

And when you said you were satisfied with the test the malaria test. Is that satisfied like in okay, or is that satisfied in we’re ecstatic?

[John Sperzel:]

That means that the sensitivity levels that we were able to achieve were between 10 times and 30 times greater than the market leading rapid malaria test. So, we’re very satisfied with that.

[Ross Taylor:]

And do you believe you’ll be with your new programs in place sales force, manufacturing outside the U.S., automated manufacturing. Will you be able to compete in this market on profitability price basis?

[John Sperzel:]

So a couple comments about that, Ross. One of the things that kept us out of the malaria market in the past was one, we didn’t have a test but two we were not intrigued by the average selling price in the market. It did not present itself from an economic standpoint as attractive. The fact that we acquired the business in Malaysia and we now have a facility that can produce product at a much lower cost of goods it makes the margin profile look much better on a DPP Malaria Assay. The second important piece is that market research indicates and the folks that are focused on malaria indicate that the average selling price for a highly sensitive malaria assay could approach a dollar. And so both of those factors make it very attractive for us and you don’t have to take too much market share in a market the size of malaria to make it very meaningful to a company like Chembio.

[Ross Taylor:]

Great, thank you. And I’ll step back into the queue.

[John Sperzel:]

Thanks, Ross.

[Operator:]

Thank you. Our next question comes from Raymond Myers. Please state your question.

[Raymond Myers:]

Thanks. Good evening, John. Great to have you back.

[John Sperzel:]

Thanks, Ray.

[Raymond Myers:]

I want to ask you about the market interest that you’re seeing among prospective customers for this ultra sensitive malaria test. Presumably, you’ve talked with a lot of people. Are you getting the sense that there is a purchase intent?

[John Sperzel:]

Not yet. I think it's a little bit early for that. But as I said, the stakeholders in malaria are the ones that had indicated that we could achieve a higher selling price in the market and of course, we've been pretty focused internally on being able to produce it at a cost that makes economic sense for us between those two yardsticks.

[Raymond Myers:]

Moving onto the HIV Syphilis opportunity, there's been quite a bit of press this year involving the emerging syphilis threat here in the United States. Has that influenced Chembio's market estimates to that Syphilis market or your development plans?

[John Sperzel:]

Not necessarily. We've known for quite a while that the co-infection rate between HIV and Syphilis is a serious concern. We've seen the growth in Syphilis incidence in the United States. But I think as you can listen to one of our competitors' earnings calls that started out many quarters ago with sort of interesting perspective about how big the U.S. Syphilis market would be, which seemed to decline quarter after quarter. And I don't think it was even mentioned in the last quarterly call. That's because there doesn't seem to be a separate budget for Syphilis testing at the point of care in the United States. And most of the budget for the sexually transmitted infectious disease rests in the HIV space, which is why we put HIV and Syphilis together, because we're going to take that combination test to the HIV customer that is also concerned about Syphilis and has the budget to buy it. So that's the difference in our strategy compared to one of our competitors.

[Raymond Myers:]

That's great. And let me ask you about the Zika/Chikungunya/Dengue triple test. That has been sold in the four pilot countries for a little while now. How is that progressing and what's the opportunity to potentially expand that beyond the initial pilot?

[John Sperzel:]

So we don't have the results of that pilot in those four key countries that are being supported by CDC yet. So I can't comment on that. But we think the market demand for a Zika/Dengue/Chikungunya combination test would be strong because as you know, it's the same mosquitos that transmit all three of those viruses. They present to healthcare professionals with similar symptoms and it's very difficult to discriminate one from the other. And it's almost impossible if you're able to cross that first barrier to identify patients that have co-infection, which is becoming more and more of a problem.

[Raymond Myers:]

You would certainly think so. Do you have a sense of when you will get those pilot results and when you can use that to leverage sales?

[John Sperzel:]

Don't know yet, Ray.

[Raymond Myers:]

You mentioned in your remarks that there's a 10 country World Health Organization study. Can you elaborate on that? That sounds really interesting.

[John Sperzel:]

We're going to initiate that in the first quarter of 2018 and I can't comment on the countries yet.

[Raymond Myers:]

And it is for HIV Syphilis?

[John Sperzel:]

Yes…

[Raymond Myers:]

Excellent…

[John Sperzel:]

And I think it's a reflection of the growing global concern about HIV and Syphilis co-infection.

[Raymond Myers:]

And how long do you think that study will take?

[John Sperzel:]

I don't want to comment on that yet, Ray. I'll be able to update in a future quarter for sure.

[Raymond Myers:]

And then I think the last one for me is you mentioned the automation in New York. I want to ask a two prong question on that. One is how much does it lower your costs? And second, what made you feel the need to increase capacity to 5 million tests? That's a very high level.

[John Sperzel:]

Well, if you've seen many lateral flow type manufacturing processes, they tend to be largely manual and manual assembly in some countries may be an effective way to have the cost of goods that's competitive but in the United States it's generally not and certainly in New York or on Long Island, it's not. So automating production is important in terms of controlling costs. It's also important in terms of ensuring quality. And so both of those were factors in our decision to automate as well as our expected demand. So having the capacity or having the ability to increase capacity by 5 million tests is part of our strategy in terms of growth and in terms of ensuring quality.

[Raymond Myers:]

And the other part about 5 million tests, do you see a potential need for 5 million test capacity in the next year or two is this just a safety capacity?

[John Sperzel:]

Well, I don't want to get into forecasting sales on the call but you don't have to think of it as purely incremental either. Certainly, we are -- I think if you look at what we did in Q3 and you look at the investment that we've made commercially and the investments that we've made in terms of products in areas where there's growth, we expect to grow the company and automating manufacturing is an important part of that. But we're also going to replace some manual assembly.

[Operator:]

Our next question comes from Larry. Please state your question.

[Larry Haimovitch:]

Larry Haimovitch, HMTC. Hey John congrats on a great quarter. Welcome back. We're all happy to have you back. Sharon, you did a great job but we're delighted to have John back.

[John Sperzel:]

Great to be back.

[Larry Haimovitch:]

A question on Brazil. The contract I think is just a contract for this year and if I think I heard you correctly, the contract was $5.9 million, of which you shipped $4.5 million in Q3. Is that correct?

[John Sperzel:]

So it's $5.8 million and we have shipped all but 1.4 million, which we expect to ship in the fourth quarter.

[Larry Haimovitch:]

So what was Q3 shipments 4 million something?

[John Sperzel:]

$3.5 million, so we shipped $900,000 in the second quarter, $3.5 million in the third, and we expect to ship 1.4 million in the fourth, which would complete the $5.8 million order.

[Larry Haimovitch:]

And where does that leave us regarding that business, John, for 2018? Can we reasonably expect that business to continue in 2018…

[John Sperzel:]

Early indications from the Ministry of Health is that our demand will be strong in 2018.

[Larry Haimovitch:]

And there are obviously other people that can bid against you in that business, though, right? It's not a shoe in that you'll get it. There are others that would love to have it as well, I'm sure.

[John Sperzel:]

It's never a shoe in. One thing we can say and I think we discussed this in the past is that the Ministry of Health in Brazil did decide in 2015 to go in a different direction and they came back to Chembio because of the quality of our DPP HIV Assay. So we feel reasonably confident that we are going to hold that business in 2018.

[Larry Haimovitch:]

And then UNICEF, of course, we know it's been tremendously delayed. I think they initially were going to award the contract in June, but when they award it, it's a $10 million contract and you've said that it's likely to be divided amongst two players. Now, John, is that business 2018 business or when does that $10 million get flowing into the revenue side?

[John Sperzel:]

It's a 2018 and 2019 award.

[Larry Haimovitch:]

Okay, so just take an example. If it splits 50-50 and you can get $5 million and you split it between 2018 and 2019, you'd get half of $5 million in '18 and half of $5 million in '19.

[John Sperzel:]

I followed your math, but I can't comment on how it would be spread.

[Larry Haimovitch:]

But just roughly speaking, that math would make some sense, I guess.

[John Sperzel:]

Right…

[Larry Haimovitch:]

And is that business likely to continue beyond that, at some point, or is that another award, another RFP?

[John Sperzel:]

The UNICEF Award is backed by that $10 million funding from USAID. So I think another award would have to be backed by additional funding, whether it's USAID or some other group.

[Larry Haimovitch:]

And John, my final question. Tremendous accomplishments in this quarter, in particular, certainly all year have been so many things that have been -- so many positive things in Malaysia and building up the sales force. When you look at the first 10 or so months of this year, what one or two things are you particularly excited or particularly proud about?

[John Sperzel:]

I'm super excited about the sales growth that we've accomplished on a year-to-date basis. I don't know too many points of care diagnostic companies that have put up 38% year-over-year growth through the first nine months of the year. So we're super excited about that. I'm very grateful, frankly, to have the investor support allowing us to invest in the commercial organization, because that's absolute key success factor and we hope going forward that it continues.

[Larry Haimovitch:]

And John, on that point of the commercial team. My guess, given that there are -- that this business has a long selling side, you just don't walk in day one, show up and get a $1 million or $2 million order. That we really haven't seen the full fruits yet of the commercial team that we will see a lot more benefit as we go-forward, because as they're on the ground longer as a Chembio representative that business should increase over time. Is that a reasonable way to look at it?

[John Sperzel:]

I would characterize it as we are really starting to play offense, yes.

[Larry Haimovitch:]

I know you like to play offense, John. That's good.

[John Sperzel:]

Absolutely…

[Operator:]

Thank you. Our next question comes from Matthew Campbell. Please state your question.

[Matthew Campbell:]

I'll second, third, and fourth, everybody's comments about having you back. And Sharon did a phenomenal job, while you were gone. So congrats to you, and congrats on the quarter but just curious, the manufacturing of STAT-PAK HIV. When did you start that process in your, in Chembio Asia?

[John Sperzel:]

So we have put the line in place. We have not started to produce product for the markets yet in Malaysia, and we’ve essentially replicated the STAT-PAK manufacturing line that we have here in New York.

[Matthew Campbell:]

So when do you think that would go to live actually?

[John Sperzel:]

Early 2018…

[Matthew Campbell:]

And do you foresee -- you obviously see some good benefit to having that up and running, I would assume?

[John Sperzel:]

Yes. I mean, for example, to sell product that’s produced in Malaysia into the market in Africa, for example, where we have pretty good strong STAT-PAK HIV sales today. We need to get the support of the World Health Organization, and that’s something that we’re working on. We need to get WHO…

[Matthew Campbell:]

Could you speak to us about the cash balance and how we, as investors, should think about it. And potentially, if there is some opportunities to get receivables or what have you. I just like understand how you’re thinking about the cash?

[John Sperzel:]

Sure, I’m going to ask Rich to comment on that if it’s okay Matt.

[Rich Larkin:]

I mean, certainly, I would prefer to have had more cash than receivables. But we do have a pretty robust amount of receivables, which we’re working on collecting this quarter. And I think in a combination with the cash that we have on hand plus what we’ll collect, we should be in fairly good shape for a few months or more into 2018. I will say also that one thing that we had done was built up our inventory that was about $1.9 million. So we’re looking to move that back down a little bit, which will also generate some cash for us to go forward. And I think as John had mentioned if you see the cash flow offset, we had from operations from the P&L, if you will, was less than really $100,000 a month in the third quarter. And if we continue that, going forward, which is certainly our goal to do that and better then we could that our cash situation should be well in hand to get us to profitability.

[Matthew Campbell:]

And Rich, congratulations on a great tenure at Chembio. We’re sorry to see you go, but does board another question to John. How was the CFO search going as it is going to...

[John Sperzel:]

It’s going great Matt. We’re down to a couple of finalist candidates, and we’re going to get it wrapped up in time. So Rich can enjoy his retirement before the end of the year.

[Operator:]

Thank you. And we have another question from Kevin. Please state your question.

[Kevin Ellich:]

John, it's Kevin Ellich again and Matthew just asked a couple of my questions. I guess, since Rich is on, I did want to ask about cash utilization. And since you’ve got profitability, I guess, at what revenue run-rate do you think you guys will hit profitability or what should be breakeven?

[John Sperzel:]

It’s a combination, obviously, of the product sales and the gross margins that we’re going to realize on those along with the amount that we’re going to get from R&D and the revenues. But we’re looking at probably, if we can get somewhere between $28 million in product revenue, I think that that would be the target to get to.

[Kevin Ellich:]

And then again, I was going to ask about the CFO search. But John is there anything specific in terms of the quality characteristics you’re looking for in Rich’s successes?

[John Sperzel:]

Probably, not but I would comment on the call, Kevin.

[Kevin Ellich:]

And then also I think a few months ago, you guys added Gail Page to the Board of Directors. Obviously, a lot of us know Gail from retirement of 3 million and what not. Are there any other areas within the board or the management that you plan to add?

[John Sperzel:]

Not that I can comment on. But Gail has been a terrific addition to our board. She is obviously an experienced diagnostic executive and really happy that she joined the board.

[Operator:]

And our next question comes from Mark. Please state your question.

[Unidentified Analyst:]

Briefly at the SEC filings, and I'm wondering about what the orders are, which to-date are not materialized and result in an increased inventory and also what's going on with the AR balance?

[Rich Larkin:]

Well, the orders that were expected we of course were hoping that we would have some Zika sales. And as part of the validation of Zika, you need to build some blocks ahead of time. So those were some of the build up that went on there. But there’s also just raw materials that we purchased to be able to respond quickly to customer orders. So lot of times we get some tenders that come in that need to fulfilled in a rather rapid fashion. So we have taken the position to be ready to be able to fulfill some of those.

[Unidentified Analyst:]

And the AR balance?

[Rich Larkin:]

On the AR balance, most of that, as you probably could see from the filing, is for one customer and that is in Brazil. And again, that's expected to be collected in full during this quarter.

[Unidentified Analyst:]

And then the last thing, have you used that in market at all?

[Rich Larkin:]

What market?

[Unidentified Analyst:]

$20 million potential sale of stock…

[Rich Larkin:]

The ATM we have not utilized the ATM at all.

[Operator:]

Matthew, are you on mute?

[Matthew Campbell:]

This is just a subjective question. But I am wondering, John from your perspective. What you think is going on with Zika. One day, you can't turn on the TV without hearing about Zika and you can't walk outside without wearing an armor suite. And then all the sudden there’s no talk of Zica. It seems to me that there it's still a problem worldwide. And I just would like to get your views on that.

[John Sperzel:]

So I think terms of whether or not we hear about Zika in the press. I would point us to malaria. Malaria is a disease where, as I said before there are more than 200 million cases a year. And we don't have or hear anything about malaria. We don't ever hear anything about dengue, because it's become normal, which now I'm going to put that in quotes, because it's obviously not normal and it's not acceptable. But I think is Zica falling into that same category. Tom Frieden from CDC said six months ago Zika is going to be with us for a very long time. Now maybe you consider episodic, but it's probably not going anywhere according to the experts.

[Matthew Campbell:]

Well, that's helpful.

[John Sperzel:]

And by the way, we believe that a rapid Zika test put in the hands of healthcare professionals close to the patient is going to be very helpful in terms of monitoring in terms of surveillance and in terms of identify positive people in a much more easy and acceptable way.

[Matthew Campbell:]

And to that point, I think you had mentioned earlier on the call that you were working with states to integrate this test. Is that right, did I hear that correctly?

[John Sperzel:]

It’s exactly what I said.

[Matthew Campbell:]

Thanks very much.

[John Sperzel:]

Thank you, Matt. I would like to thank all of you again for your participation and your support of Chembio Diagnostics. We look forward to updating you again next quarter. Have a great night.