Chembio Diagnostics, Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Greetings and welcome to the Chembio Diagnostics First Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now hand over the conference over to Mr. John Sperzel, Chief Executive Officer for. Thank you, Mr. Sperzel, you may now begin.

[John Sperzel:]

Hello and thank you for participating in today's call. Joining me is Rich Larkin, our Chief Financial Officer. Before we begin, I'd like to caution that comments made during this conference call today, May 12, 2016, 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. Each of Chembio's business segments made important advances during the first few months of 2016. In the sexually transmitted disease business, Chembio increased sales in North America, South America, Europe and Asia with a significant increase in the United States as compared to the first quarter of 2015 which resulted in strong gross margin improvement. As promised, we initiated critical U.S. clinical trial for our DPP-HIV-Syphilis combination assay which we believe will be a growth engine in the future. And we prepare internally to do some full sales and marketing responsibility for our SURE CHECK HIV assay in the United States market which will be launched on June 1 following the end of our current U.S. distribution agreement. In the fever disease business, which is largely funded by external grants and collaborations, Chembio advanced the development of multiple projects and entered new collaborations addressing Zika and related viruses which we believe will significantly expand the company's fever disease product line in the future. In fact, we expect significant sales of our DPP Zika assay in 2016 outside of the United States. And lastly, the company continues to advance its technology collaborations in the areas of cancer, traumatic brain injury and sports-related concussion and flu immunostatus all based on our patented DPP technology which continues to gain validation as a personal, market leading, point-of-care technology platform. I will provide a more detailed overview of our recent and anticipated milestones following a review of the first quarter financial results by Rich. Rich?

[Richard Larkin:]

Thanks, John. You can judge with my comments, I'd like to recommend that participants review the Chembio's 10-Q filing for additional details. Our total revenues for the first quarter of 2016 of $6.6 million were up 5.9% compared with total revenues of $6.23 million in the prior year period. Product sales in the 2016 first quarter of $5.92 million were up 5.4% compared with product sales of $5.61 million in the prior year period. Research and development milestone, grant and royalty revenues for the three months ended March 31, 2016 increased to $662,000 from $609,000 in the prior year period. Our gross margin dollars for the 2016 first quarter increased 17.8% to $3.17 million or 48% of total revenue compared $2.69 million for 43.1% of total revenue for the prior year period, due primarily to the increase in product gross margins. The amount of product gross margin dollars for the first quarter of 2016 increased 19.9% to $2.48 million or 41.9% of product revenues, from $2.07 million or 36.9% of product revenues in the prior year period due primarily to the mix in product revenues. Research and development expenses in the first quarter of 2016 were $1.63 million compared with $1.58 million in the prior year period. This increase is due primarily to increased R&D activities for projects and grants. And some projects are on a milestone basis for which revenue cannot be recognized until the milestone is achieved, while expenses to reach that milestone are expensed in the period incurred. Selling, general and administrative expenses in the first quarter of 2016 increased to $2.0 million from $1.98 million in prior year period. This is largely due to increased professional fees, investor relation expenses in consulting which were partially offset by decreased wages and related expenses, commissions and stock based compensation. The operating loss for the first quarter of 2016 was $468,000 compared with an operating loss of $875,000 for the prior year period. Net loss for the first quarter of 2016 was $304,000 or $0.03 per diluted share compared with net loss of $647,000 or $0.07 per diluted share in prior year period. The company had cash and cash equivalents of $2.66 million as of March 31, 2016 compared with $5.38 million as of December 31, 2015. The decrease was primarily due to net cash used in operating activities of $2.69 million. Our working capital decreased by $193,000 during the quarter from $9.48 million to $9.29 million. It is important to note that associated with the increase in sales this quarter we reported an increase in accounts receivable of approximately $2.5 million resulting in total receivables of $4.9 million. And we are confident in our ability to collect these receivables which will significantly increase our cash balance. That concludes the financial review. I will turn the call back over to John. John?

[John Sperzel:]

Thanks, Rich. I would like to now give an overview of the progress made in each of our business areas during the first quarter. I will first speak about our sexually transmitted disease business. In the first quarter of 2016, combined sexually transmitted disease product sales in North America, South America, Asia and Europe collectively increased 29% quarter-over-quarter as compared to the prior year period. Notably, in the United States we saw an increase of approximately $1 million which represented an increase of approximately 78% compared to the first quarter of 2015. We are pleased with the demand for our HIV products in the United States. And as previously noted, effective June 1, 2016, that is in 19 days we will begin selling SURE CHECK HIV assay in the United States to our existing U.S. salesforce and distribution channels. On the clinical development side, we made an important advance with our DPP-HIV-Syphilis assay for the U.S. market during the first quarter by initiating the clinical trial as promised. As previously announced, we introduced the DPP Micro Reader as part of the FDA pre-clinical submission which includes data collection for FDA approval and clear wave replication. The FDA requested additional data to verify the performance of the HHIV assay used in the DPP Micro Reader which we agreed to collect. And this will add approximately three to four months to the overall clinical trial. It is an important corporate priority to be first to market in the United States with an HIV-Syphilis combination test. As worth noting, that we were first to receive USA ID approval, first to receive ANVISA approval, and first to launch in Latin America. Moving on to our fever disease business. During the first quarter of 2016 Chembio extended its fever disease business by entering into two new collaborations with world-leading health research and funding organizations for the development of point-of-care diagnostics intended to contain the spread of fever diseases through accurate and early diagnosis. First, we received a catalyst grant from the Paul G. Allen Family Foundation to develop a DPP Zika assay, a DPP Zika-Dengue-Chikungunya combo assayed and to add a Zika test to the DPP fever panel currently under development and also funded by Paul G. Alllen. Second, we entered a collaboration with Bio-Manguinhos, a division of the Oswaldo Cruz Foundation in Brazil to develop and introduce an DPP Zika IgM/IgG assay for the Ministry of Health in Brazil. Since announcing the initiation of our new Zika program during the first quarter of 2016 we have made rapid and significant progress. We developed the DPP Zika assay which discreetly identifies IgM and IgG antibodies and we are highly encouraged with the results of clinical testing to-date which includes well over a thousand clinical specimens from numerous Zika-endemic countries including blood samples from approximately 600 pregnant women. As announced last week, during a symposium in Rio de Janeiro, to recognize the 40th anniversary of Bio-Manguinhos, we expanded our collaboration with Bio-Manguinhos to include DPP assays for Dengue and Chikungunya as individual tests in addition to previously announced DPP Zika and DPP Zika- Dengue-Chikungunya combo assays, as well as our DPP Micro Reader. Concurrent with this important product development work, Chembio is moving expeditiously to complete regulatory filings that will ultimately allow us to market and sell our DPP Zika assay. So as the beginning of the first quarter we filed a submission with ANVISA, which is Brazil's equivalent to the U.S. Food & Drug Administration. We filed a submission with the U.S. Food & Drug Administration for U.S. Emergency Use Authorization. And we're finalizing our submission to the World Health Organization for emergency use authorization which we expect to submit within two weeks. Supplementing these filings the company is engaged fully with these agencies in a hope of facilitating the earliest possible approvals. In addition to our work with Zika, the company entered into a partnership in April to expedite feasibility and development of the world's first oral fluid saliva point-of-care diagnostic tests to simply and accurately identify individuals infected with all species of malaria. And this is funded by the Bill & Melinda Gates Foundation. As you may recall during 2015, we completed a DPP's ability project also funded by the Gates Foundation, the results of which demonstrated a 10X improvement insensitivity compared to the market-leading point-of-care malaria test. Our latest collaboration with the Bill and Melinda Gates Foundation, the DPP Malaria Oral Fluid Saliva Test is in the early stages. However, given the performance of our recently developed ultra-sensitive DPP malaria program, as well as the fact that we have already developed and received FDA approval and clear waiver for the DPP HIV assay using oral fluid. We're optimistic about the potential to develop the world's first point-of-care malaria test using oral fluid saliva. With the addition of these three programs combined with actively developing numerous point-of-care DPP fever assays with the majority of these programs being supported and funded by leading health care organizations. It's important to note that in number of these organizations such as the Bill and Melinda Gates Foundation and the Paul G. Allen Family Foundation are returning to Chembio to initiate and fund new programs following previous experience with the company. We believe this offers critical validation for DPP technology platform, our scientific expertise, and our commitment to help stop the spread of deadly infectious diseases. Lastly, I'd like to address our technology collaborations. Chembio currently has the following four ongoing technology collaborations; DPP cancer assay, for a specific form of cancer; DPP flu immunostatus assay, DPP Traumatic Brain Injury / Sports-Related Concussion assay, and the DPP Micro Reader. We're pleased to report that we made progress with each of these programs in the first quarter of 2016. The DPP cancer assay which is funded by an undisclosed density target a specific form of cancer with finger-stick whole blood. During 2015 we successfully completed the feasibility phase and the program moved into the product development stage which is also funded by an undisclosed partner. The result to-date with this program have been highly encouraged and with success we're hopeful we'll be able to find additional applications for our DPP technology in the broader oncology market. The DPP traumatic brain injury assay which is funded by Perseus Science Group is in the feasibility stage. I'm pleased to report that we have finalized Institutional Review Board or IRB agreements with several hospitals and we're preparing to conduct initial studies of the DPP traumatic brain injury assay using patient samples. The DPP flu immunostatus assay which has received multiple rounds of funding from the U.S. government is a nine-band multiplex assay to monitor nine different seasonal and endemic flu viruses. We're awaiting response on the most recent multi-year grant proposal and while there is no guarantee that we will receive this grant, Chembio is the only company to receive the previous grants associated with this program. And finally, the DPP Micro Reader will complement a number of our DPP assays for sexually transmitted diseases, certain fever diseases, and a specific form of cancer. The DPP Micro Reader as indicated earlier is included in our U.S. clinical trial for our DPP HIV-Syphilis assay and as mentioned was also added to our collaboration with Bio-Manguinhos in Brazil. In closing, the first quarter of 2016 was exceptional for Chembio with meaningful advancements in each of our business segments. And our sexually transmitted disease business, we achieved sales growth in North America, South America, Europe and Asia during the quarter with a significant increase in U.S. sales. As promised, we initiated the U.S. clinical trial for DPP HIV-Syphilis combination assay and we prepared internally to assume sales and marketing for the SURE CHECK HIV assay in the U.S. market which will be launched on June 1st. And our fever disease business driven by the serious threat posed by malaria and Zika virus, and through collaborations with leading healthcare and funding organizations. Chembio is moving quickly to leverage its patented DPP technology into products that need a lot of healthcare workers to change current testing paradigms and continue to spread of life-threatening diseases. And finally, we are continuing to advance our technology collaborations in the areas of traumatic brain injury, the detection of a specific form of cancer, flu immunostatus and our DPP Micro Reader, all based on a proprietary DPP technology platform. This concludes the prepared remarks. I'd like to now open the call for any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Bill Bonello of Craig-Hallum. Please go ahead.

[Bill Bonello:]

Good morning guys. I have a bunch of questions. I'd love to start with Zika. Can you tell us what sort of current discussion on the expected testing protocol for Zika in Brazil? And if that includes Dengue and Chikungunya, what's the protocol there due might be?

[John Sperzel:]

Good morning, Bill. Thanks for the question. So first of all to address the question about the testing protocol for Zika virus. I think the first thing to say is, it's evolving and as you read in publications from CDC and World Health Organization, there is much that we don't know about the Zika virus and we are beginning to learn more each day. In the discussions that I've been in with various governments, the immediate priority is for testing pregnant women. In Brazil, for example, there are 3 million annual pregnancy, so that's the priority in Brazil and I suspect it will be the priority in other countries as well. So are Dengue and Chikungunya, the mosquito, the anus zip dye that's responsible for primarily spreading the virus. Is the same the mosquito species that is responsible for the spread of Dengue and Chikungunya. So if we think about Brazil, Brazil has widespread Dengue infections that I think about, 80% of the country has been exposed to one serotype of Dengue at least. And also has a number of significant outbreaks of Chikungunya. So that protocol is also evolving. In the past just given the large prevalence of Dengue, the protocol was to start with Dengue because we had had only discreet analytes to measure a single virus. There are a number of Dengue assays in the market, there are not many Chikungunya assay, good ones that is. And of course we know the situation with Zika.

[Bill Bonello:]

Okay. And when we think about sort of the timing of the way the tests rollout, is an individual Zika test, is that what probably comes to market before the multi-collection tests would come in the market or do imagine them all sort of being available as one but not -- and that's exactly what's being evaluated by the regulators right now.

[John Sperzel:]

I would anticipate a standalone Zika assay being the first product to come to market if we're talking about rapid point-of-care diagnostic tests.

[Bill Bonello:]

Yes, okay.

[John Sperzel:]

As far as our development efforts are concerned we have to make the individual tests before we multiplex it.

[Bill Bonello:]

Okay. Any that was being evaluated in Brazil right now?

[John Sperzel:]

What we have submitted to ANVISA in Brazil for approval is a standalone DPP Zika IgM/IgG assay which detects discreetly the IgM antibodies and the IgG antibodies.

[Bill Bonello:]

Okay, that's helpful and I totally understand that you may just want to pass on this one but any select on timing of -- when this test could be approved or we can start to see commercialization in Brazil?

[John Sperzel:]

I would -- what I can say about that Bill is, we have submitted to ANVISA, we anticipate some form of expedited review but it wouldn't be my place to start to forecast how long that will take. It's obviously very important for Brazil and very important in many other countries, more than 40 have local transmission of Zika.

[Bill Bonello:]

Okay, that's helpful. And for the U.S., did you say you have submitted for emergency use authorization to the FDA? And is that also the same test you submitted in Brazil?

[John Sperzel:]

That's exactly what I said, it is the same test that we submitted in Brazil and we're actively engaged in dialogue with Food & Drug Administration on that submission.

[Bill Bonello:]

And is there any -- if there is any sort of typical turnaround time on emergency use authorizations or not necessarily?

[John Sperzel:]

I don't think the word typical applies to Zika, quite honestly.

[Bill Bonello:]

Okay. So do I take from that that you think there is sense of urgency?

[John Sperzel:]

There is absolutely a sense of urgency, there is international meeting in Copenhagen today which involves a number of regulatory, government and funding organization. So this is a very high global priority as I think we all understand.

[Bill Bonello:]

Okay. And then just the last thing on Zika, I guess same question, is it just way too early to know how people are thinking about testing in the U.S. if and when the mosquitoes come up here?

[John Sperzel:]

Well, the mosquitoes are in the United States that's one factor I think we have to recognize. The [indiscernible] mosquito is present in the United States. It's very present in Puerto Rico and it's very present in Hawaii. So I think that's one thing we just have to understand this back. As far as the protocol, I think it's a little bit early but again, as we've seen in Brazil, as we see in Colombia, as we see in Mexico, there is a high priority that is being put on pregnant women. So I think we can anticipate the same thing inside of the United States. I think we will also have folks that have traveled to Zika endemic regions that will need to be screened. The challenge with all of this I think as we to understand is approximately 80% of the people that are infected with Zika have no symptoms.

[Bill Bonello:]

Yes, okay. And then just if I can, on the fever panels. Anything there in terms of sort of expected timing when any of those fever tests late be launched outside of Brazil, in Africa the malaria or the bigger panels or just -- what milestone should we be looking for on that side?

[John Sperzel:]

So I can give color on a couple of them. The first, I'll give color on is the full fever panel that is funded by the Paul G. Allen Family Foundation develop program. Remember that project when we initiated at the beginning of the year included. Malaria, Dengue, Chikungunya, Ebola, loss on [ph]. We subsequently refund from that the Paul G. Allen Family Foundation on the Zika initiative and including a Zika antigen to the full fever panel. So that project is on-track and we expect to complete the development of that project by the end of 2016. [Cross Talks] But that's the next major milestone is to complete the development and lockdown the design.

[Bill Bonello:]

Okay, perfect.

[John Sperzel:]

Before as malaria is concerned, I think what we see us do is take a very systematic, thoughtful process towards entering the malaria market. Last year we completed a malaria feasibility project funded by the Gates Foundation to see if we could develop a malaria assay and we have six months to do it as we recall. That was ten times more sensitive than the world's leading point of care, Malaria Assay. And we checked that box. Meeting we met that objective. We didn't rush out to launch a malaria asset because we want to make sure that the malaria that we bring as a at the standalone -- can in the remember a premium price because I'm not so interested in competing at a $0.50 market. We believe the lower level of detection is important towards malaria eradication, and that's a huge initiative by the Gates Foundation. And we believe our technology further allows the ability to oral fluid or saliva in the detection of all species of malaria. So we want to think about low level of detection and unique samples to allow widespread testing of malaria using oral fluid or saliva and to command a premium above the current $0.50 malaria market. So again, we're not going to rush into the malaria market because we can't -- we're going to go into the malaria market when it makes sense to bring a highly differentiated product that can command a premium price.

[Bill Bonello:]

Okay. And just one last question if I can and I'll hop out. In terms of gross margin standpoint, is this kind of the new normal for gross margins or how should we -- we're way up year-over-year and way better than what we had projected. How should we be thinking about that?

[John Sperzel:]

Well, I couldn't get you -- I think as Rich said, a lot of that had to do with product mix. Of course we had strong sales in the U.S. where we have higher gross margin. But on a go-forward basis of course as our fever initiatives come into the market, it's going to start to change the product mix of our business from traditionally sexually transmitted diseases into more highly differentiated fever diseases but there we talk about a full fever panel, we talk about a DPP assay for something like Zika or Ebola multi-client DPP assays for Zika, Dengue and Chikungunya for example. We expect those to have an upward lift in our overall gross margin. But that's not going to happen in the next quarter.

[Bill Bonello:]

Yes, thanks a lot.

[John Sperzel:]

Thank you, Bill.

[Operator:]

Thank you. The next question is from Brian Marckx with Zacks Investment Research. Please go ahead.

[Brian Marckx:]

Good morning John and Rich, and congratulations on all the progress, particularly on the fever front and the Zika front. I'm wondering if you could talk a little bit about the U.S. sales, which -- as you know we were particularly strong in Q1. And it is any relation to competitors marketing rights rolling off at the end of -- or near the end of next quarter. I noticed that in Q1 2014 there was a situation where U.S. lateral close, sales were particularly strong which was just prior to the roll-off of Alere's marking right to stat [ph]. If this sort of over-related situation?

[John Sperzel:]

So I think the short answer to your question Brian is, yes, there is a relationship but maybe I'll just give a little bit color about the overall U.S. market and our position. I think in doing so it's important to remember where were two years ago. Two years ago had two point-of-care HIV assays that were both FDA approved in clear ways, excellent performance, that were sold exclusively by our partner who by the way had announced plans to introduce a competing product. That's not an enviable position to be in. And at the same time we were hopeful to get a clear waiver of our DPP HIV assay. So over the last two years we have been working very diligently and executing a strategy focused on gaining control of our assets, directly, and building a U.S. commercial plan. So have what have we done. We hired a U.S. sales and marketing team, a customer support team, we established agreements with several major U.S. distribution channel partners like McKesson/PSS, Fisher Healthcare, and ReSchein, Medline and etcetera. We terminated STAT-PAK U.S. distribution agreement in 2014 and launched Chembio STAT-PAK HIV assay in the U.S. market. We received the clear waiver in 2014 and launched Chembio DPP HIV assay for blood and oral fluids. And we announced the acquisition of the full rights to the SURE CHECK HIV assay from SVS in 2015 and announced plans to launch the Chembio SURE CHECK HIV assay effective June 1, 2016. So as I said in the prepared remarks, our U.S. HIV products sales during the quarter increased 78%. We know that some of that is based on the infrastructure we built, the sales focus that we have, and not just SURE CHECK with our current U.S. distribution partner. We see sales in STAT-PAK, we see sales in DPP. And we're obviously focused on sales across the whole platform. So do we believe that Alere built inventory in anticipation of the end the agreement? Absolutely. But what we're focused on is in 19 days on June 1, we will assume full sales and market responsibility for the product and that point we will be selling all three point-of-care HIV assays in the U.S. market directly and via our channel partners. Remember, the SURE CHECK product line has a very good reputation for ease of use, including a tiny 2.5 microliter sample which is the smallest blood sample size in the U.S. market. And it has customer-friendly unitized packaging. Its FDA approved, its clear way, the CE-marked, it's WHO prequalified. Bottom-line, it's a great product and on June 1, we're looking forward to adding it to our U.S. portfolio.

[Brian Marckx:]

Okay, John I appreciate that. In terms of DPP in the quarter, which was quite a stronger than I had expected. Was there anything -- any meaningful sales as any of the payroll related assay main for validation purposes.

[John Sperzel:]

No.

[Brian Marckx:]

No, okay.

[John Sperzel:]

I think as we said, the strong sales in Brazil during the first quarter is really what was behind the DPP performance. And then on the DPP Syphilis-HIV U.S. clinical program. He has talk a little bit about the size of the -- the expense size trials for time frame and maybe a little bit interest paid cost?

[John Sperzel:]

So first thing, we very happy that were able to deliver on the farmers when initiating that clinical trial during the fourth quarter. So we're happy about that. We had ongoing dialogue from fruit and drug and administration over third number of months because we included the DPP Micro Reader, in our free clinical submission and that was new, and frankly, that's what pushed about one quarter as we recall from the past dialogue. The FDA asked us to additional HIV specimens to the clinical trial. So that will add upto 300 to 400 patients. Before we head communication about 1,200. So we're talking about 1,500 to 1,6000 patients in the total group, we believe with the additional three to four months required. It's going to take about twelve months to complete that trial. And the cost, I think you can anticipate another $300,000 easily which will occur in 2017.

[Brian Marckx:]

All right, great. Thanks a lot guys.

[Operator:]

Thank you. The next question is from Raymond Myers of The Benchmark Company. Please go ahead.

[Raymond Myers:]

Thank you for taking the questions. John, let me first clarify that you have submitted EUA submission to the FDA. You submitted filing for approval or has we confessed to the Brazilian regulatory authorities and you expect World Health Organization filing of an EUA within approximately few weeks. Is that all correct?

[John Sperzel:]

That's all correct.

[Raymond Myers:]

Can you elaborate on what geographies except the World Health Organizations fee rate submission or distribution of such products versus which ones require the FDA?

[John Sperzel:]

That would be a long conversation Ray, I mean we can certainly have that discussion but in general, we're obviously focused on countries where Zika is endemic, and we're focused on the large regulatory agency because we have to prioritize. So that's why we started with Brazil ANVISA. And we've previously announced that filing, and of course, I would say the next for me sort of broad brush regulatory filings that cover major or geographies are the food and drug administration because that's going to cover the United States and territories under the jurisdiction, many other countries are going to look to the United States to look at the tests that they have approved, whether it's under an EUA authorization or whether it's under TitanK [ph]. So that's a priority for us. And then of course World Health Organization has a very broad umbrella and CE mark is well as something that we're pursuing. So we think by focusing on Brazil, United States FDA world health organization and CE. Mark, we're going to cover the four major pieces before we start getting into in country registration like with the government of Mexico, with the government of Colombia etcetera. So we have to follow sort of prioritized and process and that's what we've announced.

[Raymond Myers:]

Great. You have proscriptive sales here in the first quarter. Can you help us understand how that impacts your cash conversion cycle time because the increase of direct sales in the U.S. O I understand increases your accounts receivable. Can you give us a sense of how long it takes to convert those sales from accounts receivable to actual cash. And what options do you have to finance the expected -- growth of that business this year?

[John Sperzel:]

I'm going to ask Rich to comment on that.

[Richard Larkin:]

Again, as we've talked about amount of the increase in Alere, they paid pretty much -- pretty quickly. So we have no issues with that. Certainly with our direct sales, you're selling to sometimes hospitals that take 60 to 90 days but we also are selling to distributors which are on regular basis on terms. So for those sales there is no concern there. And again because it's spread out among a lot of different companies, it's really not something I'm really very concerned about U.S. collections.

[John Sperzel:]

I think it's also probably to know that the receivables that Rich mentioned are not age receivables.

[Raymond Myers:]

So one thing I wanted to be sure about is, if that business takes off in June, as we're hopeful of it will, that you could Finance those receivables balls through traditional receivables financing at very reasonable rates and therefore your need for more diluted cash is alleviated. Is that a fair question?

[John Sperzel:]

Well, certainly that our receivables increased by $2.5 million upto the $4.9 million. And collections of that is going to happen so I'm not sure that we'll see a large jump in receivables beyond that. In addition, I think that we also had some -- if you look at our payables, our payables went down by almost $400,000. Of which $460,000 of that royalties. So there were some that we had to pay that are not expected to recur in this next quarter. Some of them are six month so that would not recur until the third quarter. So I'm not concerned at all at this point.

[Raymond Myers:]

Thank you. I think that are about covers it. Thank you. Great job guys. Great, thank you, Ray.

[Operator:]

Thank you. The next question is from Ross Taylor with Capital [ph].

[Unidentified Analyst:]

Thank you. First, greater quarter and not just on the number side but also on the product development side. And couple of questions, first on Brazil, any idea on the economic crisis and what you're doing is licensing arrangement down there with their given their legal barriers to prudent conduct, in the country and in the past added lice team?

[John Sperzel:]

We're perhaps not the most favorable to the shareholders and can we be sure that licensing arrangement not the most favorable to. I can tell you that first as far as the past is concerned, two products we took out of the technology transfer agreement; one is the DPP HIV-Syphilis. So that's no longer part of the tech transfer. And the DPP Syphilis screening confirmed, also took out, that is no longer part of the tech transfer. And the DPP Zika assay and the other assays that we announced in collaboration Allen [ph] last week are also not part of any of technology transfer type of agreement. So we're selling product to [indiscernible] deliver to the Ministry of Health in Brazil. That's pretty straightforward.

[Unidentified Analyst:]

And given obviously the great deal of -- the upcoming Olympics, to common side of Harvard -- yesterday that they actually see this as a potential global disaster, Zika, having the Olympics in Rio. So we assume that while this is an obviously a high priority for the Brazilian that you would expect to see actual sales before or during the summer Olympics period?

[John Sperzel:]

That's going to depend on the regulatory agency ANVISA and how quickly we can the ANVISA approval. What I can tell you is we are going to be prepared to deliver products, if not immediately shortly thereafter giving be ANVISA approval. So if that happens next week, great will be ready, if it happens a month or two from now, we'll also be ready.

[Unidentified Analyst:]

And then in the advancement or they've moved into the oral fluids, that seems like it could be a substantial ground breaker or really a major change and improvement in how these tests are done, not just for malaria, I would assume overtime for a much broader range of blood borne diseases. Could you comment on that?

[John Sperzel:]

While we're pleased that we the technology platform that can use number of different specimen types; blood or fluid, etcetera so it's a very versatile platform and of course it's candid. So we're happy about all of that. When it comes to these particular viruses or infectious diseases, some of them are more present potent than others in saliva or fluid. So it's not easy to just take a broad brush and say, we can do all of these tests using oral fluid or saliva. We really have to look at them one at a time, so that what see us starting to do with malaria under the grant from the Gates Foundation. And there certainly is the potential to look at some of these other viruses. I've seen that a lot of the data that is coming out with respect to our RNA detection. The Zika virus, this is a really important point to make, most people when they think about molecular technology or PCR technology they think it's better than all sort of traditional, rapid point-of-care test. With respect to Zika, Dengue and Chikungunya, the body starts to develop at antibodies to fight the virus very early. When that happens, it's called sero-conversion. And at that point the virus is no longer detectable by RNA or if you want to PCR technology. So that sort of conversion happens with Zika between three and five days. And with Chikungunya and Dengue also within one week. So that means if someone gets infected and they go to get tested, A week or so later by PCR technology the result is likely to be negative. That's very complicating considering any percent of the people who are in symptomatic when it comes to Zika, not so with dengue and Chikungunya. So very complicated situations and the holy grail here is not easy mark because it's going to be combination for have and there in front of healthcare provider very early but that's also an expensive proposition. So we believe that widespread screening; screening of pregnant women and others will require a serological test.

[Unidentified Analyst:]

You guys have a great number of times in the fire, you've done an excellent job of changing, did you continue your history of single delivery and it looks like it should be a pretty exciting period and that's 9 to 12 months or so.

[John Sperzel:]

We're excited about that.

[Operator:]

[Operator Instructions] The next question is from Larry Haimovitch of HMTC. Please go ahead.

[Larry Haimovitch:]

So a lot of my questions have been answered by lot smart people. John , on the four initiatives you cited at some point during the call. Is it possible for you to rank -- I realize is probably not but -- is it possible for you to -- timing of when each of these could be commercial or is it just too unpredictable given that they are in development cycles and you need regulatory approval?

[John Sperzel:]

Which ones are you referring to Larry and I'll try to add some color to it.

[Larry Haimovitch:]

You mentioned HIV, the concussion initiative, the cancer initiatives and I guess there is one other one.

[John Sperzel:]

So if I take them sort of one at a time, flu immunostatus project, that's basically – we're waiting for additional funding from the U.S. government. We have received two rounds of funding and one follow on. As far as the cancer as it is concerned we continue to make our progress. This will be a significant milestone if we're able to commercialize that product because we're talking about detecting a specific type of cancer on a low cost platform. The brain injury, sports related concussion assay is moving from sort of internal feasibility to completing the IRBs and we're going to begin testing on clinical specimens from trauma center. So we feel good about that progress.

[Larry Haimovitch:]

Okay. Could you give a little more color to what preparations you have on the commercial side to replace their activities are there revenue?

[John Sperzel:]

The are some limitations to what I can say because you can imagine we have an agreement with our partner that runs through May 31 and we have to honor all of the requirements of that agreement. So there's not a lot I can say other than tell you that we are very well prepared internally. Our salesforce is training and we are essentially ready to hit the go button and we will do that on June.

[Larry Haimovitch:]

The revenue generated from the product that you acquired, do you think that's going to be the case with the situation or is it a different situation today?

[John Sperzel:]

I think it's very different and the reasons that is different are that when we separated from that partner with respect STAT-PAK, we didn't have a salesforce, didn't have any distribution partners, we served them noticed and then had a 60-day waiting period. They did creative things like they told customers that that product was being discontinued and as a brand it was. So this situation is very different. You have a sales force, we have relationships with customers, we have distribution partners, certainly we have not been able to speak to them about SURE CHECK because we have to honor the agreement that we have in place but it's a very different situation and as I said in the prepared remarks, the SURE-CHECK product is very unique, it's form factor is unique, it's use is unqiue, it's very well suited for the public health market and we intend to leverage all of those. And more importantly, we will effective June 1, have three FDA approved clear wave HIV assays that all have different features and benefits that we can position differently within the market. And we intend to start playing offence on June 1st, rather than playing a little bit offense and a little bit of defense.

[Larry Haimovitch:]

And then on Q1 in the U.S. I think we would all say, at least the analyst side would all say that was better than expected, I was a bit holding my breath here on Q1 but you did very, very well in the U.S. And another analyst asked the question about, just want to be sure, there is nothing unusual about this, is there any special orders or anything that shouldn’t make us feel little cautious about the number being so good.

[John Sperzel:]

Yes as I said that we Alere built inventory during the first quarter on the SURE CHECK bottom line. So we wouldn’t expect SURE CHECK sales at that level, certainly not to Alere because they are not able to order any more products after May 31. So that’s a caution -- I think raised by one of the analyst and I agree with that. As I said the transition from that partner internally will be different than it was in the past but it's still in transition that we have to go through, they have been servicing customers since 2006.

[Larry Haimovitch:]

And Q2 you will have two months of sales to Alere and then you will have one month of your sales as you begin the transition.

[John Sperzel:]

I would say that the Alere sales were much more heavy in Q1 than we would expect in Q2.

[Larry Haimovitch:]

But beginning June you will have your own revenue from that source?

[John Sperzel:]

Absolutely.

[Larry Haimovitch:]

Okay. And then one just small housekeeping which Rich, during your prepared remarks you mentioned cash used from operations and I was little confused by that, it appears that the only cash that was truly used was when the receivables went up, not much else different. Did I misunderstand what you said or can you clarify that please?

[Richard Larkin:]

I mean that is correct, substantially all of the cash used was the increase in NAR. For the operating cash loss is really was only a $120,000.

[Larry Haimovitch:]

And Rich, that increase in receivable just to make sure I'm clear about that, is that that O-U.S. as in Brazil or is that within the U.S. or a combination of both?

[Richard Larkin:]

A combination of both, but primarily Brazil.

[Operator:]

The next question is from Matthew Campbell of Laridae Capital. Please go ahead.

[Matthew Campbell:]

In all seriousness, with regard your Malaria fluid [indiscernible] is that giving you the ability potentially to see that market actually expand?

[John Sperzel:]

Yes we believe so because that would allow testing of asymptomatic patients which has done today. I think it's important to know that there are 319 million rapid diagnostic test used today for malaria, so it's a huge market. As we said before it is a low price market which is not something we’re particularly interested in and that’s why we’re looking to leverage the characteristics of technology like low level of detection, oral fluid saliva enter in a thoughtful way. But it is a big market and it looks like it will expand if we’re able to bring oral fluid saliva test to the market, that’s what the Gates Foundation believes and as you know they are heavily invested in malaria eradication. The believe testing asymptomatic patients is a key towards eradication.

[Matthew Campbell:]

And just I was sure I heard this correctly but maybe you can educate me on this, did you say that 80% of the people with Zika have no symptoms as well?

[John Sperzel:]

Yes that total data.

[Operator:]

Thank you. We have no more questions at this time. I will turn the conference back over to Mr. Sperzel for closing remarks.

[John Sperzel:]

I would just like to say thank you again for your participation in today's call and continue to support Chembio Diagnostics. We look forward to updating you again next quarter. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.