Chembio Diagnostics, Inc.
Q3 2016 Earnings Call Transcript

Published: 12 Nov 2016

[Operator:]

Greetings, and welcome to the Chembio Diagnostics Third Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. John Sperzel, Chief Executive Officer. Thank you, Mr. Sperzel, the floor is yours.

[John Sperzel:]

Hello, and thank you for joining in today's call. Also 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, November 10, 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 statements made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. Subsequent to the second quarter of 2016, Chembio took important steps which we believe will transform our business. We strengthened our balance sheet. We secured millions of dollars in grants and awards from the U.S. government. We achieved important regulatory milestones. We appointed experienced commercial executives to lead the global expansion of the company’s sales and marketing. And we announced an agreement to acquire a point-of-care diagnostic company based in Malaysia. Let me provide a summary on each of these accomplishments. Regarding the balance sheet, in August 2016, Chembio completed an equity financing which generated gross proceeds of $13.8 million, providing the company with capital necessary to accelerate its product development programs and invest in sales and operations needed to support sustained growth. Regarding grants and awards from the US government. We had several notable accomplishments. In August 2016 Chembio was awarded up to $13.2 million from Health and Human Services or BARDA for the development of a rapid point-of-care Zika test using our patented DPP technology platform. In September 2016, Chembio was awarded a $330,000 contract from the United States Centers for Disease Control and Prevention involving CDC’s commitment to purchase DPP Zika assay, DPP Zika, Dengue, Chikungunya combination assay and DPP Micro Reader for a pilot program in four countries. And also in September 2016, Chembio was awarded a $600,000 grant from the United States Department of Agriculture to develop a point-of-care test for bovine tuberculosis, also using our patented DPP technology platform. Regarding regulatory milestones. In July 2016 Chembio obtained a CE Mark for its DPP Zika assay and DPP Micro Reader allowing the products to be sold in much of Europe and the Caribbean region. In October 2016, the DPP Zika assay received approval by Brazil's health regulatory agency ANVISA which puts us one step closer to commercialization in Brazil. Also, Chembio advanced its ongoing clinical trial for the DPP HIV Syphilis assay for the United States market, which is expected to be completed on schedule during the first quarter of 2017. Regarding commercial operations. Subsequent to the second quarter of 2016, Chembio appointed presidents for the EMEA and APAC regions and for the Americas region, both tasked with building and leading Chembio sales and marketing functions in the respective regions. During the third quarter of 2016, Chembio signed distribution agreements with Isla Lab, the largest diagnostics distributor in the Caribbean region, to support the sale of the company's products in the entire Caribbean, including Puerto Rico and the U.S. Virgin Islands. And following our strategic decision to transform the company from an OEM supplier to a branded company with direct control of its sales and marketing in the United States, we continue to increase sales of the company’s STAT-PAK HIV assay in the United States and we are encouraged by the sales progress of the company’s SURE CHECK HIV assay, giving us confidence in our ability to commercialize these products under our Chembio brands. Finally, regarding M&A activity. Subsequent to the end of the third quarter of 2016, Chembio signed an agreement to acquire RVR Diagnostics, a Malaysia-based privately held manufacturer and distributor of point-of-care diagnostic test for infectious diseases. Subject to satisfaction of conditions to closing, the RVR acquisition will provide the company with a strategically located beachhead in Southeast Asia -- a cost effective manufacturing facility, a source of additional revenue, and a potential to accelerate product registrations throughout Southeast Asia. I will provide a more detailed overview of our recent and anticipated milestones following a review of the third quarter financial results. Rich?

[Richard 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’ll go over the results of the third quarter of 2016. Our total revenues in the 2016 third quarter of $3.75 million decreased 45.6% compared with $6.8 million in the prior year period. Product sales in the 2016 third quarter of $2.5 million decreased 59.7% compared with $6.2 million in the prior year period. R&D milestone, grant and royalty revenues in the 2016 third quarter of $1,244,000 increased 83.4% compared with $678,000 in the prior-year period. Gross margin dollars in the 2016 third quarter of $1.95 million decreased 32.9% compared with $2.91 million in the prior-year period, due primarily to decreased product revenues. The amount of product gross margin dollars in the 2016 third quarter of $0.71 million decreased 68.3% compared with $2.23 million in the prior-year period, which also was due primarily to the decreased product revenues. Research and development expenses in the 2016 third quarter of $2.26 million increased 44.2%, compared with $1.57 million in the prior-year period. This increase is due primarily to increased clinical trial expenses as well as R&D activities for projects and grants. Selling, general and administrative expenses in the 2016 third quarter of $1.83 million decreased 4.5% compared with $1.92 million in the prior-year period, largely due to decreased commissions, due to decreased sales in Brazil, as well as decreases in stock-based compensation, travel, entertainment and trade shows, consulting, and other expenses, which were partially offset by increases in wages and related costs, marketing materials, professional fees and investor relations expenses. Our operating loss in the 2016 third quarter was $2,144,000, compared with an operating loss of $579,000 in the prior-year period. The net loss in the 2016 third quarter was $2,138,000, or $0.19 per diluted share, compared with a net loss of $437,000, or $0.05 per diluted share, in the prior-year period. Now I will go over our results for the first nine months of 2016. With total revenues in the 2016 first nine months of $13.61 million, it was a decrease of 31.4% compared with $19.83 million in the prior-year period. Product sales in the 2016 first nine months of $10.45 million decreased 42.4% compared with $18.15 million in the prior-year period. R&D milestone, grant and royalty revenues in the 2016 first nine months of $3,161,000 increased 87.2% compared with $1,689,000 in the prior-year period. Our gross margin dollars in the 2016 first nine months of $6.7 million decreased 22.3% compared with $8.62 million in the prior-year period, due primarily again to the decrease in product sales. The amount of product gross margin in the 2016 first nine months of $3.54 million decreased 48.9% compared with $6.93 million in the prior-year period. Our R&D expenses in the 2016 first nine months of $6.27 million increased 27.6%, compared with $4.91 million in the prior-year period. This increase is due primarily to increased R&D activities for projects and grants. Selling, general and administrative expenses in the 2016 first nine months of $5.43 million decreased 10.3%, compared with $6.06 million in the prior-year period, largely due to decreased commissions on sales in Brazil, decreased wages and related costs, stock-based compensation, consulting and travel, entertainment and trade shows, which were partially offset by increases in marketing materials, investor relations expenses and professional fees. Our operating loss in the 2016 first nine months was $4,998,000, compared with an operating loss of $2,352,000 in the prior-year period. Net loss in the 2016 first nine months was $10,789,000, or $1.06 per diluted share, compared with a net loss of $1,748,000, or $0.18 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 $5,801,000. The company had cash and cash equivalents of $12.17 million as of September 30, 2016, compared with $5.38 million as of December 31, 2015. This increase was primarily due to cash provided by financing activities primarily from cash raised in the sale of common stock, partially offset by cash used in operating activities of the nine months of 2016. Our working capital increased by $8.06 million from $9.48 million as of December 31, 2015 to $17.54 million. As John mentioned, in August 2016, the company sold 2.3 million shares for a total of $13.8 million, which after expenses resulted in approximately $12.5 million in net funds to the company. That concludes the financial review. I will now turn the call back over to John.

[John Sperzel:]

Thanks, Rich. I’d now like to give an overview of the progress made in each of our business areas during the third quarter of 2016, that is sexually transmitted disease, fever and technology collaborations. In addition, I'd like to share information on our progress and plans to expand our sales and marketing presence globally. I’ll first speak about our sexually transmitted disease business. Chembio’s sexually transmitted disease product sales decreased during the third quarter of 2016 as compared to the third quarter of 2015, due primarily to the discontinuation of sales to the company's former US distributor after termination of their distribution agreement in June 2016, as well as the discontinuation of sales of the company's DPP HIV and DPP Syphilis standalone assays in Brazil due to the loss of ongoing business as a result of a tender offer in Brazil being won by a competitor at an extremely low price point as previously disclosed. Despite the loss of this tender and its impact on 2016 sales, we believe the government in Brazil will be an important customer given ongoing product sales of the company’s DPP HIV Confirmatory assay and DPP Leishmania assay to Brazil's Ministry of Health via our partner Bio-Manguinhos/Fiocruz. We also believe the anticipated launch of the DPP Zika assay and DPP Macro Reader which I'll discuss during my comments on the fever disease business will be important new products in Brazil. And we believe these new products offer significant growth opportunities throughout Latin America. Despite reporting a decrease in product sales for the second and third quarters of 2016 as compared to the same period in 2015, a quarter-over-quarter or a sequential quarter analysis shows sales growth with total revenues for the third quarter of 2016 increased 15% as compared to the second quarter of 2016. And product sales for the third quarter of 2016 increased 23% as compared to the second quarter of 2016. A look at the U.S. sales of our point of care HIV assays also shows positive trends. In the United States during the third quarter of 2016 sales of the HIV STAT-PAK assay increased 44% as compared to the third quarter of 2015 and 21% as compared to the second quarter of 2016. This growth provides strong evidence that we are effectively rebuilding the US HIV STAT-PAK business since we took back the US distribution rights to this product in June 2014. We're also seeing encouraging US sales of the company’s HIV SURE CHECK assay since we took back distribution rights of this product in the United States at the end of May 2016. As mentioned earlier, the company continued to advance the U.S. clinical trial for its DPP HIV syphilis assay during the third quarter of 2016 which is expected to be completed on schedule in the first quarter of 2017. Chembio is also in the process of submitting the technical dossier for CE mark which, if obtained, will allow the company to commercialize the DPP HIV syphilis assay in Europe and the Caribbean region. It is an important corporate priority to be first to market in the United States with a DPP HIV syphilis combination test as we believe a combination assay can capture meaningful market share in the United States market, particularly in screening pregnant women to reduce mother to child transmission of both HIV and syphilis and for screening within the MSM community. Moving on to our fever disease business. During the third quarter of 2016 Chembio advanced the feasibility testing and development of the DPP malaria assay being developed under a $678,000 grant from the Bill and Melinda Gates Foundation. The company plans to complete the assay development by the end of 2016 and subsequently provide DPP malaria tests to a third party in the first quarter of 2017 in order to verify assay performance. We advanced the development of the DPP Fever Panel Assay being developed under a $2.6 million grant from the Paul G. Allen Family Foundation. The point of care multiplex test is intended to simultaneously detect Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa and Marburg with a single drop of blood from the fingertip. And the company plans to complete assay development by the end of 2016 and plans to initiate field testing during the first quarter of 2017 in collaboration with FIND who is also a recipient of funding from Paul G. Allen Family Foundation. We also advanced the development of the DPP Dengue assay being developed as a standalone test with initial funding and support from RVR, which was previously undisclosed although given our plans to acquire RVR, I'm now able to disclose the source. It is also being funded in a multiplex assay by the Paul G. Allen Family Foundation. During the second quarter of 2016 we initiated registration of the DPP Dengue assay to begin initial commercialization in Southeast Asia via our partner RVR and we anticipate selling in the fourth quarter of 2016. In August of 2016, Chembio was awarded its largest grant ever, up to $13.2 million in funding from the United States Government, Health and Human Services, ASPR, BARDA for the development and commercialization of the company's DPP Zika, Dengue, and Chikungunya assays. The BARDA contract includes an initial award of $5.9 million to fund development, clinical trials and U.S. regulatory submissions related to the DPP Zika assay and DPP Micro Reader, and an option for $7.3 million in additional funding for the development, clinical trials and regulatory submissions related to the DPP Zika, Dengue, Chikungunya accommodation assay. Through this grant the company is working to develop a much needed alternative to the currently available molecular and/or laboratory based antibody tests for the Zika virus that may have limited utility but they are primarily useful during a narrow window of time between initial Zika virus exposure and the patient's development of detectable antibodies to the virus in the case of molecular test, or maybe inconvenient or have an excessively long time to result in the case of lab based antibody tests. The DPP Zika system which includes a DPP Zika assay and the DPP Micro Reader detects both IgM and IgG antibodies using a tiny drop of blood 10 micro-liters from the fingertip and provide semi quantitative results in only fifteen minutes. Subject to appropriate regulatory approvals, we believe the company's DPP Zika system will have significant advantages as compared to the currently available tests and we believe it will be well received by the market. In September 2016 Chembio was also awarded a $330,000 contract by the CDC for the purchase a point of care surveillance diagnostic test for Zika, Dengue and Chikungunya. Under the terms of the twelve month contract, Chembio will sell its DPP Zika -- its DPP Zika, Dengue, Chikungunya combination assays and the DPP Micro Reader to the CDC for surveillance testing pilot program in India, Peru, Guatemala and Haiti. On the regulatory front, a CE Mark was obtained in July 2016 that allows the company to begin commercializing the DPP Zika system in 17 European countries, including the United Kingdom, Germany and France as well as the majority of the Caribbean nations. The company also received approval for commercial use of its DPP Zika assay by the Brazilian health regulatory agency ANVISA in early November. Brazil has been hardest hit by the Zika virus where it’s estimated that 1.5 million people have been infected with Zika and 2000 babies have been born with microcephaly, a devastating birth defect linked to the Zika virus. For this reason the company is particularly pleased to have received approval from ANVISA. We look forward to initiating sales of our DPP Zika assay which we expect to occur following a successful evaluation of the DPP Zika system by Brazil's National Institute for Quality in Health or INCQS and ANVISA approval of the DPP Micro Reader. We're currently involved with both INCQS and ANVISA to accomplish these final steps. Beyond these regulatory successes, the company has made additional regulatory filings during 2016 for the DPP Zika assay and DPP Micro Reader, including an emergency use authorization submission with the United States Food and Drug Administration, an emergency use authorization application with the World Health Organization, a submission to Cofepris, the Mexican equivalent of the Food and Drug Administration as well as submissions via our partner RVR in Malaysia. Supplementing these filings the company is engaged fully with these agencies in the hope of facilitating the earliest possible approvals. Moving on to our technology collaborations. Chembio is currently focused on the following ongoing technology collaborations

[Operator:]

[Operator Instructions] And our first question comes from the line of Per Ostlund with Craig-Hallum Capital Group.

[Per Ostlund:]

Thanks, good morning guys. And congratulations on what sounds like a significant amount of progress. I want to start on the Zika approval in Brazil that you recently announced as it pertains to ANVISA and INCQS, and I know that these things can be a little bit hard to handicap but I wonder if there is any way to handicap sort of the timing of the two. And then also from the ANVISA side, specifically I know you got the assay approved, you still have the reader side of it to approve or get approved. I don't want to put words in your mouth but with Zika being a reader dependent assay, is it reasonable to think that the assay having been approved should logically translate into the reader itself being approved in reasonably short order? We will start there. Thank you.

[John Sperzel:]

Great. Good morning, Per, thank you. So excellent question. I think the best way to respond to that is that it is a reader dependent system. So when we talk about our Zika system that includes the Zika assay and includes the DPP Micro Reader. And the approval processes within ANVISA in Brazil are somewhat separate, so they're on a parallel path but they are on a separate path. So we expect it to get a separate ANVISA approval for the assay and for the reader. And you're correct in stating that one would have to be used to assess the other. That said it is a separate process. We have two steps to complete before we can commercialize the test in Brazil. That being as we mentioned the INCQS evaluation which is an independent performance evaluation which is ongoing, as well as checking the box to get the ANVISA approval for the DPP Micro Reader. I’ll just remind everyone that while in the United States the summer months are largely behind us, in Brazil summer officially starts on December 1. So we are headed into ‘the mosquito season’ in Brazil.

[Per Ostlund:]

To follow on to that I guess the next question that would follow for me on Brazil is assuming approval, how quickly are you in a position to convert that approval into order flow and sales? Is it situation where you're building inventory now and you'd be ready to roll basically as soon as you got an approval?

[John Sperzel:]

So, the shorter answer is immediately. The longer answer is we have not built up a substantial amount of inventory because we're going through the regulatory approval process in many countries. And so it would have been premature to do that. We obviously took some risk based decisions to build a certain amount of inventory. So if we got an order from Brazil tomorrow, we would be in a position to fulfill a certain portion of that immediately.

[Per Ostlund:]

Okay, excellent. Want to switch over to the lateral flow and the HIV side, it sounds like we're making some good progress there. Looking at sort of where we were I think in Q2 it sort of had bottomed out there. I think your former partner had larded up their system a little bit in advance of the separation. So I guess I'm kind of curious two things

[John Sperzel:]

So first, let me take this one piece at a time. In terms of the overall point of care HIV business there are a few moving parts here. As I mentioned in the prepared remarks, we're making very good progress in the U.S. in terms of rebuilding or recapturing the STAT-PAK business. And we're showing early signs of progress on the SURE CHECK business which we just took back, if you will, effectively June 1 of 2016. Unfortunately that's a little bit masked by the fact that we have this transition of the business from our former partner in the United States as well as the loss of the tender in Brazil. So I tried to make those points separately because the progress in the U.S. is getting masked when you aggregate those numbers. To your other point about our former partner and their current situation, I don't probably want to comment on that. But what I could say is that it does create a little bit of chaos organizationally and we will try to turn that to our advantage with the customer in this transition in the United States in particular.

[Per Ostlund:]

Okay, that sounds entirely fair on all points. One more for me and I'll cease the floor. At the time that you guys raised the capital, you had the preliminary second quarter results and I believe in that press release you had sort of pointed to kind of a second half revenue forecast of $8 million to $10 million. And I just wanted to see sort of -- check your temperature on where you stand on that. Is that still kind of a reasonable expectation given 3.7, 3.8 here in this quarter? Thanks.

[John Sperzel:]

Yes it is, Per. So it's still reasonable. Our temperature is the same on it. I would add the fact that we said that there is also significant upside related to product sales of our DPP Zika assay and we remain confident that there is upside. I think we have to qualify significant a little bit because a couple of months have gone by between now and then. However as I said we did start to scale up the production of the assay in anticipation of orders this year and we will be able to fulfill those. And we're in a position now given the cash that we have in the balance sheet to ramp that up even quicker should those orders materialize in 2016 and we remain hopeful that they are given all of the efforts and all of the shots on goal with multiple regulatory agencies.

[Operator:]

Our next question comes from the line of Brian Marckx with Zacks Investment Research.

[Brian Marckx:]

Good morning guys. And congratulations, you've been busy, it’s obvious, lot of progress there. John, can you talk about the Zika assay and the Micro Reader? And if there's any differences between what you will develop and hopefully get regulatory approval for in the U.S. And if that differs from the Zika sets that you have CE Mark for and Brazilian regulatory approval for.

[John Sperzel:]

So the system that we're developing is a system that we intend to commercialize globally. So it is a reader based assay. So when you compare that to the way we might think about traditional lateral flow HIV tests which are essentially qualitative tests, you get a yes or a no, a positive and negative. In this case we're actually getting a semi quantitative result. So on both the IgM and IgG antibody detection we provide the customer with a number. That helps us to set cut off on what is a positive and what is a negative or a non-reaction specimen. And it also over time, when we look at secondary infections in many countries, we'll see a significant increase in the IgG antibody in secondary infections. And so the numerical value is we believe going to be a significant differentiator in the market. So we intend to commercialize the product as a system globally. I would caution, however, to say that we are in discussion with multiple regulatory agencies and until those discussions are finalized, it would be a little bit premature to say that the product will be positioned and promoted exactly the same way in every region around the world, because the ultimate decision maker in many cases is a regulatory body.

[Brian Marckx:]

Are you -- how much insight I guess, does -- do you have in terms of what FDA will look for in terms of clinical trials and support for submission and in terms of the clinical trials, is that something that they're going to require you to do here in the U.S. or can you do that somewhere overseas?

[John Sperzel:]

So there are two parts to the answer to that question. The first is the immediate objective is to obtain an emergency use authorization by the FDA. And we have extremely good visibility on what is required to accomplish that objective. And we are actively engaged with the agency to accomplish that objective. So that part is very clear. As far as a 510(k) and a CLIA waiver that's something that I would be able to address down the road. There is a tremendous amount of cooperation which I had hoped would be the case when we started in the Zika initiative back in February of this year. I hoped that there would be collaboration between industry, between the funding organizations and between regulators and we're seeing a tremendous amount of cooperation whether it's between WHO and FDA, and ANVISA and BARDA and CDC, the cooperation has been terrific. And it's helped the industry I believe accelerate the development so that we can get into markets like Brazil and really help the patients that are suffering. I can tell you that I’ve personally been in Asia, in Latin America, specifically in Brazil, in the Caribbean and people are worried and people are suffering. So we're really looking forward to getting these products in the market.

[Brian Marckx:]

In terms of the HHS, BARDA grant, can you tell me what that term is in terms of months or years for the initial portion and then also at whose discretion Chembio’s or BARDA is the option to tick up the follow on portions?

[John Sperzel:]

So it's a multi-year grant with BARDA and the option is entirely BARDA’s and it's based on funding and it's based on need. Obviously we believe that there is going to be a significant need for a combination assay that with a 10 micro-liter drop of blood from the fingertip can simultaneously identify antibodies for Zika, Dengue and Chikungunya. I mean one thing that we didn't talk about is that Brazil, it is believed, is about to have a significant outbreak of Chikungunya, on top of the outbreak that they're having with Zika and the widespread dengue that that's in the country. We're seeing the same thing in Puerto Rico where 75% of the island has been exposed to dengue and on top of that we have had sporadic Chikungunya outbreaks. And we're obviously in the midst of a significant Zika outbreak. So these viruses cross react with one another and unless you're an expert epidemiologist it's very difficult to discriminate between the viruses and even if you are, according to experts, while you might be able to discriminate between the viruses based on a patient consultation, probably it's very difficult to identify cold infected patients without a diagnostic test that can discriminate and identify co-infected. So we think over time that the meat [ph] is going to continue to evolve for a combination assay and we're hopeful that the US government takes advantage of the option that we have in the agreement to fund the combo assay as well. In the meanwhile Chembio was funding that. That's part of why we raised the money in 2016 in August so that we could fund that. But keep in mind the funding that we get from BARDA is focused on the United States market. And it's focused on product development, clinical trials and regulatory submissions and the clinical trial and regulatory submission can be significant given the fact that we're talking about a 510(k) and CLIA waiver.

[Brian Marckx:]

And just a couple more on Zika and then I'll wrap it up. In terms of the INCQS approval, do you have any kind of foresight I guess and anything to kind of ballpark off of in terms of how long that could take?

[John Sperzel:]

I wouldn't want to guess on that, Brian. We're actively engaged, we're well into the process.

[Operator:]

Our next question comes from the line of Raymond Myers with Benchmark.

[Raymond Myers:]

Thank you. John, I want to touch on the momentum in the lateral flow business. If we look at the third quarter momentum sequentially from Q2, there's very strong momentum, at least on a percentage basis it’s about 26% sequential growth in that business. Revenue wise quarter over quarter and very strong margin improvement as well. I wouldn't want to extrapolate too much from one quarter. Could you give us a sense of how strong that momentum is and what the cadence is likely to be over the next several quarters?

[John Sperzel:]

Well we're working very hard to recapture and I think we talked about this in prior earnings call, the STAT-PAK business in the United States market. I think when we took back the rights to that product in 2014 and we spent some time talking about this, we didn't have a sales team. We didn't have relationships with the major distributors in the U.S. market and we didn't have any access to the customer information. So we've built that since 2014 and unfortunately if we reverse back to 2014 and the early part of ’15 not much of that STAT-PAK business came over the wall in the transition from our former partner. So we've worked very hard to rebuild that business and as you mentioned, Ray, the quarter to quarter sort of sequential analysis of that business shows really good progress. It's unfortunately masked by a couple of losses that we've had and a couple of other moving parts. But in the U.S. we're making very good progress. It's been a deliberate effort. We keep in mind, until 2014 Chembio has operated like a product supplier organization or an OEM supplier where we supplied product to a single partner in the United States and we supplied product to the government in Brazil. Outside of that we had zero sales resources and we would win an occasional tender in Africa but that was our model. That's not the kind of model that you need to build a global diagnostic company. We need people in the regions to drive the business and that's why we put a U.S. sales team in place to move ourselves from that OEM model to a direct model where we control our destiny. That's why we've appointed Bob Passas to head up the EMEA and APAC region. That's why we've appointed Sharon to head up the Americas region and we will put some regional directors in these key regions like Latin America, Africa and Asia Pacific urgently because we want to build the business in those regions and our portfolio has evolved beyond just a few very good HIV tests to include fever and tropical disease tests that are well suited for these markets. We're talking about Latin America, Africa, Asia Pacific. If you look at where that Aedes aegypti mosquito is present it’s right across that those entire three regions.

[Raymond Myers:]

And maybe to further that point, could you discuss the revenue contribution you would dissipate from RVR’s acquisition recently in the current quarter or through 2017? I know that they had a business before that you'll be taking on as well as the dengue launch that you’re expected in the fourth quarter and also touch on the contribution that might be possible from the new Isla Lab distributorship?

[John Sperzel:]

Sure. So let me start with RVR and I'm glad you asked the question. First of all, we're very happy about the opportunity to acquire a company like RVR. As you know we initiated a partnership with RVR back in early 2014 and we worked very closely with them over the last couple of years to establish a Malaysian operation from scratch. I was just in Kuala Lumpur last week to sign the agreement and I'm very impressed with the manufacturing, distribution, quality, regulatory affairs and sales and marketing capabilities that have been established there in a couple of years. Obviously I affirmed who the undisclosed partner was working with us on the standalone dengue assay, it was RVR. So we've been working with them very closely over the last couple years. What RVR does for the company going forward is it provides us with a cost effective manufacturing facility where we can drive gross margin improvement and it will allow us to enter new markets that we have been previously locked out of, because of the high cost of goods of our products. And I'm going to come back to that in a minute. It provides the company with strategically located operations in Malaysia which is centrally located in Southeast Asia. The reputation for quality of products in Malaysia or in Singapore is very high and so selling out of Malaysia throughout Southeast Asia will be received very well. And by the way you might ask, the population in southeast Asia alone is approximately 600 million people and they're experiencing widespread Zika, Dengue and to a lesser extent Chikungunya outbreaks. It gives us an established revenue stream. So this was your point, Ray. In 2016 RVR is expected to have revenue approximating $1.5 million and we expect to grow that going forward. As I mentioned we expect to launch the DPP dengue assay in 2016 before year end. We believe that RVR Diagnostics is at an inflection point where the startup risk has been minimized and the growth potential was apparent. And that's why our timing to acquire the company was optimal at a reasonable price or at least what we thought was a reasonable price. And so if I go back to the opportunity there are many sales opportunities that we're frankly just unable to participate in in Latin America, in Africa, in Southeast Asia and in the Middle East because manufacturing the product in New York puts us in a non-competitive situation. So we believe RVR offers us great opportunity to expand our product sales obviously into Southeast Asia but also into other regions. And that will allow us to invest more here in New York as well. And your other question, Ray, was about Isla Lab and what that offers the company. We signed two agreements with Isla Lab because they actually have two operating units, the first is Isla lab LLC and the second is Isla Lab Caribbean. The LLC covers Puerto Rico and U.S. Virgin Islands which I think as we all know are under FDA responsibility or regulations, and the Isla Lab Caribbean is under CE Mark. So obtaining the CE Mark allows us to sell in sort of the non Puerto Rico U.S. Virgin Islands part of the Caribbean. And we're actively engaged in the launch of the DPP Zika assay developing key opinion leaders and establishing certain testing. And I've been in the region as well to kick that off. So we're excited to have a partner like Isla Lab, I've known these folks for thirty years. They are the best diagnostic distributor in the region, period and they represent exclusively some of the best diagnostics companies in the industry. So we're honored and pleased to have them as our exclusive partner in that region.

[Raymond Myers:]

That's great and my last question is about your grant funding and the type of grant revenue ramp that we might expect. If we just straight lined the $13 million BARDA grant over three years, we can all do the math. Is that how we should think about your recognition of that grant or is it either front or back end loaded?

[John Sperzel:]

So the first thing I want to say is frankly we’re thrilled to get the support of the U.S. government, specifically BARDA. They only invested in two rapid diagnostic companies, one, they had prior experience with and Chembio. So I mean to say that we're thrilled about the outcome of all the hard work that went into establishing that agreement would be just a massive understatement. In terms of how to think about that spread, it’s important to recognize that $5.9 million of it is committed. The $7.3 million is an option. So I wouldn't sort of bake in that $7.3 million until we actually get an award from BARDA and that has not happened yet. The $5.9 million is committed funding, the $5.9 million is related to Zika to take it through development, to take it through emergency use authorization, to take it through clinical trials, and to take it through the regulatory submissions. We will come back hopefully when we have success on the Zika, Dengue, Chikungunya combination assay which is the option award of $7.3 million.

[Operator:]

And our next question comes from the line of Larry Haimovitch with HMTC.

[Larry Haimovitch:]

John, you've covered a lot of ground, lots of good questions, lots of great information. I just want to take a step back and ask you when you look back over the last few months with all the various accomplishments and progress you've made, is there any one or two things you highlight as being most important on your mind the greatest accomplishments in the last few months?

[John Sperzel:]

Larry, that's a great question. You have a habit of asking excellent questions like that. So I think that the first thing that jumps out at me is the grant that we received from the U.S. government. It's a heck of an endorsement. It's a very very well stringent [ph] process. There were many many applicants and as I said a minute ago to Ray, we're super thrilled to get that grant. We take it very seriously. This is taxpayer money. We are going to do our best to get these products to the market as quickly as we can, because as I said before people are worried, I talk to people that are thinking about having a baby or are expecting a baby, may have traveled to an endemic area and they're worried. And we think we can help. So we're going to do our darndest to make that happen. The other thing that I would point to is the pending acquisition of RVR. I think it has the potential to be transformative for this company. It's our first physical presence outside the United States with a would be Chembio organization and it will allow us to enter I believe very quickly certain markets in Southeast Asia and it can allow us to gain access to markets where we've just been locked out in other regions of the world. So I think that would be the second one that I would point to.

[Larry Haimovitch:]

And then a follow on, I am taking the other side, probably seeing on everything as well as you hoped and certainly knowing the energy level that bring to the company, things may be not happening fast. What would you say are the one or two things that maybe had not happened that you might have hoped would have happened by now that you'd like see happening quickly?

[John Sperzel:]

Well in the interest of being just unwaveringly focused, I would say that we have to improve sales. That's the starting point for how we can transform this company. We have invested a lot in product development as I said before largely through government or philanthropic grants. And I think that's been very shareholder friendly. It's been a deliberate strategy that we've executed in the last couple of years and we've had terrific success with it. But as these products get close to the goal line we need to shift our focus to include commercialization. And that's why we've appointed Bob, that's why we've appointed Sharon. That's why we built the sales team in the United States and we’re seeing progress. But we absolutely have to drive sales in this company and these products do not sell themselves. So we need sales professionals. We've hired two great leaders and put them in place and we expect to put regional directors in Africa, in Asia and in Latin America in the coming months. End of Q&A

[Operator:]

There are no further questions at this time. I will turn it back over to you, John for any closing remarks.

[John Sperzel:]

I just like to thank you all for your participation and your continued support of Chembio Diagnostics. We look forward to updating you again next quarter. Have a great day.