UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10 - Q

 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 20172018
 
OR
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: ______ to ________

000-30379
(Commission File Number)

Chembio Diagnostics, Inc.
(Exact name of registrant as specified in its charter)

Nevada 88-0425691
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)

3661 Horseblock Road
Medford, New York 11763
(Address of principal executive offices including zip code)
(631) 924-1135
(Registrant'sRegistrant’s telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No □☐

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

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

 Large accelerated filer □☐
Accelerated filer ☒
 Non-accelerated filer □  (Do not check if a smaller reporting company)☐ 
Smaller reporting company □☐
 Emerging growth company □☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes □☐ No □☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes □☐ No ☒

As of November 6, 2017,5, 2018, the Registrant had 12,318,57017,187,184 shares outstanding of its $.01 par value common stock.

1
Quarterly Report on FORMForm 10-Q
For The Quarterly Period Ended
September 30, 20172018

Table of Contents

Chembio Diagnostics, Inc.

 
Page
   
Part I. FINANCIAL INFORMATION: 
 

Item 1. Financial Statements:Statements:
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 20162
   
 
Condensed Consolidated StatementsBalance Sheets as of Operations and Comprehensive Loss (unaudited) for the for the three and nine months ended September 30, 20172018 (unaudited) and 2016December 31, 2017
3
   
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2018 and 2017
4
Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2018 and 2017
5
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 20172018 and 20162017
46
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
57
   
 
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
1716
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk24
Item 4. Controls and Procedures
3224
   
Part II. OTHER INFORMATION: 
   
 
Item 6. Exhibits1. Legal Proceedings
3325
   
SIGNATURES34
Item 1A. Risk Factors
25
Item 6. Exhibits
26
   
SIGNATURES
28
EXHIBITS 
 
The words ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ ‘and ‘‘Chembio’’ refer to Chembio Diagnostics, Inc., unless otherwise we indicate.

STAT-PAK, STAT-VIEW, SURE CHECK and DPP are our registered trademarks, and our logo design is our trademark. For convenience, these trademarks appear in this Quarterly Report on Form 10-Q supplement without ® and ™ symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks.

2

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors, including those described or incorporated by reference in “Item 1A. Risk Factors” of Part II of this report, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we assume no obligation to update these statements publicly or to update the reasons actual results could differ materially from those anticipated in these statements, even if new information becomes available in the future.

You should read this report, and the documents that we reference in this report, including exhibits that are being filed as part of this report, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

3
PART I
Item 1.
Item 1.
FINANCIAL STATEMENTS

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF

 September 30, 2017  December 31, 2016  September 30, 2018  December 31, 2017 
 (Unaudited)     (Unaudited)    
- ASSETS -            
CURRENT ASSETS:            
Cash and cash equivalents $1,871,982  $10,554,464  $6,848,583  $3,790,302 
Accounts receivable, net of allowance for doubtful accounts of $52,000 at September 30, 2017 and December 31, 2016, respectively  5,768,920   3,383,729 
Accounts receivable, net of allowance for doubtful accounts of $42,000 at September 30, 2018 and December 31, 2017, respectively
  7,794,014   2,085,340 
Inventories, net  5,235,164   3,335,188   5,978,426   4,423,618 
Prepaid expenses and other current assets  842,532   840,145   1,579,750   554,383 
TOTAL CURRENT ASSETS  13,718,598   18,113,526   22,200,773   10,853,643 
                
FIXED ASSETS, net of accumulated depreciation
  1,964,427   1,709,321   2,372,896   1,909,232 
                
OTHER ASSETS:                
Intangible assets, net  1,431,921   1,597,377 
Goodwill  1,597,617   -   1,628,864   1,666,610 
Intangible assets, net  1,573,518   - 
Deposits on manufacturing equipment  243,755   31,900 
Deposits and other assets  146,789   720,489   331,423   589,159 
  3,392,208    3,853,146 
        
TOTAL ASSETS $19,244,704  $20,575,236  $27,965,877  $16,616,021 
                
- LIABILITIES AND STOCKHOLDERS' EQUITY -        
- LIABILITIES AND STOCKHOLDERS’ EQUITY -        
CURRENT LIABILITIES:                
Accounts payable and accrued liabilities $3,870,161  $3,013,133  $6,798,600  $3,046,303 
Deferred revenue  -   392,517   760,750   50,000 
Current portion of note payable
   202,096    - 
TOTAL CURRENT LIABILITIES  3,870,161   3,405,650   7,761,446   3,096,303 
                
OTHER LIABILITIES:                
Notes payable  207,694   99,480 
Deferred tax liability  335,990   -   333,318   341,042 
Long-term portion of loans payable  99,480   - 
TOTAL LIABILITIES  4,305,631   3,405,650   8,302,458   3,536,825 
                
COMMITMENTS AND CONTINGENCIES        
COMMITMENTS AND CONTINGENCIES (Note 6)        
                
STOCKHOLDERS' EQUITY:        
STOCKHOLDERS’ EQUITY:        
Preferred stock - 10,000,000 shares authorized; none outstanding  -   -   -   - 
Common stock - $.01 par value; 100,000,000 shares authorized; 12,318,570 and 12,026,847 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  123,185   120,268 
Common stock - $.01 par value; 100,000,000 shares authorized; 14,173,620 and 12,318,570 shares issued
and outstanding at September 30, 2018 and December 31, 2017, respectively
  141,736   123,185 
Additional paid-in capital  62,733,065   60,721,783   74,108,046   62,821,288 
Accumulated deficit  (54,739,124)
  (50,044,225)
Accumulated other comprehensive income  128,616   -   152,761   178,948 
Accumulated deficit  (48,045,793)  (43,672,465)
TOTAL STOCKHOLDERS' EQUITY  14,939,073   17,169,586 
TOTAL STOCKHOLDERS’ EQUITY  19,663,419   13,079,196 
                
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,244,704  $20,575,236 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $27,965,877  $16,616,021 

See accompanying notes to condensed consolidated financial statements


24
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
  For the three months ended  For the nine months ended 
  September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017 
REVENUES:            
Net product sales $7,856,038  $6,132,725  $21,112,126  $14,453,097 
License and royalty revenue  228,553   150,000   707,010   477,631 
R&D, milestone and grant revenue  1,292,202   1,304,649   3,995,115   3,096,626 
TOTAL REVENUES  9,376,793   7,587,374   25,814,251   18,027,354 
                 
COSTS AND EXPENSES:                
Cost of product sales  6,774,749   4,064,791   16,827,956   9,487,848 
Research and development expenses  1,897,751   1,805,738   5,736,265   6,034,735 
Selling, general and administrative expenses  3,034,130   2,305,358   7,987,914   6,903,055 
   11,706,630   8,175,887   30,552,135   22,425,638 
LOSS FROM OPERATIONS  (2,329,837)
  (588,513)  (4,737,884)
  (4,398,284)
                 
OTHER INCOME:                
Interest income, net
  15,656   3,852   42,985   24,956 
           
     
LOSS BEFORE INCOME TAXES  (2,314,181) 
 (584,661)  (4,694,899)
  (4,373,328)
   
             
Income tax provision  -   -   -   - 
                 
NET LOSS $(2,314,181) $(584,661) $(4,694,899)
 $(4,373,328)
                 
Basic loss per share $(0.16) $(0.05) $(0.34)
 $(0.36)
                 
Diluted loss per share $(0.16)
 $(0.05) $(0.34) $(0.36)
           
     
Weighted average number of shares outstanding, basic  14,173,620   12,311,098   13,872,055   12,293,781 
           
     
Weighted average number of shares outstanding, diluted  14,173,620   12,311,098   13,872,055   12,293,781 
See accompanying notes to condensed consolidated financial statements
5
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

  For the three months ended  For the nine months ended 
  September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016 
REVENUES:            
Net product sales $6,132,725  $2,502,097  $14,453,097  $10,453,188 
License and royalty revenue  150,000   77,754   477,631   133,850 
R&D, milestone and grant revenue  1,304,649   1,166,610   3,096,626   3,026,927 
TOTAL REVENUES  7,587,374   3,746,461   18,027,354   13,613,965 
                 
Cost of product sales  4,064,791   1,794,364   9,487,848   6,916,015 
                 
GROSS MARGIN  3,522,583   1,952,097   8,539,506   6,697,950 
                 
OPERATING EXPENSES:                
Research and development expenses  1,805,738   2,263,719   6,034,735   6,265,483 
Selling, general and administrative expenses  2,305,358   1,832,451   6,903,055   5,430,668 
   4,111,096   4,096,170   12,937,790   11,696,151 
LOSS FROM OPERATIONS  (588,513)  (2,144,073)  (4,398,284)  (4,998,201)
                 
OTHER INCOME:                
Interest income  3,852   5,855   24,956   9,729 
   3,852   5,855   24,956   9,729 
                 
LOSS BEFORE INCOME TAXES  (584,661)  (2,138,218)  (4,373,328)  (4,988,472)
                 
Income tax provision  -   -   -   5,800,818 
                 
NET LOSS $(584,661) $(2,138,218) $(4,373,328) $(10,789,290)
                 
Foreign currency translation adjustments  4,375   -   128,616   - 
                 
Comprehensive loss $(580,286) $(2,138,218) $(4,244,712) $(10,789,290)
                 
                 
Basic loss per share $(0.05) $(0.19) $(0.36) $(1.06)
                 
Diluted loss per share $(0.05) $(0.19) $(0.36) $(1.06)
                 
Weighted average number of shares outstanding, basic  12,311,098   11,142,090   12,293,781   10,150,737 
                 
Weighted average number of shares outstanding, diluted  12,311,098   11,142,090   12,293,781   10,150,737 
                 
  For the three months ended  For the nine months ended 
  September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017 
Net loss $(2,314,181)
 $(584,661) $(4,694,899)
 $(4,373,328)
Other comprehensive income (loss):                
Foreign currency translation adjustments  (104,657)
  4,375   (26,187)
  128,616 
Comprehensive loss $(2,418,838)
 $(580,286) $(4,721,086)
 $(4,244,712)

See accompanying notes to condensed consolidated financial statements

36
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Unaudited)

 September 30, 2017  September 30, 2016  September 30, 2018  September 30, 2017 
            
CASH FLOWS FROM OPERATING ACTIVITIES:            
Cash received from customers and grants $15,249,646  $11,928,304  $20,816,327
 $15,249,646
Cash paid to suppliers and employees  (22,451,537)  (17,614,106)  (28,389,820)  (22,451,537) 
Interest received  24,956   9,729 
Interest received, net
  42,985   24,956 
Net cash used in operating activities  (7,176,935)  (5,676,073) 
(7,530,508) 
(7,176,935)
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Payment for net assets of business acquired  (850,000)  - 
Purchase of RVR Diagnostics Sdn Bhd  -   (850,000)
Acquisition of and deposits on fixed assets  (789,827)  (79,877)  (401,897)  (789,827)
Net cash used in investing activities  (1,639,827)  (79,877)  (401,897)  (1,639,827)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from option exercises  34,800   57,575 
Proceeds from equipment loan  99,480   - 
Proceeds from option and warrant exercises
  71,914    34,800 
(Payments on) proceeds from note payable
  (15,800)
  99,480 
Proceeds from sale of common stock, net  -   12,493,398   10,934,352   - 
Net cash provided by financing activities  134,280   12,550,973   10,990,466   134,280 
                
Effect of exchange rate changes on cash  220   - 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (8,682,482)  6,795,023   3,058,281   (8,682,482)
Cash and cash equivalents - beginning of the period  10,554,464   5,376,931   3,790,302   10,554,464 
                
Cash and cash equivalents - end of the period $1,871,982  $12,171,954  $6,848,583
  $1,871,982 
                
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES        
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:        
                
Net Loss $(4,373,328) $(10,789,290)
Net loss $ (4,694,899) $  (4,373,328) 
Adjustments:                
Depreciation and amortization  1,011,349   876,103   663,250    1,011,349 
Deferred taxes  -   5,800,818 
Share based compensation  296,674   220,274   299,044    296,674 
Changes in assets and liabilities:                
Accounts receivable  (2,385,191)  (1,785,261)  (5,708,674)   (2,385,191) 
Inventories  (1,899,976)  150,867   (1,554,808)   (1,899,976) 
Prepaid expenses and other current assets  (114,887)  (37,626)  (997,468)   (114,887) 
Deposits and other assets  23,262   1,481   -    23,262 
Accounts payable and accrued liabilities  657,679   (213,039)  3,752,297   657,679 
Deferred revenue  (392,517)  99,600   710,750    (392,517) 
Net cash used in operating activities $(7,176,935) $(5,676,073) $ (7,530,508)
 $  (7,176,935) 
                
Supplemental disclosures for non-cash investing and financing activities:                
Deposits on manufacturing equipment transferred to fixed assets $210,472  $49,590  $ 268,655  $ 210,472 
Seller-financed equipment purchases  326,110   - 
Accrual of contingent earn-out  148,000   -   -   148,000 
Issuance of common stock for net assets of business acquired  1,682,725   -   -   1,682,725 


See accompanying notes to condensed consolidated financial statements

47
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172018
(UNAUDITED)

NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (the "Company" or "Chembio") and its wholly-owned subsidiaries Chembio Diagnostic Systems Inc., and Chembio Diagnostics Malaysia Sdn Bhd ("CDM"(collectively, the “Company” or “Chembio”), (formerly known as RVR Diagnostics Sdn Bhd), develop, manufacture, and market rapidcommercialize point-of-care (“POC”) diagnostic tests that are used to detect infectiousor monitor diseases. The Company's main lateral flow productsCompany’s product development efforts are three rapid tests for the detection of HIV antibodies in whole blood, serum and plasma samples, two of which were approved by the FDA in 2006; the third is sold for export only. In addition, the Company has several products basedfocused on its patented Dual Path Platform (DPP®)DPP technology, including a novel POC diagnostic platform that offers certain customer advantages as compared to traditional lateral flow technology. POC tests, by providing prompt and early diagnosis, can reduce patient stays, lower overall costs, improve therapeutic interventions and improve patient outcomes.  POC tests can also prevent needless hospital admissions, simplify testing procedures, avoid delays from central lab batching, and eliminate the need for return visits.

The Company’s product commercialization and product development efforts are focused in two areas: infectious disease, which includes both sexually transmitted and tropical & fever disease; and strategic collaborations with leading global healthcare companies in order to leverage the DPP platform. In infectious disease, the Company is commercializing tests for HIV, test approved bySyphilis, Zika virus, dengue virus, and chikungunya virus, and developing tests for hepatitis C, malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. Certain of these are also being developed as part of fever panel tests. Through strategic collaborations, the FDACompany is developing tests for a specific form of cancer, concussions, bovine tuberculosis, and, in 2013collaboration with global biopharmaceutical company AstraZeneca, an undisclosed biomarker.

Large and CLIA-Waivedgrowing markets have been established for these kinds of tests, initially in 2014. Lateral Flow Rapid HIV tests represented 38%high prevalence regions where they are critical for large scale prevention and treatment programs. The Company’s product development is focused on areas where the availability of rapid, POC screening, diagnostic, or confirmatory results can improve health outcomes.  More generally, the Company's product revenuesCompany believes there is and will continue to be a growing demand for diagnostic products that can provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the first nine monthspoint of 2017. care.

The Company's products based on its DPP® platform represented approximately 48% of the Company's product revenues in the first nine months of 2017. The Company also has other rapid tests and components that together represented approximately 14% of product sales in the first nine months of 2017. The Company'sCompany’s products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are soldinternationally, under the Company's STAT PAK®,its STAT-PAK, SURE CHECK®, STAT-VIEW® or DPP®CHECK, STAT-VIEW and DPP registered trademarks, or under the private labels of its marketing partners. All

The Company routinely enters into arrangements with governmental and non-governmental organizations for the funding of the Company's products that are currently being developed are based on its patented DPP®, which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology.

research and development efforts.

NOTE 2 — ACQUISITION OF RVR DIAGNOSTICS SDN BHD NOW KNOWN AS CHEMBIO DIAGNOSTICS MALAYSIA SDN BHD:ACQUISITION:

On January 9, 2017, pursuant to a stock purchase agreement (the "Stock“RVR Purchase Agreement)Agreement”), the Company acquired all of the outstanding common stock of RVR Diagnostics Sdn Bhd a Malaysia corporation ("RVR"(“RVR”), a privately-held Malaysia-based manufacturing company focused on assembly and sales of rapid medical POC assays, for $3,231,000, utilizing some of the proceeds from the funds raised by the$3,083,000.  The Company in August 2016, the issuance of Chembio's common stock, and a contingent consideration, as described below, related to RVR reaching a milestone based on revenues that was valued at $148,000.acquired RVR, which subsequently changed its name to Chembio Diagnostics Malaysia Sdn Bhd ("CDM"(“CDM”), is a privately-held Malaysia based manufacturing company focused on assembly and sales of rapid medical assays.  The Company acquired CDM to have a better presence in Asia, access to lower cost, shorter approval time of in-country regulatory approvals, and a lower cost assembly operation.

Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding common stock and other equity interests of CDM forTotal consideration was: (i) a cash payment of $1,400,000, of which $550,000$550,000 was paid as a deposit in December 2016 and2016; (ii) 269,236 shares of Chembio'sChembio’s common stock, with a value at closing of $1,683,000, of which 7,277 shares are beingwere held back to satisfy certain potential claims under the StockRVR Purchase Agreement and will becomebecame issuable to the sellers if at all, on the one-year anniversary of the closing.

In addition, the Stock Purchase Agreement provides that the sellers may become entitled to receive certainclosing; and, a contingent $148,000 milestone paymentspayment based on the achievement of performance goals related to sales by CDM during the 12 months endingended December 31, 2017. CDM's actual salesThe performance goals were not achieved and the related $148,000 accrual was reversed during that period will be used to determine the "Milestone Proration Amount," which is a fraction that (i)fourth quarter of 2017 and recognized in selling, general, and administrative expenses associated with the numerator of which is the positive amount, if any, by which actual sales for calendar year 2017 are greater than $2,250,000, up to a maximum overage of $250,000, and (ii) the denominator of which is $250,000. Based on the actual sales achieved by CDM, the Sellers will be entitled to receive (i) a cash milestone payment equal to $100,000 multiplied by the Milestone Proration Amount, for a maximum cash milestone payment of $100,000, and (ii) a stock milestone payment equal to 21,830 shares of Chembio common stock multiplied by the Milestone Proration Amount, with a maximum stock milestone payment of 21,830 shares of Chembio common stock.  As of March 31, 2017 the Company had accrued $148,000 for the milestone.  This amount is the estimated value of the common stock of $85,000 based on the assumption of reaching the milestone of 74.5% and discounted by 15%, as well as the cash portion of the milestone payment valued at $63,000.  There was no change in the fair value of this contingent milestone payment through September 30, 2017.value.

As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $1,503,361$1,651,361 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. In addition, the Company recorded $1,800,000 in intangible assets which results largely fromassociated with the addition of CDM'sCDM’s intellectual property, customer base and distribution channels, trade names, order backlog, industry reputation, and management talent and workforce. Our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017 include $25,000 of transaction costs related to the CDM acquisition, which are reflected as general and administrative expenses.
 
5
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
The acquisition was accounted for using the purchase method of accounting.  The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of January 9, 2017:

  PRELIMINARY 
    
Property, plant and equipment $235,141 
Goodwill  1,503,361 
Deferred tax liability  (307,636)
Other intangible assets (estimated useful life):    
Intellectual property (approximate 10 year weighted average)  800,000 
Customer contracts / relationships (approximate 10 year weighted average)  700,000 
Order backlog (3 months)  200,134 
Trade names (approximate 11 year weighted average)  100,000 
Total consideration * $3,231,000 

* Total consideration includes the $1,400,000 paid in cash, $1,683,000 in shares of common stock and $148,000 in contingent consideration.
8

 
 Amount 
    
Property, plant and equipment $235,141 
Goodwill  1,651,361 
Deferred tax liability  (307,636)
Contingent consideration  (148,000)
Other intangible assets (estimated useful life):    
Intellectual property (approximate 10 year weighted average)  800,000 
Customer contracts / relationships (approximate 10 year weighted average)  700,000 
Order backlog (3 months)  200,134 
Trade names (approximate 11 year weighted average)  100,000 
Total consideration $3,231,000 
The Company calculated the fair value of the fixed assets based on the net book value of CDM as that approximates fair value. The intellectual property, customer contracts and trade names were based on assumption by discounted cash flowflows using management estimates. The order backlog was based on an order that CDM had at the closing, which was shipped in the first quarter of 2017 and valued at an amount equal to estimated net income.

As indicated, the allocation of the purchase price and estimated useful lives of property, plant and equipment, intangible assets and deferred tax liability shown above is preliminary, pending final completion of valuations. Upon completion of this analysis, an adjustment may be required.

For the period from January 10, 2017 to September 30, 2017, net sales and loss before income taxes from the acquisition was approximately $1,489,500 and $438,000, respectively, which have been included in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017.  The following represents unaudited pro forma operating results as if the operations of CDM had been included in the Company's Condensed Consolidated Statements of Operations as of January 1, 2016:

Proforma table For the nine months ended September 30, 2016 
Total revenues $14,782,544 
     
Net loss $(10,508,280)
     
Net loss per common share $(1.06)
     
Diluted net loss per common share $(1.06)

The pro forma financial information includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets of approximately $339,000. The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.

6
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


a)Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2016,2017, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of September 30, 20172018 and for the threethree- and nine-month periods ended September 30, 20172018 and 2016,2017, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"“SEC”). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believethe Company believes that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, previously filed with the SEC.SEC on March 8, 2018.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company'sCompany’s condensed consolidated financial position as of September 30, 2017,2018, its condensed consolidated results of operations for the threethree- and nine-month periods ended September 30, 20172018 and 2016, respectively,2017, and its condensed consolidated cash flows for the nine-month periods ended September 30, 20172018 and 2016,2017, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Going Concern

A fundamental principle of the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, the Company has prepared its consolidated financial statements on a going concern basis.

The Company has incurred significant operating losses in the previous three years as well as negative cash flow from operations. The Company currently has a working capital surplus of $9.8 million. The Company's ability to continue as a going concern depends on its ability to execute its business plan, increase revenue and billings and reduce expenditures. During 2017, the Company began to focus on aligning its expense structure with revenue expectations which included tighter expense controls and overall operational efficiencies which better align the Company's current business plan on a run-rate basis. In addition, the Company recently increased its inventory in anticipation of orders which to date have not materialized and the plan includes reducing inventory levels to provide additional cash to fund operations.   Another focus is on the Company's receivable balance which also increased over the nine months, partially due to increased product sales, and we are focusing on reducing days outstanding.

The Company also has an ATM (At-The-Market) in place, of over twenty million dollars, and anticipates the ability to raise additional funding if needed through this vehicle.  In addition, the Company may be able to raise additional funds through a private offering.  With these options available and the steps outlined above, the Company expects it will be able continue as a going concern into and beyond 2018.  However, there can be no assurance that the Company will be able to obtain financing or that such financing will be on favorable terms. Any such financing would be dilutive to shareholders.  Failure to generate sufficient revenue, control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continue as a going concern.

Fair Value of Financial Instruments

The carrying value for cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the immediate or short-term maturity of these financial instruments.



b)Revenue Recognition:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product.  As the Company did not identify any material accounting changes that impacted the amount of reported revenues with respect to its product revenue, license and royalty revenue, and R&D, milestone and grant revenues, no adjustment to retained earnings was required upon adoption.
The Company adopted the standards to contracts that were not completed at the date of initial application (January 1, 2018).
9

Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenue forrevenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.

Product Revenues

Revenues from product sales in accordance with ASC 605, which provides that revenue isare recognized when therethe customer obtains control of the Company’s product, which occurs at a point in time, typically upon tendering to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is persuasive evidenceone year or less or the amount is immaterial.

Freight and distribution activities on products are performed after the customer obtains control of the goods. The Company has made an arrangement, delivery has occurredaccounting policy election to account for shipping and handling activities that occur either when or services have been rendered,after goods are tendered to the sales price is determinable,customer as a fulfillment activity, and collectability is reasonably assured. Revenue typically is recognized at timetherefore recognizes freight and distribution expenses in Cost of shipment. SalesProduct Sales.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of reserves established for applicable discounts rebates and returns.allowances that are offered within contracts with the Company’s customers. The Company’s process for estimating reserves established for these variable consideration components does not differ materially from its historical practices.

7Product revenue reserves, which are classified as a reduction in product revenues, are generally related to discounts. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based on all information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIESRoyalty Revenues
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017The Company receives royalty revenues on sales by its licensees of products covered under patents that it owns. The Company does not have future performance obligations under these license arrangements. The Company records these revenues based on estimates of the sales that occurred during the relevant period as a component of license and royalty revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to the Company, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.
(UNAUDITED)

R&D, milestone and grant revenue

All such contracts are evaluated under the five-step model described above. For certain contracts that represent grants where the funder does not meet the definition of a customer, the Company recognizes revenue from non-milestone payments and grant revenues when earned. Such contracts are further described under Disaggregation of Revenue, below. Grants are invoiced and revenue is recognized after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. Deferred revenues not earned were $-incurred as that is the depiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and $392,517 as of September 30, 2017 and December 31, 2016, respectively.pivotal studies.

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

Disaggregation of Revenue

In August 2016, the Company was awarded a grant of $5.9 million from BARDA, which is part of the U.S. Department of Health and Human Resources, to develop a rapid Zika virus assay. The Company earned $0.3 million and $1.5 million during the three and nine months ended September 30, 2018, respectively as R&D, milestone and grant revenue in the Condensed Consolidated Statements of Operations.

In September 2016, the Company was awarded a $0.7 million contract from the U.S. Department of Agriculture to develop a Bovid TB assay. The Company earned $20,000 and $0.2 million during the three and nine months ended September 30, 2018, respectively, as R&D, milestone and grant revenue in the Condensed Consolidated Statements of Operations.
10
The following table disaggregates Total Revenues for the three and nine months ended September 30, 2018:
  For the three months ended  For the nine months ended 
  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total  
Exchange
Transactions
  
Non-Exchange
Transactions
  Total 
Net product sales $7,856,038  $-  $7,856,038  $21,112,126  $-  $21,112,126 
License and royalty revenue  228,553   -   228,553   707,010   -   707,010 
R&D, milestone and grant revenue  960,332   331,870   1,292,202   2,328,058   1,667,057   3,995,115 
  $9,044,923  $331,870  $9,376,793  $24,147,194  $1,667,057  $25,814,251 
Contract Liabilities

Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract.  At December 31, 2017, the Company reported $50,000 in deferred revenue of which $50,000 was earned and recognized as R&D, milestone and grant revenue during the nine months ended September 30, 2018, respectively.

c)Inventories:Inventories


Inventories consist of the following at:

 September 30, 2017  December 31, 2016  September 30, 2018  December 31, 2017 
Raw materials $2,339,615  $1,824,248  $2,750,356  $1,767,684 
Work in process  413,800   535,320   780,114   286,413 
Finished goods  2,481,749   975,620   2,447,956   2,369,521 
 $5,235,164  $3,335,188  $5,978,426  $4,423,618 

Inventories are stated at the lower of cost and net ofrealizable value. There were reserves against inventory of approximately $245,000$67,000 and $195,000 as of September 30, 20172018 and December 31, 2016.2017, respectively.


d)EarningsLoss Per Share:

Basic earningsloss per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted incomeloss per share for the three- and nine-month periods ended September 30, 2018 and 2017 reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities, presented on a common share equivalent basis for the three- and nine-month periods ended September 30, 2017 and 2016, have been included in the earnings per share computations:

 For the three months ended For the nine months ended
 September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Basic12,311,098 11,142,090 12,293,781 10,150,737
        
Diluted12,311,098 11,142,090 12,293,781 10,150,737

As there were losses for the three and nine months ended September 30, 2017 and 2016, no common share equivalents are included in the diluted per share computations.

There were 699,663693,116 and 614,949699,663 weighted-average number of options outstanding as of September 30, 20172018 and 2016,2017, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended September 30, 20172018 and 20162017 respectively, because the effect would have been anti-dilutive. There were 668,510709,042 and 677,050668,510 weighted-average number of options outstanding as of September 30, 20172018 and 2016,2017, respectively, that were not included in the calculation of diluted per common share equivalent for the nine months ended September 30, 20172018 and 2016,2017 respectively, because the effect would have been anti-dilutive.


e)Employee Stock Option Plans and Share-Based Compensation:Incentive Plan:

Effective June 3, 2008, the Company'sCompany’s stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"(“SIP”), initially with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company'sCompany’s stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, which expired in 2018, the Compensation Committee of the Company'sCompany’s Board had the discretion to select the persons to whom awards are to be granted. Awards could be stock options, restricted stock and/or restricted stock units (‘Equity Award Units”). The awards became vested at such times and under such conditions as determined by the Compensation Committee. As of September 30, 2018, there were 508,889 options exercised, 99,132 options outstanding and no options still available to be issued under the SIP.

Effective June 19, 2014, the Company’s stockholders voted to approve the 2014 Stock Incentive Plan (“SIP14”), with 800,000 shares of common stock available to be issued. Under the terms of the SIP14, the Compensation Committee of the Company’s Board of Directors has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant.granted. Awards can be incentive stock options, restricted stock and/or restricted stock units.in the form of Equity Award Units. The awards become vestedvest at such times and under such conditions as determined by the Compensation Committee at the time of the initial stock option grant.Committee. As of September 30, 2017, there were 228,177 options outstanding under the SIP, with 480,172 options previously having been exercised.

8
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("2014-SIP"), with 800,000 shares of Common Stock available to be issued. Under the terms of the 2014-SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of2018, 85,407 shares of common stock had been issued pursuant to be covered by each grant. Awards can be incentivethe exercise of options granted under the SIP14,  options to purchase 405,968 shares of common stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee at the time of the initial stock option grant. As of September 30, 2017, there were 22,000 options exercised, 250,625 options outstanding and 527,375 options or332,224 shares stillof common stock were available to be issued pursuant to Equity Award Units granted under the 2014-SIP.SIP14.

There were 142,875 and 106,875 stock options granted duringStock-based compensation expense recognized in the nine months ended September 30, 2017 and 2016, respectively.  The weighted averageCondensed Consolidated Statements of Operations was classified as the following approximate amounts:
 
 For the three months ended  For the nine months ended 

 September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017 
Cost of product sales $5,800  
$
12,800
  $19,800  
$
34,200
 
Research and development expenses  3,600   
12,100
   19,000   
77,300
 
Selling, general and administrative expenses  65,400   
62,200
   260,200   
185,200
 
 
 $74,800  
$
87,100
  $299,000  
$
296,700
 
Stock option compensation expense in each of the periods presented represents the estimated fair value at their respective dates of grant,options outstanding, amortized on a straight-line basis over the requisite vesting periods of stock options granted in the nine months ended September 30, 2017 and September 30, 2016, was $2.22 and $2.77 per share, respectively.  entire awards.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon the historical volatility of our stock.the Company’s common stock and other contributing factors. The expected term is based on the Company’s historical information.experience with similar type options.


11
The weighted-average assumptions made in calculating the fair values of options granted during the periods indicated are as follows:

For the three months ended For the nine months ended For the three months ended  For the nine months ended 
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017 
Expected term (in years)4.5 n/a 4.8 4.8  4.5   4.5   4.9   4.8 
Expected volatility41.22% n/a 43.01% 46.18%   39.69%   41.22%   39.91%   43.01%
Expected dividend yield0% n/a 0% 0%   0%   0%    0%   0%
Risk-free interest rate1.48% n/a 1.54% 0.93%  2.70%   1.48%   2.70%   1.54%


The Company's results for the three-month periods ended September 30, 2017 and 2016 include share-based compensation expense, consisting solely of stock options, totaling $87,100 and $74,100, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of product sales ($12,800 and none), research and development ($12,100 and $27,300, respectively) and selling, general and administrative expenses ($62,200 and $46,800, respectively). The results for the nine-month periods ended September 30, 2017 and 2016 include share-based compensation expense, consisting solely of stock options, totaling approximately $296,700 and $220,300, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of product sales ($34,200 and none), research and development ($77,300 and $62,000, respectively) and selling, general and administrative expenses ($185,200 and $158,300, respectively). An operating expense, resulting in income tax benefit, has been recognized in the statement of operations for share-based compensation arrangements.

Stock option compensation expense for the three and nine months ended September 30, 2017 and 2016 is based on the estimated fair value, at the date of issuance, of options outstanding, which is being amortized on a straight-line basis over the requisite service period for each vesting portion of the award. Accordingly, for stock options that vested immediately, the estimated fair value was expensed immediately.

The following table provides stock option activity for the nine months ended September 30, 2017:2018:

Stock Options Number of Shares  Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value  
Number of
Shares
  
Weighted
Average
Exercise Price
per Share
 
Weighted
Average
Remaining
Contract
Term
 
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2016  600,549  $4.55 3.43 years $1,463,052 
Outstanding at December 31, 2017  810,670  $5.18 3.69 years $2,477,853 
                          
Granted  142,875   5.84        93,750   9.80    - 
Exercised  56,969   4.19        144,947   4.83   
523,527 
Forfeited/expired/cancelled  785   5.56        47,505   8.82    - 
Outstanding at September 30, 2017  685,670  $4.84 3.35 years $1,092,813 
Outstanding at September 30, 2018  711,968  $5.62 3.58 years $3,520,084 
                          
Exercisable at September 30, 2017  347,295  $4.34 2.85 years $693,550 
Exercisable at September 30, 2018  343,113  $4.33 2.51 years $2,126,832 

9
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at September 30, 20172018:
(UNAUDITED)
  Stock Options Outstanding  Stock Options Exercisable 
Range of
Exercise
Prices
 Number of Shares
  
Average
Remaining
Contract Term
(Year)
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
  Number of Shares  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
 
1 to 2.79999  -   -  $-  $-   -  $-  $- 
2.8 to 4.59999  304,343   2.15   3.45   2,145,916   254,343   3.46   1,791,731 
4.6 to 6.39999  152,875   3.69   5.85   710,662   58,020   5.80   272,870 
6.4 to 8.19999  207,875   5.31   7.31   663,506   21,375   7.59   62,231 
8.2 to 12  46,875   4.85   11.45   -   9,375   11.45   - 
 Total  711,968   3.58  $5.62  $3,520,084   343,113  $4.33  $2,162,832 

As of September 30, 2017,2018, there was $387,192$790,321 of net unrecognized compensation cost related to stock options that haveare not vested, which is expected to be recognized over a weighted average period of approximately 2.342.64 years. The total fair value of stock optionsshares vested during the nine-month periods ended September 30, 2018 and 2017 was $379,384 and 2016 was $323,113, respectively.


f)Geographic Information and Economic Dependency
The Company produces only one group of similar products known collectively as “rapid medical tests”, and $237,095, respectively.it operates in a single business segment. Net product sales by geographic area were as follows:

  For the three months ended  For the nine months ended 
  September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017 
Africa $3,064,034  $965,606  $6,929,104  $1,797,285 
Asia  211,261   93,101   1,201,182   1,637,065 
Europe & Middle East  716,030   401,730   1,743,680   1,441,890 
Latin America  3,115,811   3,556,815   9,071,994   6,701,923 
United States  748,902   1,115,473   2,166,166   2,874,934 
  $7,856,038  $6,132,725  $21,112,126  $14,453,097 
12

g)Fair Value of Financial Instruments:

The carrying value for cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of the Company’s note payable approximates the recorded value as the rate is based upon the current rates offered to the Company for similar financial instruments.


f)Geographic Information:

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

  For the three months ended  For the nine months ended 
  September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016 
Africa $965,606  $577,108  $1,797,285  $1,686,327 
Asia  93,101   34,116   1,637,065   187,105 
Europe  401,730   313,664   1,441,890   642,427 
North America  1,115,473   903,327   2,874,934   3,953,469 
South America  3,556,815   673,882   6,701,923   3,983,860 
  $6,132,725  $2,502,097  $14,453,097  $10,453,188 

g)h)Accounts Payable and Accrued Liabilities:

Accounts payable and accrued liabilities consist of:

 September 30, 2017  December 31, 2016  September 30, 2018  December 31, 2017 
Accounts payable – suppliers $2,352,192  $1,437,290  $4,199,275  $1,494,759 
Accrued commissions  339,380   221,982   451,741   126,827 
Accrued royalties / license fees  219,505   352,660   667,207   429,297 
Accrued payroll  248,563   167,575   285,233   187,305 
Accrued vacation  313,490   289,587   404,933   309,767 
Accrued bonuses  -   282,500   494,340   282,500 
Accrued expenses – other  397,031   261,539   295,871   215,848 
TOTAL $3,870,161  $3,013,133  $6,798,600  $3,046,303 

h)    

i)Goodwill and Intangible Assets:

Goodwill represents the excess of the purchase price wethe Company paid over the fair value of the net tangible and identifiable intangible assets acquired in ourits acquisition of CDM in January 2017. Goodwill is not amortized but rather is tested annually as of the first day of the fiscal fourth quarter for impairment or more frequently if we believethe Company believes that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to makeThe Company makes a qualitative evaluation about the likelihood of goodwill impairment.impairment, which is based on a number of applicable factors. If we concludethe Company concludes that it is more likely than not that the faircarrying value of athe applicable reporting unit is greater than its carryingfair value, then the Company recognizes an impairment charge for the amount then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair values of the applicable reporting unit with its aggregate carrying value, including goodwill. Ifby which the carrying value of a reporting unit exceeds the reporting unit'sunit’s fair value, we performprovided the second step ofimpairment charge does not exceed the test to determine thetotal amount of goodwill allocated to the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit's goodwill and intangible assets with the respective carrying values.unit.

If actual future results are not consistent with management's estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will be performed annually in the first day of the fiscal fourth quarter, or sooner if a triggering event occurs. This is a change from our previously disclosed annual testing date of the fiscal first quarter of each annual period.  This change does not represent a material change to a method of applying an accounting principle. There was no impairment recorded for the three and nine months ended September 30, 2017.
2018. 10Following is a table that reflects changes in Goodwill:
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)

Goodwill 
Beginning balance 1/1/17 $- 
     
Acquisition of CDM  1,503,361 
     
Changes in foreign currency exchange rate  94,256 
     
Balance at September 30, 2017 $1,597,617 
Beginning balance December 31, 2017 $1,666,610 
Change in foreign currency exchange rate  (37,746)
Balance at September 30, 2018 $1,628,864 

In addition, the Company recorded certain intangible assets as part of the CDM acquisition whichas follows:

  September 30, 2018  December 31, 2017 

 Cost  
Accumulated
Amortization
  
Net Book
Value
  Cost  
Accumulated
Amortization
  
Net Book
Value
 
Intellectual property $866,786  $151,687  $715,099  $886,872  $88,687  $798,185 
Customer contracts/relationships  758,438   132,727   625,711   776,013   77,601   698,412 
Order backlog  216,842   216,842   -   221,867   221,867   - 
Trade names  108,348   17,237   91,111   110,859   10,079   100,780 
  $1,950,414  $518,493  $1,431,921  $1,995,611  $398,234  $1,597,377 

Order backlog was amortized during the period of the related sales during 2017, and intellectual property, customer contracts/relationships, and trade names are as follows as ofamortized over 10, 10, and 11 years, respectively. Amortization expense for the three months ended September 30, 2017.
  Cost  Accumulated Amortization  
Net Book Value
September 30, 2017
 
Intellectual property 
$
850,158
  
$
63,762
  
$
786,396
 
Customer contracts/relationships  
743,889
   
55,792
   
688,097
 
Order backlog  
212,682
   
212,682
   
-
 
Trade names  
106,270
   
7,245
   
99,025
 
             
  $1,912,999  $339,481  $1,573,518 

2018 and 2017 was approximately $43,854 and $47,199, respectively. Amortization expensesexpense for the nine months ended September 30, 2018 and 2017 was approximately $339,000.$134,208 and $339,000, respectively.

j)Taxes:

The Company did not record an income tax provision for the three and nine month period ended September 30, 2018, resulting in an effective tax rate of zero.  The zero rate reflects the Company’s judgement that based on the weight of positive and negative evidence a valuation allowance on all domestic deferred tax assets is needed and the tax holiday in effect with respect to foreign operations.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously tax deferred and creates new taxes on certain foreign-sourced earnings.

The Company has applied the guidance in ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, when accounting for the enactment-related effects of the Act. The Company has accounted for the tax effects of the Act under the guidance of SAB 118 on a provisional basis. During the nine months ended September 30, 2018, the Company did not recognize any adjustments to the provisional amounts recorded as of December 31, 2017. The Company will continue to assess the Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary.
13

i)k)Recent Accounting Pronouncements Affecting the Company:

In May 2014, the FASB issued Accounting Standards Update No.converged guidance on recognizing revenue in contracts with customers, ASU 2014-09, "RevenueRevenue from Contracts with Customers" (Topic 606), which supersedes nearly all existingCustomers. The intent of the new standard is to improve financial reporting and comparability of revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP").globally. The core principle of Topic 606the standard is for a company to recognize revenues when promisedrevenue in a manner that depicts the transfer of goods or services are transferred to customers in an amount that reflects the consideration to which an entitythe company expects to be entitledreceive in exchange for those goods or services. Topic 606 definesThe guidance provides a five step processfive-step analysis of transactions to achieve this core principledetermine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in doing so, more judgment andcertain circumstances, allowing estimates mayof variable consideration to be required within the revenue recognition process thanrecognized before contingencies are required under existing U.S. GAAP.resolved. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information aboutrequires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from a company'san entity’s contracts with customers.

The standard iswas effective for annual periods beginning after December 15, 2017, andthe Company as of January 1, 2018.
In addition to expanding disclosures in these interim periods therein, using eitherfinancial statements, the Company completed its evaluation of the following transition methods: (i) a full retrospective approach reflecting the application of thenew standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting Topic 606 recognized at the date of adoption (which includes additional footnote disclosures). We have evaluatedand assessed the impact of our pending adoption of Topic 606 on ourits consolidated financial statements and have determined to use the modified retrospective method by which we will reflect the cumulative effect in the adoption of the standard in 2018.statements. The Company has hired an independent firm to assist the Company in analyzing itsreviewed significant open contracts with customers for each revenue streamsstream, and based on its sales contracts with customers. Based onevaluation, revenue recognition under the analysis to date, the Company doesnew standard did not expect its product sales to have a material impact on itsthe Company’s consolidated financial statements. Revenue from product sales are recognized when control of the goods transfer to the customer which we expect to be the date of shipment.  The Company will make the accounting policy election to treat shipping and handlingalso assessed its control framework as fulfillment activities. The Company is evaluating the impacta result of Topic 606 on its other revenue streams, including R&D, milestone and grants, and on its disclosures for its financial statement footnotes and expects to complete its implementation ofadopting the new standard in 2017.and noted minimal, insignificant changes to its systems and other controls processes.

The new standard permits two adoption methods under ASU 2014-09. The guidance may be adopted through either retrospective application to all periods presented in the consolidated financial statements (full retrospective) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective). The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, the Company applied the rules to all contracts existing as of January 1, 2018. The cumulative effect was immaterial, and therefore no adjustment to the opening balance of retained earnings was required.

The disclosures in the notes to the consolidated financial statements related to revenue recognition are expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue.

In November 2015, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance had no material effect in 2017. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements in the future.

11ASU was adopted January 1, 2018.
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
In February 2016, the FASB issued Accounting Standards Update ("ASU")ASU 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. We areThe Company is in the initial stages of evaluating the effect of the standard on ourits financial statements and will continue to evaluate.  While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity and operating results.equity.

In MarchAugust 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation – StockASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017. The guidance in ASU 2016-15 is generally consistent with the Company’s current cash flow classifications, and it was adopted effective January 1, 2018, without any material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): ImprovementsScope of Modification Accounting, to Employee Share-Based Payment Accounting,provide clarity to which will change certain aspectschanges to the terms or conditions of a share-based payment award require an entity to apply modification accounting for share-based payments to employees.  ASU 2016-09 isin Topic 718. This update was adopted effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016.  The Company adopted the provisions of ASU 2016-09 on January 1, 2017.  The Company evaluated this standard and2018, without any material effect on the adoption of it did not have a material impact on itsCompany’s consolidated financial statements.

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

NOTE 4 — COLLABORATIVE RESEARCH AND DEVELOPMENT ARRANGEMENTS:

a)Brain Injury agreement:

In January 2015, the Company entered into a technology development agreement with Perseus Science Group LLC for $946,000 and a follow-on agreements in December 2016 and during 2017 aggregating to $1,060,000. The Company earned $293,000 and $180,000 for the nine-month periods ended September 30, 2017 and 2016, respectively, from this agreement. The Company earned $1,060,000 from this grant from inception through September 30, 2017, so that as of September 30, 2017, the Company has received the entire amount of this grant.

b)Malaria agreement:

In April 2016, the Company was awarded a grant from the Bill & Melinda Gates Foundation for $678,000.  The Company earned  $159,000 for the nine-month period ended September 30, 2017 from this agreement.  The Company earned $678,000 from this grant from inception through September 30, 2017, so that as of September 30, 2017, the Company has received the entire amount of this grant.

c)Fever Panel agreement:

In October 2015, the Company entered into a technology development agreement with the Paul G. Allen Ebola Program for $2,118,000 and a follow-on agreement in February 2016 for $550,000. The Company earned none and $2,260,000 for the nine-month periods ended September 30, 2017 and 2016, respectively, from this agreement. The Company earned $2,668,000 from this grant from inception through September 30, 2017.

d)BARDA Zika agreement:

In August 2016, the Company was awarded a grant for $5,934,000 from BARDA, which is part of the U.S. Department of Health And Human Resources. The Company earned $1,900,000 and none ,  for the nine-month period ended September 30, 2017 and 2016, respectively, from this agreement. The Company earned $2,373,000 from this grant from inception through September 30, 2017.

12
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
e)USDA Bovid:

In September 2016, the Company entered into a Phase II agreement with the USDA for an additional $600,000 to develop a Bovid TB assay.  The Phase I agreement was for  $100,000.  Revenue for these agreements are being recognized under a proportional performance method. The Company earned $222,000 for the nine-month period ended September 30, 2017 from these agreements. The Company earned $274,000 from these agreements from inception through September 30, 2017.

f)FIND agreement:

In March 2017, the Company entered into a technology development agreement with FIND  for $999,000. The Company earned $500,000 for the nine-month period ended September 30, 2017 from this agreement. The Company earned $500,000 from this grant from inception through September 30, 2017.

NOTE 5 — RIGHTS AGREEMENT:

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

14
Rights Initially Not Exercisable. The Rights are not exercisable until a Distribution Date, which is defined below. Until a Right is exercised, the holder thereof, in his capacity as a holder of Rights, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.

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

NOTE 65 — COMMON STOCK, WARRANTS AND OPTIONS:STOCKHOLDERS’ EQUITY:

During the thirdfirst quarter of 2017,2018, options to purchase 46,000119,947 shares of the Company'sCompany’s common stock were exercised for cash and on a cashless basis into 19,44860,372 shares of common stock at an average exercise price of $4.24.  The exercise prices$4.71 by the option holder surrendering options and shares of common stock already owned as payment of the exercise price.
During the second quarter of 2018, options to purchase 25,000 shares of the Company’s common stock were exercised on a cashless basis were paidinto 10,918 shares of common stock at an exercise price of $5.07 by the exercising option holdersholder surrendering options and shares of common stock already owned as payment of the exercise price.

During the third quarter of 2017,On February 13, 2018, the Company issued options to oneclosed on an underwritten registered public offering of 1,783,760 shares of its directors pursuant to the Company's compensation policy for directors.  The director was issued options to purchase 46,875 shares of common stock.  The options become exercisable in five equal annual installments starting on the date of issue.  The options issued have an exercisestock at a public offering price of $6.05$6.75 per share which was  the last traded pricefor gross proceeds of the common stock on the day issued.approximately $12.0 million. The options expire five years from date of issue.

13
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
The Company entered into an employment agreement, effective as of May 22, 2017 (the "Klugewicz Employment Agreement"), with Sharon Klugewicz to serve as the Company's President of the Americas, for an additional term of one year through May 22, 2018. Pursuant to the Klugewicz Employment Agreement, the Company issued to Ms. Klugewicz incentive stock options to purchase 10,000 shares of the Company's common stock. Fifty percent of these options vest on each of the secondnet proceeds, after underwriting discounts and third anniversary of the effective date. The exercise price for these options was equal to the last trading price for the Company's common stock on September 17, 2017, which was $5.90 per share. Each option granted will expire and terminate, if not exercised sooner, upon the earlier to occur of (a) 30 days after termination of Ms. Klugewicz's employment with the Company or (b) on the five year anniversary of the effective date of the grant.

During the second quarter of 2017, no optionscommissions, were granted or exercised.$10.9 million.

During the first quarter of 2017, options to purchase 10,969 shares of the Company'sCompany’s common stock were exercised on a cashless basis into 3,039 shares of common stock at an exercise price of $4.19$4.00 by surrendering options and shares of common stock already owned as payment of the exercise price.

The Company completed the acquisition of CDM on January 9, 2017.  Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding common stock and other equity interests of CDM from the sellers for (i) a cash payment of $1,400,000, (ii) contingent consideration of $148,000 and (iii) 269,236 shares of the Company's common stock, of which 7,277 shares are being held back to satisfy certain potential claims under the Stock Purchase Agreement and will become issuable to the Sellers, if at all, on the one-year anniversary of the closing.  The closing price of our common stock on January 9, 2017 was $6.25.

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

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

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

During the year 2016, options to purchase 191,804 shares of the Company's common stock were exercised for cash and on a cashless basis into 125,750 shares of common stock at exercise prices ranging from $2.80 to $5.56 byholder surrendering options and shares of common stock already owned.

During the fourththird quarter of 2016, the Company issued2017, options to purchase 36,00046,000 shares of the Company’s common stock were exercised on a cashless basis into 19,448 shares of common stock to a newly-hired president of the EMEA and APAC regions. The options are exercisable in three equal annual installments starting on the first anniversary of the date of issue. The options issued haveat an exercise price of $7.15 per share, which was$4.24 by the last traded price of the common stock on the day issued. Theoption holder surrendering options expire five years from date of issue.

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

14
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
During the second quarter of 2016, the Company issued options to one of its directors pursuant to the Company's compensation policy for directors.  The director was issued options to purchase 46,875 shares of common stock.  The options become exercisable in five equal annual installments starting on the date of issue.  The options issued have an exercise price of $8.86 per share, which was  the last traded price of the common stock on the day issued.  The options expire five years from date of issue.

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

NOTE 76 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:


a)Economic Dependency:

The following table discloses product sales and accounts receivable the Company had with respect to each customer that purchased in excess of 10% of the Company'sCompany’s net product sales for the periods indicated:

For the three months ended For the nine months ended Accounts Receivable as of For the three months ended  For the nine months ended  Accounts Receivable as of 
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017  September 30, 2018  Dec. 31, 2017 
Sales % of Sales Sales % of Sales Sales % of Sales Sales % of Sales     Sales  % of Sales  Sales  % of Sales  Sales  % of Sales  Sales  % of Sales       
Customer 1$3,530,364 58%$662,841 26%$6,426,158 45%$3,919,011 37%$3,262,125 $2,683,910 $3,039,722   39% $3,530,364   58% $8,666,867   41% $6,426,158   45% $3,267,075  $- 
Customer 2 * *  * *  * *  1,796,477 17% *  -  1,852,186   24%  *   *   3,312,816   16%  *   *   1,852,186  * 
Customer 3 * *  * *  1,326,171 9% * *  -  *  *   *   602,087   10%  *   *   *   *   *  * 
Customer 4 602,087 10% * *  * *  * *  172,821  *
In the table above, an asterisk (*) Productindicates that product sales to the customer did not exceed 10% for the period indicated.

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

15
The following table discloses purchases and accounts payable that the Company had with respect tomade from each vendor that sold to the Company in excess of 10% of the Company'sCompany’s total purchases for the periods indicated:

For the three months ended For the nine months ended Accounts Payable as of For the three months ended  For the nine months ended  Accounts Payable as of 
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017  September 30, 2018  Dec. 31, 2017 
Purchases % of Purc. Purchases % of Purc. Purchases % of Purc. Purchases % of Purc.     Purchases  % of Purc.  Purchases  % of Purc.  Purchases  % of Purc.  Purchases  % of Purc.       
Vendor 1$* * $132,122 11%$*  *  $558,044  12%$* $53,682 $
*   *  $
*   *  $
*   *  $
698,838   13% $
*  $
* 
Vendor 2 * *  * *  698,838  13%  *  *  -  *  508,646   22%  383,827   14%  1,372,521   17%  711,865   13%  *  * 
Vendor 3 383,827 14% * *  711,865  13%  *  *  98,152  *
Vendor 4 420,410 16% * *  605,931  11%  *  *  -  *
Vender 3
  *   *
  420,410   16%  *   *   605,931   11%  *  * 
In the table above, an asterisk (*) Purchasesindicates that purchases from the vendor did not exceed 10% for the period indicatedindicated.

15
CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(UNAUDITED)
The Company currently buys materials whichthat are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms as the vendors shown in this table. A change in suppliers, however, could cause a delay in manufacturing, either from the logistics of changing suppliers or from product changes attributable to new components, which could result in a possible loss of sales, and which could adversely affect operating results.


b)Governmental Regulation:

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


c)Employment Agreements:Contracts:

The Company has employmentmulti-year contracts with fivetwo key employees: CEO John J. Sperzel III; CSTO Javan Esfandiari; President of the Americas, Sharon Klugewicz; Managing Director of CDM, Magentiren Vajuram; and Vice-President of CDM Dr. Avijit Roy. The contractsemployees that call for salaries presently aggregating $1,280,000$770,000 per year. The Sperzel contract expires in March 2020, the Esfandiari contract expirescontracts expire in March 2019 the Klugewicz contract expires May 2018, and the Vajuram and Roy contracts expire in January 2018. In connection with the Sperzel contract that expires in March 2020, the2020. The following table is a schedule of future minimum salary commitments as of September 30, 2018:

2018 $192,500 
2019  485,493 
2020  85,000 


d)Pension Plan:

The Company issued, in March 2017, options to purchase 20,000 common shares of stock, which vest on the third anniversary of the grant. In connection with the Esfandiari contract that expires in March 2019, the Company issued, in March 2016, options to purchase 60,000 shares of common stock, with one-third vesting on eachhas a 401(k) plan established for its employees whereby it matches 40% of the first second5% of salary (or up to 2% of salary) that an employee contributes to the plan. Matching contribution expenses totaled $71,858 and third anniversaries of$68,821 for the grant.   In connection with the Klugewicz contract that expires in Maynine months ended September 30, 2018 the Company issued, in Septemberand 2017, options to purchase 10,000 shares of common stock, with one half vesting on each of the second and third anniversaries of the grant.respectively.

NOTE 87 — LOAN PAYBLE:NOTE PAYABLE:

In September 2017, the Company entered into an agreement with an equipment vendor to purchase automated assembly equipment for approximately $660,000. The terms called for prepayments of 30% down, 60% at time of factory acceptance testing and 10% after delivery.  The vendor agreed to lend the Company certain portions of the prepayments, 15% of the first prepayment, 40% of the second prepayment and the last 10% on delivery.  The Company will paypaid interest only at an annual rate of 12% untilprior to delivery. Thirty days after delivery, the Company will beginbegan making monthly payments of principal and interest of approximately $20,150, at an annual rate of twelve percent,12% over a twenty-four monthtwenty-four-month period.

NOTE 8 — SUBSEQUENT EVENTS:


a)Public Offering
On November 5, 2018, the Company closed an underwritten registered public offering of 2,726,000 shares of its common stock, including the underwriter’s exercise of its overallotment of 355,565 shares, at a public offering price of $6.75 per share for gross proceeds of approximately $18.4 million. The net proceeds, after underwriting discounts and commissions and estimated expenses, were approximately $16.6 million. The Company intends to use the net proceeds (a) to support its business growth strategy, including broadening its U.S. manufacturing automation and expanding and improving its facilities, and (b) for other general corporate purposes, which may include acquiring additional complementary businesses, technologies and products.


b)Acquisition

On November 6, 2018, the Company completed an acquisition of opTricon GmbH (“opTricon”), pursuant to a share purchase agreement, dated as of October 17, 2018 (the “opTricon Purchase Agreement”) pursuant to which the Company acquired all of the outstanding shares of opTricon for a purchase price of $5.5 million in cash. The opTricon Purchase Agreement contains customary representations and warranties from the Company and opTricon. Of the purchase price paid at closing, $100,000  was deposited in escrow for a potential purchase price adjustment based on the working capital of opTricon and $750,000 was deposited in escrow to satisfy certain claims that the Company may make against the sellers in accordance with the terms of the opTricon Purchase Agreement.

16
ITEM 2. MANAGEMENT'S
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, or our Annual Report. The terms "Chembio", "Company", "we", "us",following discussion contains forward-looking statements that reflect our plans, estimates, and "our" referbeliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to Chembio Diagnostics, Inc.these differences include those discussed below and its subsidiaries as a consolidated entity, unlesselsewhere in this report, particularly in the context suggests otherwise.

Overview

This discussion and analysis should be readsection titled “Item 1A. Risk Factors” in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes.Part I of our Annual Report. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("(“U.S. GAAP"GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review our estimates

Our management’s discussion and assumptions. Our estimates are based on our historical experienceanalysis of financial condition and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies,operations is intended to help you understand the policies we believe are most important to the presentation of ourbusiness operations and financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly from December 31, 2016, with the exception of goodwill.

In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievementscondition of the Company toas of September 30, 2018, and for the three and nine months ended September 30, 2018. This discussion should be materially different from any futureread in conjunction with Item 1. Financial Statements. Our management’s discussion and analysis of financial condition and results performance or achievements expressed or implied by the forward-looking statements. Specifically, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income are dependent upon our ability to develop and sell our products, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential", "continues" or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflectedoperations is presented in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.six sections:

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report, as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

●
Executive Overview


●
Consolidated Results of Operations


●
Liquidity and Capital Resources


●
Recent Developments


●
Significant Accounting Policies and Critical Accounting Estimates


●Recently Issued Accounting Pronouncements

All of the Company's future productsExecutive Overview
Our Business

Through our wholly-owned subsidiaries Chembio Diagnostic Systems Inc. and Chembio Diagnostics Malaysia Sdn Bhd, we develop, manufacture, and commercialize point-of-care diagnostic tests that are currently being developedused to detect or monitor diseases. Our product development efforts are basedfocused on itsour patented Dual Path Platform (DPP®), which isDPP technology, a uniquenovel point-of-care diagnostic point-of-care platform that hasoffers certain customer advantages overas compared to traditional lateral flow technology. The CompanyChembio Diagnostics, Inc. is a Nevada corporation formed in 1985.
Business Strategy
We are a leading provider of point-of-care diagnostic products for the detection and diagnosis of infectious diseases. We have been expanding our product portfolio based upon our proprietary DPP technology platform, which uses a small drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes. We seek to build additional revenue streams by entering into strategic collaborations with leading global healthcare companies in order to leverage the DPP platform.

Compared with traditional lateral flow technology, the DPP technology platform provides enhanced sensitivity and specificity, advanced multiplexing capabilities, and, when used with the DPP Micro Reader, quantitative results. Our DPP HIV test provides sensitivity of 99.8% and specificity of 100%, and has completedbeen approved by the U.S. Food and Drug Administration, or FDA, and approved as a waived test under the Clinical Laboratory Improvement Amendments of 1988.

We are pursuing four corporate priorities, aimed at executing on our key building blocks to drive growth and operating efficiency:

●expand our core point-of-care infectious disease business;

●leverage our patented DPP technology and scientific expertise through collaborations;

●broaden our sales channels worldwide; and

●automate our U.S. manufacturing operations to increase capacity and margin.

Recent accomplishments and highlights:
●Closed the acquisition of opTricon GmbH, a privately-held developer and manufacturer of hand-held analyzers for rapid diagnostic tests.
●
Filed CE Mark for a point-of-care DPP® test to detect an undisclosed biomarker through the AstraZeneca funded collaboration and development program.
●Received a $10.5 million purchase commitment from Bio-Manginhos for the production of DPP HIV and DPP Leishmania assays in Brazil and their subsequent supply to Brazil's Ministry of Health.
●Completed an underwritten public offering that provided an estimated $16.6 million of net proceeds to the Company.
Our product commercialization and product development efforts are focused in two areas: infectious disease, which includes both sexually transmitted and tropical & fever disease; and strategic collaborations with leading global healthcare companies, which leverage the DPP platform to provide us with additional revenue streams. In infectious disease, we are commercializing tests for HIV, Syphilis, Zika virus, dengue virus, and chikungunya virus, and developing tests for hepatitis C, malaria, ebola, lassa, Marburg, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. Certain of severalthese are also being developed as part of fever panel tests. Through strategic collaborations, we are developing tests for a specific form of cancer, concussions, bovine tuberculosis, and, in collaboration with global biopharmaceutical company AstraZeneca, an undisclosed biomarker.

Large and growing markets have been established for these kinds of tests, initially in high prevalence regions where they are indispensable for large-scale prevention and treatment programs. Our product development is focused on areas where the availability of rapid POC screening, diagnostic, or confirmatory results can improve health outcomes.  More generally, we believe there is and will continue to be a growing demand for diagnostic products that employcan provide accurate, actionable diagnostic information in a rapid, cost-effective manner at the DPP® technology whichpoint of care.

Our products are currently marketed under Chembio's label (DPP® HIV 1/2 Screening Assaysold globally, directly and DPP® HIV 1/2 –Syphilis Assay, which latter assay is not yet approvedthrough distributors, to be marketedhospitals and clinics, physician offices, clinical laboratories, public health organizations, government agencies, and consumers.
17
Consolidated Results of Operations

Three Months Ended September 30, 2018 versus Three Months Ended September 30, 2017
The results of operations for the three months ended September 30, 2018 and 2017 were as follows (dollars in thousands):

  September 30, 2018  September 30, 2017 
TOTAL REVENUES $9,377   100% $7,587   100%
                 
OPERATING COSTS AND EXPENSES:                
Cost of product sales  6,775   72%  4,065   54%
Research and development expenses  1,898   20%  1,806   24%
Selling, general and administrative expenses  3,034   32%  2,305   30%
   11,707
       8,176
     
LOSS FROM OPERATIONS  (2,330)
      (589)
    
                 
INTEREST INCOME, NET  16       4     
                 
LOSS BEFORE INCOME TAXES  (2,314)
  (24)%  (585)
  (8)%
                 
Income tax provision  -       -     
NET LOSS $(2,314)
     $(585)
    

Percentages in the U.S.),table reflect the percent of total revenues.

Total Revenues

Total revenues during the three months ended September 30, 2018 were $9.4 million, an increase of $1.8 million, or which may be marketed pursuant23.6% compared to private labelthe three months ended September 30, 2017. The increase in total revenues was comprised of the following:


●$1.7 million, or a 28.1% increase in net product sales compared to the three months ended September 30, 2017, reflecting gains in Africa ($2.1 million, or 217.3%), including both ongoing growth and continued shipments to Ethiopia, and Europe & Middle East ($0.3 million, or 78.2%), and

●$0.1 million, or a 4.5% increase in R&D, milestone and grant, and license and royalty revenues compared to the three months ended September 30, 2017, reflecting ongoing technology and scientific collaborations.
Gross Product Margin

Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross margin percentage is gross product margin as a percentage of net product sales.

Gross product margin during the three months ended September 30, 2018 decreased by $1.0 million, or distribution agreements such as those47.7% compared to the three months ended September 30, 2017. The following schedule calculates gross product margin and gross product margin percentage (dollars in thousands):

  For the three months ended  Favorable/(unfavorable)  
 
  September 30, 2018  September 30, 2017  $ Change
  % Change 
Net product sales $7,856  $6,133  $1,723   28.1%
Less: Cost of product sales  6,775   4,065   (2,710)
  (66.7)%
  Gross product margin $1,081  $2,068  $(987)
  (47.7)%
Gross margin percentage
  13.76%  33.72%        

The $1.0 million decrease in gross product margin was comprised of the following:


●$0.6 million from favorable net product sales volume as described above, and

●offset by $1.6 million decrease from lower product margins, related to the sales growth in markets with lower average selling prices, coupled with costs incurred through the scaling of labor and production reflecting the current manual assembly process to deliver the 28.1% increase in net product sales volume.
The decrease in gross product margin percentage is related to the same factors described above with the Oswaldo Cruz Foundation ("FIOCRUZ"), Labtest, and Bio-Rad.respect to lower gross product margin.

18
Research and Development

This category includes costs incurred for clinical & regulatory affairs and other research & development, ("as follows (dollars in thousands):

  For the three months ended   Favorable/(unfavorable)  
 
  September 30, 2018  September 30, 2017  $ Change
  % Change 
Clinical & regulatory affairs $244  $485  $241   50.0%
Other research & development  1,654   1,321   (333)
  (25.2)%
  Total Research and Development $1,898  $1,806  $(92)
  (5.1)%

The decrease in clinical & regulatory affairs costs for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 is primarily associated with decreased spending on the Company’s U.S. clinical trial evaluating its DPP® HIV-Syphilis System. The increase in other research & development costs is primarily associated with a higher R&D"),&D headcount and an increase in spending on materials & supplies, each corresponding with the growth in R&D milestone and grant revenuesrevenue-related projects.

Selling, General and Administrative Expense

Selling, general and administrative expense, or SG&A, includes administrative expenses, sales and marketing costs (including commissions), and other corporate items.

The $0.7 million, or 31.6% increase in SG&A for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, was primarily associated with merger and acquisition expenses and increased head count and related costs.

Interest Expense, net

Interest expense, net is interest income earned on the Company's deposits, net of interest expense on the note payable. This increased on a net basis by approximately $12,000 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.
Nine Months Ended September 30, 2018 versus Nine Months Ended September 30, 2017
The results of operations for the nine months ended September 30, 2018 and 2017 increased to $3.10 million from $3.03 millionwere as follows (dollars in thousands):

  September 30, 2018  September 30, 2017 
TOTAL REVENUES $25,814   100% $18,027   100%
                 
COSTS AND EXPENSES:                 
Cost of product sales  16,828   65%  9,488   53%
Research and development expenses  5,736   22%  6,035   33%
Selling, general and administrative expenses  7,988   31%  6,903   38%
   30,552       22,426     
LOSS FROM OPERATIONS  (4,738)
      (4,399)
    
                 
INTEREST INCOME, NET  43       25     
                 
LOSS BEFORE INCOME TAXES  (4,695)
  (18)%  (4,374)
  (24)%
                 
Income tax provision  -       -     
NET LOSS $(4,695)
     $(4,374)
    

Percentages in the prior-year period, which was primarilytable reflect the resultpercent of increased R&D project revenues in 2017.total revenues.

R&D expensesTotal Revenues

Total revenues during the nine months ended September 30, 2018 were $25.8 million, an increase of $7.8 million, or 43.2% compared to the nine months ended September 30, 2017. The increase in total revenues was comprised of the following:


●$6.7 million, or a 46.1% increase in net product sales compared to the nine months ended September 30, 2017, reflecting strong gains in Africa ($5.1 million, or 279.0%), including both ongoing growth and the Company’s continued shipments to Ethiopia, Latin America ($2.4 million, or 35.3%) and Europe & Middle East ($0.3 million, or 20.7%), and

●$1.1 million, or a 31.6% increase in R&D, milestone and grant revenues and license and royalty revenues compared to the nine months ended September 30, 2017, reflecting growing governmental, non-governmental, and commercial collaborations.

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Gross Product Margin

Cost of product sales is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization, and other operating expenses. Gross product margin is net product sales less cost of product sales, and gross margin percentage is gross product margin as a percentage of net product sales.

Gross product margin during the nine months ended September 30, 2018 decreased by $0.7 million, or 13.7% compared to the nine months ended September 30, 2017 were $6.03. The following schedule calculates gross product margin and gross product margin percentage (dollars in thousands):

  For the nine months ended   Favorable/(unfavorable)  
 
  September 30, 2018  September 30, 2017  $ Change
  % Change 
Net product sales $21,112  $14,453  $6,659   46.1%
Less: Cost of product sales  16,828   9,488   (7,340)
  (77.4)%
  Gross product margin $4,284  $4,965  $(681)
  (13.7)%
Gross product margin percentage
  20.29%  34.35%        

The $0.7 million compared with $6.27 milliondecrease in gross product margin was comprised of the prior-year period. Development work continues on several assays utilizing Chembio's DPP® platform, including the DPP® HIV multiplex tests that are designed to detect various infectious diseases such as Zika, Malaria, Dengue and other fever diseases partially funded by projects and grants.following:


●$2.3 million from favorable product sales volume as described above, and
17
Research & Development Activities

Sexually Transmitted Disease

●offset by $3.0 million decrease from lower product margins, related to the sales growth in markets with lower average selling prices, coupled with costs incurred through the scaling of labor and production reflecting the current manual assembly process to deliver the 46.1% increase in net product sales volume.
 
·DPP® HIV-Syphilis Assay: The DPP® HIV-Syphilis Assaydecrease in gross product margin percentage is a rapid, point-of-care (POC), multiplex test for the simultaneous detection of antibodies to HIV and to Treponema Pallidum (TP) bacteria (the causative agent of syphilis). This novel combination assay was developed to address the growing concern among public health officials regarding the rising co-infection rates of HIV and syphilis as well as mother-to-child transmission (MTCT) of HIV and syphilis. The product received approval by the Mexican regulatory agency (COFEPRIS) in 2014, received approval by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (ANVISA) in 2015, and received CE mark approval in 2017. We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, which was initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed.  These studies are in progress and expected to be complete during the fourth quarter of 2017, in preparation for filing the Premarket Approval Application.
Fever & Tropical Disease
·DPP® Malaria Assay: The DPP® Malaria Assay is a rapid, POC, multiplex test for the simultaneous detection of plasmodium falciparum and other plasmodium infections. In January 2015, we received a grant from the Bill & Melinda Gates Foundation to expedite the development and feasibility testing of a POC DPP® Malaria Assay. The Company completed this project, which compared the new DPP® malaria assay to the world's leading currently-available POC Malaria Assay with favorable results: a ten-fold improvement in sensitivity.  In April 2016, we received a second malaria grant from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world's first oral fluid/saliva POC diagnostic test to simply and accurately identify individuals infected with all species of malaria. We completed the feasibility and delivered DPP® Malaria Assay prototypes to a partner of the Bill & Melinda Gates Foundation for a lab evaluation, which was completed successfully during the third quarter of 2017.
·DPP® Dengue Fever Assay: The DPP® Dengue Fever Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM and NS1 antigens. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system related to the DPP® Dengue Fever Assay. We completed verification and validation studies, and production of pilot lots,same factors described above with respect to support preclinical studies. During 2016, we initiated registration in Southeast Asia and initiated commercialization of the DPP® Dengue Assay in Southeast Asia during the first quarter of 2017.
·DPP® Zika Assay: The DPP® Zika Assay is a rapid POC stand-alone test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million ($5.9 million to develop DPP® Zika Assay and obtain U.S. regulatory approval). The Company obtained CE mark in July 2016, and then began selling in the Caribbean region via its distribution partner, Isla Lab, LLC. In September 2016, the Company received a contract award from CDC, to initiate a Zika surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika IgM/IgG Assay to CDC for field testing purposes during the first quarter of 2017. The Company received approval by the Brazilian health regulatory authority, Agência Nacional de Vigilância Sanitária (ANVISA), for the DPP® Zika IgM/IgG Assay in November 2016 and for the DPP® Micro Reader in July 2017, in collaboration with Bio-Manguinhos/Fiocruz. In September 2017, the Company became the first to receive FDA Emergency Use Authorization for a rapid Zika test.
·DPP® Chikungunya Assay: The DPP® Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgG/IgM antibodies. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Chikungunya Assay. During 2017, we initiated registration to begin initial commercialization in Southeast Asia.
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·DPP® Zika/Dengue/Chikungunya Assay: The DPP® Zika/Dengue/Chikungunya Assay is a rapid, POC, multiplex test for the simultaneous detection of IgM/IgG antibodies. In February 2016, we received a grant from The Paul G. Allen Family Foundation to initiate development of the DPP® Zika/Dengue/Chikungunya Assay. During 2016, Chembio announced collaborations with Bio-Manguinhos, the unit of the Oswaldo Cruz Foundation (Fiocruz) responsible for the development and production of vaccines, diagnostics and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system, related to the DPP® Zika/Dengue/Chikungunya Assay. In August 2016, the Company received an award from the U.S. Government (HHS/ASPR/BARDA), granting the Company up to $13.2 million (including an option of $7.3 million to develop DPP® Zika/Dengue/Chikungunya Assay and obtain U.S. regulatory approval). In September 2016, the Company received a contract award from CDC to initiate a Zika, Dengue, and Chikungunya surveillance program in India, Peru, Guatemala, and Haiti, and we began selling the DPP® Zika/Dengue/Chikungunya IgM/IgG Assay to CDC during the first quarter of 2017. 
·DPP® Fever Panel Assay (1): The DPP® Fever Panel Assay (1) is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, Ebola, Lassa, and Marburg. In October 2015, we received a $2.1 million grant from the Paul G. Allen Ebola Program to develop the DPP® Fever Panel Assay (1) and a $0.55 million follow-on grant to add a test for the detection of Zika virus. We completed the development of the DPP® Fever Panel Assay in 2016, including the addition of Zika, and we supplied 10,000 DPP® Fever Panel Assays (1) to FIND, which initiated field evaluation in Peru and Nigeria. The field evaluation is completed, FIND is analyzing the data, and expected to deliver the final report in the first quarter of 2018.
·DPP® Fever Panel Assay (2): The DPP® Fever Panel Assay (2) is a rapid, POC, multiplex test for the simultaneous detection of Malaria, Dengue, Chikungunya, Zika, leptospirosis, Rickettsia typhi, Burkholderia pseudomallei, and Orientia tsutsugamushi. In April 2017, the Company announced collaboration with FIND, to develop a DPP® Fever Panel Assay (2) for the Asian market. Development is ongoing and on schedule.
·DPP® Ebola Assay and DPP® Malaria-Ebola Assay: The DPP® Ebola Assay is a rapid POC test for the detection of Ebola, and the DPP® Malaria-Ebola Assay is a rapid, POC, multiplex test for the simultaneous detection of Malaria and Ebola. In October 2014, we announced plans to develop, validate, and commercialize POC DPP® Assays for Ebola and Febrile Illness. We completed the development of the DPP® Ebola Assay and submitted it for Emergency Use Authorization (EUA) with the Food & Drug Administration (FDA) and World Health Organization (WHO), and we are actively engaged with these regulatory agencies. During the third and fourth quarters of 2015, we sold DPP® Ebola and DPP® Malaria-Ebola Assays to the Centers for Disease Control & Prevention (CDC) for field studies in West Africa, which is ongoing.
Technology Collaboration
·DPP® Cancer Assay: The DPP® Cancer Assay is a rapid, POC, multiplex test for the early detection and monitoring of a specific type of cancer. In October 2014, we entered into collaboration with an international diagnostics company to develop a POC diagnostic test for a specific type of cancer. This program is fully funded by this partner. However, under the terms of the agreement, neither Chembio's partner nor the specific type of cancer is being disclosed. The cancer project represents an application of the DPP® technology outside of the infectious disease field, and the scope of the agreement involveslower gross product development of a quantitative, reader-based cancer assay for two cancer markers, utilizing Chembio's DPP® technology and DPP® Micro Reader. During the third quarter of 2015, we completed successful feasibility, and our partner agreed to fund continued development and verification of the DPP® Cancer Assay, which are ongoing.
·DPP® Traumatic Brain Injury Assay: The DPP® Traumatic Brain Injury Assay is a rapid POC test for the detection of traumatic brain injury (TBI) and sports-related concussion. In January 2015, we entered into an agreement with the Concussion Science Group (CSG) Division of Perseus Science Group LLC, to combine CSG's patented biomarker with our proprietary DPP® platform and DPP® Micro Reader, to develop a semi-quantitative or quantitative POC test, to diagnose TBI. The DPP® Traumatic Brain Injury Assay is in the feasibility and pre-clinical stage. Under institutional review board (IRB) agreements with multiple hospitals, we are conducting pre-clinical studies of the prototype DPP® Traumatic Brain Injury Assay using patient samples.
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·DPP® Bovine Tuberculosis: The DPP® BovidTB Assay is a rapid POC test for the detection of bovine tuberculosis (TB). In September 2016, the Company was awarded a $600,000 grant from the United States Department of Agriculture (USDA) to develop the DPP® BovidTB Assay. The grant is managed by the Small Business Innovation Research Program (SBIR) of the National Institute of Food and Agriculture (NIFA), a federal agency within the USDA, and the assay is being developed in collaboration with National Animal Disease Center (NADC) and Infectious Disease Research Institute (IDRI). Under the two-year grant, Chembio is using its patented DPP® technology to undertake to develop a simple, rapid, accurate and cost-effective test for bovine TB in cattle. The DPP® BovidTB Assay is being designed to provide results within 20 minutes, thereby significantly improving on the time-consuming, tedious and inadequate diagnostic methods currently in use.
Regulatory Activities
·DPP® HIV-Syphilis Assay: We have developed a U.S. version of the DPP® HIV-Syphilis Assay, designed to meet the performance requirements for the "reverse" algorithm that is currently in clinical use for syphilis testing in the United States. The clinical trial to support the FDA application for the DPP® HIV-Syphilis Assay, initiated during first quarter of 2016, has been completed. In March 2017, the FDA requested further studies in addition to the clinical studies recently completed, which are in progress and expected to be complete during the fourth quarter of 2017, in preparation for filing the Premarket Approval Application.
·DPP® Zika IgM/IgG System: The DPP® Zika IgM/IgG System, which includes the DPP® Zika Assay and DPP® Micro Reader, obtained CE mark, allowing the product to be commercialized in Europe as well as the majority of the Caribbean nations. In November of 2016, the Company received approval from ANVISA, Brazil's regulatory Agency, for the DPP® Zika IgM/IgG Assay, and in July 2017, the Company received ANVISA approval for the DPP® Micro Reader, in collaboration with Bio-Manguinhos.  In September 2017, the Company received FDA Emergency Use Authorization, allowing the Company to commercialize the DPP® Zika System in the United States, Puerto Rico, and the U.S. Virgin Islands. The Company has also filed regulatory submissions with the World Health Organization (Emergency Use Assessment and Listing) and with COFEPRIS (Mexico), and we are actively engaged with these organizations.
There can be no assurance that any of the aforementioned Research & Development and/or regulatory products or activities will result in any product approvals or commercialization, nor that any of the existing research and development activities, or any new potential development programs or collaborations will materialize or that they will meet regulatory or any other technical requirements and specifications, and/or that if continued, will result in completed products, or that such products, if they are successfully completed, can or will be successfully commercialized.

Critical Accounting Policies and Estimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, valuation of long-lived assets, goodwill, and income taxes. For a summary of our significant accounting policies, which have not changed from December 31, 2016, with the exception of goodwill, see our Annual Report on Form 10-K for the twelve months ended December 31, 2016, which was filed with the SEC on March 7, 2017.

20
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2016
Income:
For the three months ended September 30, 2017, Loss before income taxes was $585,000 compared to $2,138,000 for the three months ended September 30, 2016. Net Loss for the 2017 period was $585,000 as compared to $2,138,000 for 2016. The decrease in Net Loss is primarily attributable to increased product revenues in the 2017 period over the 2016 period, together with smaller increases in R&D and royalty revenues, increased product gross margin, and a decrease in operating expenses. Product gross margin increased in the three months ended September 30, 2017, as compared with the three months ended September 30, 2016, by $1,360,000 or 192.19%.

Revenues:

Selected Product Categories: For the three months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Lateral Flow HIV Tests and Components $2,289,972  $1,471,458  $818,514   55.63%
DPP® Tests and Components  3,582,145   997,768   2,584,377   259.02%
Other  260,608   32,871   227,737   692.82%
Net Product Sales  6,132,725   2,502,097   3,630,628   145.10%
License and royalty revenue  150,000   77,754   72,246   92.92%
R&D, milestone and grant revenue  1,304,649   1,166,610   138,039   11.83%
Total Revenues $7,587,374  $3,746,461  $3,840,913   102.52%

Revenues for our lateral flow HIV (LF-HIV) tests and related components during the three months ended September 30, 2017 increased by approximately $819,000 from the same period in 2016. This was primarily attributable to increased sales to Africa of approximately $475,000, USA of approximately $272,000, and Europe of approximately $57,000. Revenues for our DPP® products during the three months ended September 30, 2017 increased by approximately $2,584,000 over the same period in 2016, primarily due to increased sales in Brazil. The increase in R&D, milestone and grant revenue, was primarily due to increased R&D project revenues in 2017.

21
Management is also focused on sales by region as well as sales by product types.  As a result, we are providing the following table which shows sales by region and by product type.

  For the three Months ended     For the three Months ended    
Region September 30, 2017 September 30, 2016 $ Change 
Part-Type
 September 30, 2017  September 30, 2016  $ Change 
Africa $965,606 $483,088 $482,518 DPP® $7,700  $5  $7,695 
LF-HIV  957,905   482,993   474,912 
OTHER  1   90   (89)
Asia  90,781  125,616  (34,835)DPP®  984   100,250   (99,266)
LF-HIV  23,805   20,026   3,779 
OTHER  65,992   5,340   60,652 
Europe  401,730  315,669  86,061 DPP®  1,120   2,860   (1,740)
LF-HIV  357,375   300,537   56,838 
OTHER  43,235   12,272   30,963 
Latin America  3,556,815  731,291  2,825,524 DPP®  3,523,924   718,841   2,805,083 
LF-HIV  17,651   9,100   8,551 
OTHER  15,240   3,350   11,890 
Other  2,320  5  2,315 DPP®  –   –   – 
LF-HIV  2,320   10   2,310 
OTHER  –   (5)  5 
USA  1,115,473  846,428  269,045 DPP®  48,417   175,812   (127,395)
LF-HIV  930,916   658,792   272,124 
OTHER  136,140   11,824   124,316 
TOTALS $6,132,725 $2,502,097 $3,630,628    $6,132,725  $2,502,097  $3,630,628 

Gross Margin:

 For the three months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Gross Margin per Statements of Operations $3,522,583  $1,952,097  $1,570,486   80.45%
Less: R&D, milestone, grant, license and royalty revenues  1,454,649   1,244,364   210,285   16.90%
Gross Margin from Net Product Sales $2,067,934  $707,733  $1,360,201   192.19%
Product Gross Margin %  33.72%  28.29%        

The overall gross margin dollar increase of $1,570,000 included a $1,360,000 increase in gross margin from product sales and an increase in non-product revenues of $210,000. The increase in net product sales gross margin of $1,360,000 is primarily attributable to the increase in sales compared to 2016. The net product sales gross margin increase is primarily affected by two components, one is the increase in product sales of $3,631,000, which, at the 28.3% margin percentage for September 30, 2016, contributed $1,027,000 to the increase, and the other is the increased change in margin percentage of 5.43%, which contributed $333,000 to the balance of the increase in our net product sales gross margin.
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Research and Development:

Research and development expenses includeDevelopment

This category includes costs incurred for productclinical & regulatory affairs and other research & development, regulatory approvals, clinical trials, and product evaluations.as follows (dollars in thousands):

Selected expense lines: For the three months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
Clinical and Regulatory Affairs:            
Wages and related costs $130,331  $153,500  $(23,169)  -15.09%
Consulting  20,352   11,849   8,503   71.76%
Clinical trials  293,400   322,518   (29,118)  -9.03%
Other  41,047   15,018   26,029   173.32%
Total Clinical and Regulatory Affairs  485,130   502,885   (17,755)  -3.53%
                 
R&D other than Clinical Regulatory Affairs:                
Wages and related costs  731,251   732,775   (1,524)  -0.21%
Consulting  44,208   58,711   (14,503)  -24.70%
Stock-based compensation  12,101   27,263   (15,162)  -55.61%
Materials and supplies  399,051   802,144   (403,093)  -50.25%
Other  133,997   139,941   (5,944)  -4.25%
Total R&D other than Clinical Regulatory Affairs  1,320,608   1,760,834   (440,226)  -25.00%
                 
Total Research and Development $1,805,738  $2,263,719  $(457,981)  -20.23%
  For the nine months ended   Favorable/(unfavorable)  
 
  September 30, 2018  September 30, 2017  $ Change
  % Change 
Clinical & regulatory affairs $927  $1,589  $662 
  41.6%
Other research & development  4,809   4,446   (363)
  (8.2)%
  Total Research and Development $5,736  $6,035  $299 
  5.0%

Expenses for Clinical & Regulatory Affairs for the three months ended September 30, 2017regulatory affairs decreased by $18,000 as compared to the same period in 2016. This was primarily due to the decrease in clinical trial expenses of $29,000.

R&D expenses other than Clinical & Regulatory Affairs decreased by $440,000 in the three months ended September 30, 2017, as compared with the same period in 2016. The decreases were primarily related to a decrease in material and supplies, that resulted from the decrease in our sponsored research.

Selling, General and Administrative Expenses:

Selected expense lines: For the three months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Wages and related costs $943,436  $844,123  $99,313   11.77%
Consulting  102,008   5,969   96,039   1,608.96%
Commissions  333,800   147,652   186,148   126.07%
Stock-based compensation  62,154   46,750   15,404   32.95%
Marketing materials  22,631   153,465   (130,834)  -85.25%
Investor relations/investment bankers  62,574   67,607   (5,033)  -7.44%
Legal, accounting and compliance  312,311   250,129   62,182   24.86%
Travel, entertainment and trade shows  136,347   115,701   20,646   17.84%
Other  330,097   201,055   129,042   64.18%
Total S, G &A $2,305,358  $1,832,451  $472,907   25.81%

Selling, general and administrative expenses for the three months ended September 30, 2017, increased by $473,000 as compared with the same period in 2016, a 25.8% increase. This increase resulted primarily from increases in commissions, primarily due to increased sales to Brazil, wages and related costs due to an increase in sales staff, consulting, professional fees, travel, entertainment and trade shows, and other expenses which were partially offset by decreases in marketing material, and decreases in investor relations expense.
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Other Income:

 For the three months ended     
 September 30, 2017 September 30, 2016 $ Change % Change 
Interest income $3,852  $5,855  $(2,003)  -34.21%
Total Other Income $3,852  $5,855  $(2,003)  -34.21%

Other income for the three months ended September 30, 2017 decreased to $3,852, from income of $5,855 in the same period in 2016, primarily as a result of less interest income received as a result of less cash to invest.

Income tax provision:

The Company recorded a full valuation allowance for the three months ended September 30, 2017, on its deferred tax assets.


RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2016
Income:
For the$0.7 million for the nine months ended September 30, 2017, Loss before income taxes was $4,373,0002018, as compared to $4,988,000the nine months ended September 30, 2017, primarily related to a decrease in clinical trial expenses for the DPP HIV-Syphilis System.
The $0.4 million increase in other research & development costs was primarily associated with a higher R&D headcount and an increase in spending on materials & supplies, each corresponding with the $1.0 million growth in R&D milestone and grant revenue-related projects.

Selling, General and Administrative Expense

SG&A includes administrative expenses, sales and marketing costs including commissions, and other corporate items.

The $1.1 million increase in SG&A for the nine months ended September 30, 2016, primarily as a result of higher net product sales, non-product revenues and reduction in R&D expenses partially offset by increased selling, general and administrative expenses. Net Loss for the 2017 period was $4,373,0002018, as compared to $10,789,000 for 2016. The decrease in Net Loss is primarily attributable to recording of a full valuation of approximately $5,801,000 on our Deferred Tax Asset (DTA) in the 2016 period, an increase in product revenues, an increase in R&D and royalty revenues, and increased product gross margin. Product gross margin increased in the nine months ended September 30, 2017, as comparedwas associated with the nine months ended September 30, 2016, by $1,428,000 or 40.37%.merger & acquisition expenses, and increased sales commissions, head count and related costs.

Revenues:Interest Expense, net

Selected Product Categories: For the nine months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Lateral Flow HIV Tests and Components $5,520,073  $5,696,745  $(176,672)  (3.10)%
DPP® Tests and Components  6,969,815   4,490,214   2,479,601   55.22%
Other  1,963,209   266,229   1,696,980   637.41%
Net Product Sales  14,453,097   10,453,188   3,999,909   38.26%
License and royalty revenue  477,631   133,850   343,781   256.84%
R&D, milestone and grant revenue  3,096,626   3,026,927   69,699   2.30%
Total Revenues $18,027,354  $13,613,965  $4,413,389   32.42%

Revenues for our lateral flow HIV (LF-HIV) tests and related componentsInterest expense, net is interest income earned on the Company's deposits, net of interest expense on the note payable, which increased by approximately $18,000 for the nine months ended September 30, 2017 decreased by approximately $177,000 from the same period in 2016. This was primarily attributable2018, as compared to decreased sales in the U.S. of approximately $985,000, decreased sales to Latin America of approximately $61,000, and decreased sales to Asia of approximately $27,000, and partially offset by increased sales to Europe of approximately $768,000 and increased sales to Africa of approximately $140,000. Revenues for our DPP® products during the nine months ended September 30, 2017, increasedreflecting interest on funds raised in the February 2018 public offering.
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Liquidity and Capital Resources

Overview

Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund opportunistic investments that align with our focused business strategy. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, additional capital. We will continue to explore ways to enhance our capital structure.

As of September 30, 2018, we had cash and cash equivalents of $6.8 million.

Public Offerings

As described in Note 5 – Stockholders’ Equity to the unaudited condensed consolidated financial statements included herein, on February 13, 2018, we consummated an underwritten registered public offering of 1,783,760 shares of common stock at a public offering price of $6.75 per share, for gross proceeds of approximately $12.0 million. The net proceeds, after underwriting discounts and commissions and estimated expenses, were approximately $10.9 million.

As described in Note 8 – Subsequent Events to the unaudited condensed consolidated financial statements included herein, on November 5, 2018, we consummated an underwritten registered public offering of 2,726,000 shares of common stock at a public offering price of $6.75 per share for gross proceeds of approximately $18.4 million. The net proceeds, after underwriting discounts and commissions and estimated expenses, were approximately $16.6 million.

Acquisitions

On January 9, 2017, we acquired 100% of the equity interests of RVR Diagnostics Sdn Bhd, a Malaysia manufacturer and distributor of rapid medical assays, for $1.4 million in cash and for  shares of common stock with a value at closing of approximately $1.7 million. As further described in Note 2 – Acquisition to the unaudited condensed consolidated financial statements contained herein, the acquisition was accounted for as a business combination, with the operating results of RVR Diagnostics included within our operating results from the date of acquisition. We financed the cash portion of the acquisition with funds raised in our 2016 public equity offering. After the acquisition, we changed the name RVR Diagnostics Sdn Bhd to Chembio Diagnostics Malaysia Sdn Bhd.

As described in Note 8 – Subsequent Events to the unaudited condensed consolidated financial statements included herein, on November 6, 2018, we acquired 100% of the equity interests in opTricon GmbH, a Berlin, Germany-based privately-held developer and manufacturer of hand-held analyzers for rapid diagnostic tests, for approximately $5.5 million, subject to certain post-closing working capital and other adjustments.

Government, Non-Governmental Organization, and Non-Profit Programs

We seek research and development programs awarded by approximately $2,480,000 overgovernment, non-governmental organization, and non-profit entities, including private foundations. We have, or have recently undertaken, development programs that are competitively awarded from agencies of the same periodU.S. Federal Government, including the U.S. Department of Health and Human Services and U.S. Department of Agriculture, as well as from FIND, the Bill & Melinda Gates Foundation, and The Paul G. Allen Family Foundation.

Cash Flows

As of September 30, 2018, we had cash and equivalents of $6.8 million and our only outstanding indebtedness was a $0.4 million seller-financed note payable associated with automated manufacturing equipment. Following is a summary of the changes in 2016, primarily due to increased salescash and cash equivalents (dollars in Brazil, partially offset by decreased sales in Asia.  Revenues for our other productsthousands):

  For the nine months ended  Favorable/(unfavorable)
 
  September 30, 2018  September 30, 2017  $ Change
  % Change 
             
Net cash used in operating activities $(7,530)
 $(7,177) $(353)
  (5.0)%
Net cash used in investing activities  (402)
  (1,640)  1,238   75.5%
Net cash provided by financing activities  10,990   134   10,856   8201.5%
Effect of exchange rate changes on cash  -   -   -   NA%
  Increase (Decrease) in Cash and Cash Equivalents $3,058  $(8,683) $11,741   135.2%

Our cash flows for the nine months ended September 30, 20172018 increased by approximately $1,697,000, primarily as a result of sales from our Malaysia subsidiary. The increase in R&D, milestone and grant revenue, was primarily due to increased royalty revenues in 2017.

24
Management is also focused on sales by region as well as sales by product types.  As a result, we are providing the following table which shows sales by region and by product type.


  For the nine months ended     For the nine months ended   
Region September 30, 2017 September 30, 2016 $ Change 
Part-Type
 September 30, 2017 September 30, 2016 $ Change 
Africa $1,797,285 $1,576,233 $221,052 DPP® $96,080 $18,515 $77,565 
LF-HIV  1,698,033  1,557,608  140,425 
OTHER  3,172  110  3,062 
Asia  1,633,490  272,638  1,360,852 DPP®  8,384  104,650  (96,266)
LF-HIV  129,132  156,468  (27,336)
OTHER  1,495,974  11,520  1,484,454 
Europe  1,441,890  647,582  794,308 DPP®  4,970  3,110  1,860 
LF-HIV  1,368,185  600,393  767,792 
OTHER  68,735  44,079  24,656 
Latin America  6,701,923  4,147,284  2,554,639 DPP®  6,420,768  3,975,011  2,445,757 
LF-HIV  75,861  136,843  (60,982)
OTHER  205,294  35,430  169,864 
Other  3,575  4,323  (748)DPP®  1,000  750  250 
LF-HIV  2,575  3,566  (991)
OTHER  0  7  (7)
USA  2,874,934  3,805,128  (930,194)DPP®  438,613  388,177  50,436 
LF-HIV  2,246,287  3,231,403  (985,116)
OTHER  190,034  185,548  4,486 
TOTALS $14,453,097 $10,453,188 $3,999,909    $14,453,097 $10,453,188 $3,999,909 


Gross Margin:

 For the nine months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Gross Margin per Statements of Operations $8,539,506  $6,697,950  $1,841,556   27.49%
Less: R&D, milestone, grant, license and royalty revenues  3,574,257   3,160,777   413,480   13.08%
Gross Margin from Net Product Sales $4,965,249  $3,537,173  $1,428,076   40.37%
Product Gross Margin %  34.35%  33.84%        

The overall gross margin dollar increase of $1,842,000 included a $1,428,000 increase in gross margin from product sales and a $413,000 increase in non-product revenues. The increase in net product sales gross margin of $1,428,000 is primarily attributable to the increase in sales compared to 2016. The net product sales gross margin increase is primarily affected by two components, one is the increase in product sales of $4,000,000, which, at the 33.84% margin percentage for September 30, 2016, contributed $1,354,000 to the increase, and the other is the increased change in margin percentage of 0.51%, which contributed $74,000 to the balance of the increase in our net product sales gross margin.
25
Research and Development:

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

Selected expense lines: For the nine months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
Clinical and Regulatory Affairs:            
Wages and related costs $410,136  $417,542  $(7,406)  (1.77)%
Consulting  23,815   28,300   (4,485)  (15.85)%
Stock-based compensation  9,652   -   9,652   100.00%
Clinical trials  1,079,372   481,359   598,013   124.23%
Other  65,661   38,441   27,220   70.81%
Total Clinical and Regulatory Affairs  1,588,636   965,642   622,994   64.52%
                 
R&D other than Clinical Regulatory Affairs:                
Wages and related costs  2,190,656   2,171,191   19,465   0.90%
Consulting  151,023   101,486   49,537   48.81%
Stock-based compensation  67,660   61,983   5,677   9.16%
Materials and supplies  1,565,111   2,607,179   (1,042,068)  (39.97)%
Other  471,649   358,002   113,647   31.74%
Total R&D other than Clinical Regulatory Affairs  4,446,099   5,299,841   (853,742)  (16.11)%
                 
Total Research and Development $6,034,735  $6,265,483  $(230,748)  (3.68)%

Expenses for Clinical & Regulatory Affairs for the nine months ended September 30, 2017 increased by $623,000$11.7 million as compared to the same period in 2016. This was primarily due to the increase in clinical trial expenses of $598,000.

R&D expenses other than Clinical & Regulatory Affairs decreased by $854,000 for the nine months ended September 30, 2017, as compared with the same period in 2016. The decreases were primarily related to a decrease in material and supplies, that resulted from the decrease in our sponsored research.

Selling, General and Administrative Expenses:

Selected expense lines: For the nine months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Wages and related costs $2,807,297  $2,408,996  $398,301   16.53%
Consulting  123,433   124,192   (759)  (0.61)%
Commissions  651,316   553,931   97,385   17.58%
Stock-based compensation  185,204   158,296   26,908   17.00%
Marketing materials  202,305   301,302   (98,997)  (32.86)%
Investor relations/investment bankers  203,819   231,769   (27,950)  (12.06)%
Legal, accounting and compliance  1,010,591   731,492   279,099   38.15%
Travel, entertainment and trade shows  477,870   322,909   154,961   47.99%
Other  1,241,220   597,781   643,439   107.64%
Total S, G &A $6,903,055  $5,430,668  $1,472,387   27.11%

Selling, general and administrative expenses for the nine months ended September 30, 2017, increased by $1,472,000 as compared with the same period in 2016, a 27.11% increase. This increase resulted primarily from increases in wages and related costs due to an increase in sales staff, professional fees, travel, entertainment and trade shows, increases in commissions, primarily due to increased sales to Brazil, stock-based compensation, and other expenses, primarily due to expenses from our Malaysian subsidiary, which were partially offset by decreases in marketing materials and deceases in investor relations expense.
26
Other Income:

 For the nine months ended     
 September 30, 2017 September 30, 2016 $ Change % Change 
Interest income $24,956  $9,729  $15,227   156.51%
Total Other Income $24,956  $9,729  $15,227   156.51%

Other income for the nine months ended September 30, 2017 increased to $ 24,956, from income of $ 9,729 in the same period in 2016, primarily as a result of interest income received as a result of more cash to invest.



Income tax provision:

The Company recorded a full valuation allowance for the nine months ended September 30, 2017, on its deferred tax assets.


MATERIAL CHANGES IN FINANCIAL CONDITION

Selected Changes in Financial Condition As of       
  September 30, 2017  December 31, 2016  $ Change  % Change 
Cash and cash equivalents $1,871,982  $10,554,464  $(8,682,482)  -82.26%
Accounts receivable, net of allowance for doubtful accounts of $52,000 at September 30, 2017 and December 31, 2016, respectively  5,768,920   3,383,729   2,385,191   70.49%
Inventories, net  5,235,164   3,335,188   1,899,976   56.97%
Fixed assets, net of accumulated depreciation  1,964,427   1,709,321   255,106   14.92%
Deposits on manufacturing equipment  243,755   31,900   211,855   664.12%
Deposits and other assets  146,789   720,489   (573,700)  -79.63%
Prepaid expenses and other current assets  842,532   840,145   2,387   0.28%
Goodwill  1,597,617   -   1,597,617   100.00%
Intangible assets, net  1,573,518   -   1,573,518   100.00%
Accounts payable and accrued liabilities  3,870,161   3,013,133   857,028   28.44%
Deferred revenue  -   392,517   (392,517)  -100.00%

Cash decreased by $8,682,000 from December 31, 2016, primarily due to cash used in operating activities and cash used in investing activities, primarily for the acquisition of CDM, for the nine months of 2017. In addition, there were increases in accounts receivable of $2,385,000 (primarily due to a large customer as described under "Liquidity And Capital Resources"), inventories of $1,900,000, net fixed assets of $255,000, deposits on manufacturing equipment of $212,000, an increase in accounts payable and accrued liabilities of $857,000, and increases in goodwill and intangible assets of $1,598,000 and $1,574,000, respectively due to the CDM acquisition.  We experienced a decrease in deposits and other assets of $574,000, primarily from reducing the deposit paid for the CDM acquisition, and a decrease in deferred revenue of $393,000.

27
LIQUIDITY AND CAPITAL RESOURCES

  For the nine months ended       
  September 30, 2017  September 30, 2016  $ Change  % Change 
             
Net cash used in operating activities $(7,176,935) $(5,676,073) $(1,500,862)  26.44%
Net cash used in investing activities  (1,639,827)  (79,877)  (1,559,950)  1,952.94%
Net cash provided by financing activities  134,280   12,550,973   (12,416,693)  -98.93%
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(8,682,482) $6,795,023  $(15,477,505)  -227.78%

The Company's cash decreased as of September 30, 2017 by $8,682,000 from December 31, 2016, primarily due to cash used in operating activities, and net cash used in investing activities, primarily for the CDM acquisition, for the first nine months of 2017.

The cash used in operations in the first nine months of 2017 was $7,177,000, which consisted primarily of an increase in accounts receivable of $2,385,000, an increase in prepaid expenses of $115,000 (net of amortization), increase in inventories of $1,900,000, a decrease in deferred revenue of $393,000, and a net loss net of non-cash items of $3,065,000, partially offset by cash provided by an increase in accounts payable and accrued liabilities of $658,000. Net loss net of non-cash items includes loss before income taxes of $4,373,000 reduced by non-cash expenses of $1,011,000 in depreciation and amortization, and of $297,000 in share-based non-cash compensation. The use of cash from investing activities is primarily due to the acquisition of CDM for $1,400,000 in cash, of which $850,000 was paid in the nine months ended September 30, 2017, and partially offset by reduction in deposit for the CDM investment of $550,000 for a deposit paid in December of 2016.

The Company currently has positive working capital.  It has used approximately $8.7 million in cash for the nine months ended September 30, 2017, primarily due to capital raised, offset in part by the use of cash to fund increases in accounts receivable and inventory, net of the benefit of supplier payment terms and cash collections for deferred revenue.

Cash used in operating activities. Approximately $3.3activities during the nine months ended September 30, 2018 was $7.5 million, ofprimarily due to the total $5.8$5.7 million ofincrease in accounts receivable isassociated with the increase in total revenues, and the $4.7 million net loss (excluding non-cash items) during the nine months ended September 30, 2018. In addition, inventories increased by $1.6 million to support higher sales volumes during the nine months ended September 30, 2018 and build product for the Ethiopia HIV tender that began shipping during the second quarter of 2018. The $1.6 million increase in inventory was more than offset by a $3.8 million increase in accounts payable and accrued liabilities.

Cash used in investing activities of $0.4 million during the nine months ended September 30, 2018 related to one customer,the purchase of manufacturing equipment and other fixed assets.

Cash provided by financing activities during the Company hasnine months ended September 30, 2018, primarily relates to proceeds from an underwritten registered public offering. Please see the “Public Offering” section, above, for further information.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
21
Recent Developments

In October 2018, we announced it had received a high$10.5 million purchase commitment from Bio-Manginhos for the production of DPP HIV and DPP Leishmania assays in Brazil and their subsequent supply to Brazil's Ministry of Health.

In November 2018, we announced that we had received FDA EUA for DPP Ebola Antigen System for use with fingerstick and venous whole blood.
Significant Accounting Policies and Critical Accounting Estimates

Our significant accounting policies are described in Note 3 – Summary of Significant Accounting Policies to the Unaudited Condensed Consolidated Financial Statements included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of confidence that this account receivable is collectibleuncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and information available from this customer.other outside sources, as appropriate. We consider an accounting estimate to be critical if:

A fundamental principle

●It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and

●Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

The following listing is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the preparationaccounting treatment of financial statements in accordance witha particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, ("GAAP")with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any viable alternative would not produce a materially different result. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2018, except for those changes pertaining to our adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.

Revenue Recognition

We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five-step model prescribed under Accounting Standards Update No. 2014-09: (i) identify contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.

All contracts related to R&D, milestone and grants revenues are evaluated under the five-step model described above. For certain contracts, we recognize revenue from R&D, milestone and grant revenues when earned.  Grants are invoiced after expenses are incurred, as that is the assumption that an entity will continuedepiction of the timing of the transfer of services. Performance obligations generally follow the major phases of product development processes: design feasibility & planning, product development & design optimization, design verification, design validation & process validation, and pivotal studies. Further details regarding revenue recognition are described in existenceNote 3(b) – Summary of Significant Accounting Policies: Revenue Recognition to the Unaudited Condensed Consolidated Financial Statements.

Stock-Based Compensation

We recognize the fair value of equity-based awards as compensation expense in our statement of operations. The fair value of our stock option awards was estimated using a going concern, which contemplates continuity of operationsBlack-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the realizationestimated life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option.

Research & Development Costs

Research and development activities consist primarily of new product development, continuing engineering for existing products, and regulatory and clinical trial costs.  Costs related to research and development efforts on existing or potential products are expensed as incurred.

Inventories

Inventories are stated at the lower of cost and net realizable value, using the first-in, first-out method to determine cost.  Our policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. For example, each additional 1% of obsolete inventory would reduce such inventory by approximately $60,000.

Accounts Receivable

Our policy is to review our accounts receivable on a periodic basis, no less frequently than monthly. On a quarterly basis an analysis is made of the adequacy of our allowance for doubtful accounts and adjustments are made accordingly. The current allowance is approximately 1% of accounts receivable. For example, each additional 1% of accounts receivable that becomes uncollectible would reduce such balance of accounts receivable by approximately $78,000.

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Acquisitions

In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.

We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.

Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and settlementliabilities based upon quoted market prices, the carrying value of liabilities occurring in the ordinary courseacquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, the Company has prepared its consolidated financial statements on a going concern basis.our fair value estimates, including assumptions regarding industry economic factors and business strategies.

The Company has incurred significant operating lossesOther estimates used in the previous three years as well as negativedetermining fair value include, but are not limited to, future cash flow from operations. The Company currently has a working capital surplusflows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of $9.8 million. The Company's abilityfair value are based upon assumptions believed to continue as a going concern depends on its ability to execute its business plan, increase revenuebe reasonable, but that are inherently uncertain, and billings and reduce expenditures. During 2017, the Company began to focus on aligning its expense structure with revenue expectations which included tighter expense controls and overall operational efficiencies which better align the Company's current business plan on a run-rate basis. In addition, the Company recently increased its inventory in anticipation of orders which to date havetherefore, may not materialized and the plan includes reducing inventory levels to provide additional cash to fund operations.   Another focus is on the Company's receivable balance which also increased over the nine months, partially due to increased product sales, and we are focusing on reducing days outstanding.

The Company entered into a Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co., as sales agent, pursuant to which the Company may offer and sell, from time to time, through Cantor Fitzgerald, shares of the Company's common stock, par value $0.01 per share, having an aggregate offering price of up to $21.2 million, and anticipates the ability to raise additional funding if needed through this vehicle.  In addition, the Company may be able to raise additional funds through a private offering.  With these options available and the steps outlined above, the Company expects it will be able continue as a going concern into and beyond 2018.  However,realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.

Goodwill and Intangible Assets

We periodically review goodwill for impairment indicators. We review goodwill for impairment annually on the first day of the fourth quarter or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs the goodwill impairment review at the reporting unit level. We make a qualitative evaluation about the likelihood of goodwill impairment, which is based on a number of applicable factors. If we conclude that it is more likely than not that the carrying value of the applicable reporting unit is greater than its fair value, then we would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill assessment described above, the Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives and are subject to impairment testing only if events or circumstances indicate that the asset might be impaired, as described above.

Income Taxes

Income taxes are accounted for under ASC 740 authoritative guidance, or the Guidance, which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.

The Guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.  A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing contracts that will result in future profits. We believe that it is more likely than not that we will not be able to obtain financing or that such financing will beutilize our net operating loss carryforwards and maintains a full valuation allowance. We maintain a full valuation allowance on favorable terms. Any such financing would be dilutive to shareholders.  Failure to generate sufficient revenue, control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continue as a going concern.research and development tax credits.

Fixed Asset Commitments

As of September 30, 2017, the Company had $243,755 in deposits on equipment,The Guidance also prescribes a comprehensive model for recognizing, measuring, presenting and $462,989 in commitments for additional equipment purchase obligations.
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RECENT DEVELOPMENTS AND CHEMBIO'S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
During the third quarter of 2017, Chembio continued to execute its strategy and focus on three key areas: 1) strengthening the Company's core sexually transmitted disease business, 2) building a broad tropical and fever disease portfolio, and 3) establishing a global commercial organization. 
Chembio believes there are significant opportunities in our core sexually transmitted disease business, including the commercialization of a U.S. version of the DPP® HIV-Syphilis Assay, as well as the DPP® HIV Self-Testing kits outside the U.S, specifically in Africa and Europe. The Company also believes large market opportunities can be addressed with its fever and tropical disease assays, including DPP® Malaria, DPP® Dengue, DPP® Zika, and the DPP® Fever Assays. Chembio's growing commercial organization includes experienced sales executives based in target regions, including the U.S., Latin America, Africa, Europe and Asia Pacific, and through this global sales infrastructure the Company's has had successes in each of these markets.
Sexually Transmitted Diseases Business
Within the sexually transmitted disease business, Chembio increased sales of its HIV Assays in multiple markets.  The Company expects its DPP® HIV-Syphilis Assay to play an important role in combatting global concerns related to co-infection and mother-to-child transmission of both HIV and syphilis.  The World Health Organization recommends screening all pregnant women for HIV and syphilis at the first antenatal care visit in nearly every country. Early diagnosis and treatment of both HIV and syphilis in pregnant women has proved effectivedisclosing in the prevention of both adverse outcomes of pregnancy and mother-to-child transmission.  Additionally, there are other at-risk populations that may also benefit from improved HIV and syphilis screening coverage. Chembio's DPP® HIV-Syphilis Assay is currently available in Latin America, Europe and the Caribbean (except for Puerto Rico).
In March 2017, the FDA requested that the Company undertake further studies of its DPP® HIV-Syphilis Assay, in addition to the clinical studies recently completed, which are in progress andconsolidated financial statements tax positions taken or expected to be complete during the fourth quartertaken on a tax return, including a decision whether to file or not to file in a particular jurisdiction.

Recently Issued Accounting Pronouncements

The information concerning recently issued accounting pronouncements contained in Note 3 – Summary of 2017, in preparation for the Company's filing the Premarket Approval Application for its DPP® HIV-Syphilis Assay.
Another important factor in the U.S. market is the fact that Chembio won multiple HIV rapid test procurement awards in recent quarters.  The Company has been supplying HIV products pursuant to these awards in 2017, and expects to continue doing so during 2018.
Outside the U.S., Chembio's DPP® Syphilis Screen & Confirm Assay, which is CE Marked, is now available.  The DPP® Syphilis Screen & Confirm Assay has been successfully used in several pilot programs in Africa, andSignificant Accounting Policies, to the Company's knowledgeunaudited condensed consolidated financial statements included in Part 1, Item 1 of this report is the only rapid test that can detect both active and past-treated syphilis infections with the same test. We believe this product represents a paradigm shift in syphilis confirmatory testing outside of the U.S.incorporated herein by reference.
Chembio's HIV Self-Testing products continue to record sales growth in the EU.  We believe the market for HIV Self-Testing, especially in Africa and Europe, offers significant growth potential and we believe our HIV products are well-suited to penetrate these markets.
During the third quarter, Chembio continued to fulfill the $5.8 million order received in May 2017 for the production of DPP® HIV 1/2 Assays, both blood and oral fluid, in Brazil. The Company shipped $0.9 million during the second quarter of 2017, $3.2 million in the third quarter of 2017, and anticipates shipping the remaining $1.6 million during the fourth quarter of 2017.
Tropical and Fever Disease Business
One of Chembio's key goals is the commercialization of multiple tropical and fever disease products during 2017.  We are pleased to confirm that during the third quarter of 2017 the Company initiated sales of its DPP® Dengue Assay and DPP® Zika Assay, and initiated a pilot program with the Centers for Disease Control and Prevention (CDC) for the Company's DPP® Dengue/Zika/Chikungunya Assay in India, Peru, Haiti and Guatemala.
Also during the third quarter of 2017, Chembio received approval for its DPP® Micro Reader from Agência Nacional de Vigilância Sanitária (ANVISA), the Brazilian health regulatory agency, in collaboration with Bio-Manguinhos/Fiocruz. The DPP® Zika IgM/IgG Assay detects antibodies using a tiny (10uL) drop of blood from the fingertip and provides quantitative results in 15 minutes, when used with the handheld, battery-operated DPP® Micro Reader.  With this approval, Chembio's DPP® Zika System, which includes the DPP® Zika IgM/IgG Assay and DPP® Micro Reader, is now approved for commercial use in Brazil.
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Another significant milestone during the third quarter of 2017 was Chembio's receipt of U.S. Food and Drug Administration (FDA) Emergency Use Authorization (EUA) for its DPP® Zika System.  The DPP® Zika System is the first and only rapid Zika test to receive an FDA EUA.  The test is authorized for the presumptive detection of Zika virus IgM antibodies in fingerstick whole blood, EDTA venous whole blood, EDTA plasma (each collected alongside a patient-matched serum specimen) or serum (plain or separation gel) specimens collected from individuals meeting CDC Zika virus clinical and/or epidemiological criteria, from 8 days of on-set and up to 12 weeks.  The Company believes its DPP® Zika System will be an important contributor to future sales.
The Company continues to pursue additional regulatory approvals for its DPP® Zika System, including the World Health Organization Emergency Use Assessment and Listing.  We remain optimistic regarding these authorizations, given the performance of our DPP® Zika System. 
Beyond the products that we are currently marketing, Chembio continues to work with collaborators toward the development of the Company's next generation of tropical and fever disease products, including: DPP® Fever Panel – Africa, DPP® Fever Panel – Asia, DPP® Malaria Assay and, DPP® Zika/Dengue/Chikungunya Assay, among others.  It is important to note that nearly all of the Company's tropical and fever disease products are being developed through collaborations and/or funding from world-leading health organizations, including the Bill & Melinda Gates Foundation, the Paul G. Allen Family Foundation, the CDC, FIND, and BARDA.
Global Commercialization
In mid-2014, Chembio made a strategic decision to transform from a product supply organization to an integrated commercial organization. The Company then terminated its distribution agreements with a former U.S. exclusive distributor in 2014 and 2016, respectively. Subsequently, Chembio began building a sales and marketing team in the U.S market.
During the fourth quarter of 2016, we strengthened our commercial leadership, appointing seasoned executives to lead the Americas region, as well as the European, Middle East and Africa regions and Asia Pacific region. And, during the first quarter of 2017, we added experienced diagnostics sales executives in Latin America, Africa and Asia Pacific. We believe that this infrastructure positions the Company for commercial success, globally.  
Additionally, Chembio has integrated our newly-acquired facility in Malaysia to execute upon our global commercialization strategy, which includes the manufacture of tests locally, in high growth regions where product performance and competitive pricing is key.  In Medford, NY the Company has also made investments in automation of its DPP® manufacturing line to produce high quality, reliable, products that can be scaled up quickly.  Also, importantly, the Company hired David Gyorke, Chembio's Vice President of Operations, in January 2017 to drive manufacturing strategy to support growth.
Key Personnel:
During the third quarter, Chembio announced the addition of Gail Page to the Company's Board of Directors. Ms. Page has spent her entire career in health care with a focus on diagnostics and emerging technologies. In January 2013, Ms. Page founded Vineyard Investment Advisors (VIA), through which she works with entrepreneurs, businesses, and universities to transform their ideas into products and services. Prior to VIA, Ms. Page served as the President, CEO and a Director of Vermillion, Inc., a healthcare company focused on developing and commercializing novel diagnostic blood tests. As President and CEO, Ms. Page directed Vermillion's repositioning to highlight the progressive nature of its pipeline, successfully raised over $100M in funding, developed and commercially launched the OVA1® Test, which was the first FDA-cleared blood test to help diagnose ovarian cancer, and engaged Quest Diagnostics as an equity and commercial partner. In the years preceding Vermillion, Ms. Page served as Executive Vice President and Chief Operating Officer at Luminex, and as Sr. Vice President at Roche Biomedical / Laboratory Corporation of America (LabCorp), during which time her team launched approximately 300 innovative tests, including a suite of HIV and infectious disease assays. Ms. Page's current board appointments include Sword Diagnostics, Inc., Consortia Health Holdings (Chair and Co-founder), and NxPrenatal, Inc., for which she serves as Executive Chair. 
In other personnel news, Richard J. Larkin, Chembio's Executive Vice President and Chief Financial Officer (CFO), has recently announced his intent to retire by December 31, 2017.  An external search for a new Company CFO has commenced. To ensure an orderly transition, Mr. Larkin is expected to continue to serve as the Company's CFO and remain an officer of the Company until the earlier of December 31, 2017 or until a successor is found.  Mr. Larkin has been a dedicated and valuable member of the Chembio team for fourteen years.  We wish him well as he transitions into retirement.

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Also recently, John Sperzel, Chembio's President and Chief Executive Officer (CEO), returned from medical leave to resume his full responsibilities.  During Mr. Sperzel's recovery from heart transplant surgery, he remained engaged in corporate activities and decisions.  In his absence, Sharon Klugewicz, President of the Americas, assumed the role of acting CEO, and provided expert leadership in advancing the Company's strategy.
Overview of Chembio's Global Sales:
During the third quarter of 2017, Chembio achieved total revenue of $7.6 million, which represents a 102% increase over the prior-year period.  Product sales during the third quarter of 2017 were $6.1 million, which represents a 144% increase over the prior-year period.  This increase was driven primarily by product sales growth within certain target regions compared to the prior-year period, including: 386% increase in Latin America, 100% increase in Africa, 32% increase in the U.S., and 27% increase in Europe.
The increase in product revenue during the third quarter can be attributed to the efforts of our expanding sales and marketing organization.  In Latin America, we achieved sales in excess of $3.5 million in large part led by strong DPP® sales.  In the U.S., the Company achieved over $1.1 million in sales, as we evolve from a product supply organization to direct sales of our three FDA- PMA-approved, CLIA-waived HIV rapid tests, serving both public health and the professional market.  And, we expect the recent EUA for our DPP® Zika System to strengthen U.S. sales in the coming quarters.  In Africa, we achieved sales of nearly $1.0 million, and in Europe, we recognized revenue of approximately $0.4 million, driven primarily by HIV sales for self-testing.
Conclusion:
The third quarter of 2017 was a strong one for Chembio.  During the period, sales increased over 100% as compared to the prior-year period.  In our sexually transmitted disease business, the Company advanced a pivotal clinical trial for our DPP® HIV-Syphilis Assay, and we plan to file a PMA for this assay during the fourth quarter of 2017, moving the product closer to U.S. commercialization.

Two key regulatory approvals during the third quarter have the potential to impact future sales in our tropical and fever disease business.  With ANVISA approval of the DPP® Zika System in Brazil and with the FDA EUA for the DPP® Zika System in the U.S. market, Chembio has the opportunity to establish itself as the leader in rapid testing for this growing health concern.

In both the tropical and fever disease business, as well as other areas of interest, Chembio remains actively engaged with multiple funding collaborators, working toward the development of new assays that we expect to fill our product pipeline in the future.

Supporting our near-term and future growth is the global commercial team that we've built over the last year.  With strong sales experience and leadership in target regions around the world, combined with high-quality and much needed products, we are confident in Chembio's future.




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ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.

We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, have no material derivative risk to report under this Item. As of September 30, 2018, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows.

We are exposed to market risks from changes in currency exchange rates and certain commodity prices. All sales from our U.S. subsidiary, regardless of the customer location, are denominated in U.S. dollars. Sales denominated in foreign currencies are associated with a portion of the sales from our subsidiary, Chembio Diagnostics Malaysia, and comprised approximately 4% of our total revenues for the nine months ended September 30, 2018.

ITEM 4.
CONTROLS AND PROCEDURES

(a)
Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"),or the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of September 30, 20172018 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to our management, including our chiefprincipal executive officer and chiefprincipal financial officer, as appropriate to allow timely decisions regarding required disclosure. On January 9, 2017, the Company acquired all the outstanding stock of Chembio Diagnostics Malaysia Sdn Bhd ("CDM") (formally known as RVR Diagnostics Sdn Bhd), which became a wholly-owned subsidiary of the Company as a result of the acquisition.  This report on controls does not includeManagement recognizes that any controls and procedures, concerning CDM.no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the ninethree months ended September 30, 2017, except for CDM,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 6.EXHIBITS
ITEM 1.
LEGAL PROCEEDINGS

EXHIBITS INDEXFrom time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to our interest.

ITEM 1A.
RISK FACTORS

Except as set forth below, there have been no material changes to the risk factors discussed in in Part I, Item 1A, entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2017.:

We may not generate the expected benefits of our acquisition of opTricon GmbH, and the acquisition could disrupt our ongoing business, distract our management and increase our expenses.
We entered into a share purchase agreement with opTricon GmbH, or opTricon, with the expectation that the acquisition of all of the outstanding shares of opTricon, or the Acquisition, will result in various benefits, including securing global commercial rights and reducing cost of goods. Achieving the anticipated benefits of the Acquisition is subject to a number of uncertainties, including whether our business and the business of opTricon can be integrated in an efficient and effective manner. We cannot assure you that we will be able to accurately forecast the performance or ultimate impact of the Acquisition.

It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Acquisition. There may be increased risk due to integrating financial reporting and internal control systems. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits, expense savings and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results and prospects.

We have incurred and will continue to incur  non-recurring expenses in connection with the Acquisition, including legal, accounting and other expenses. Additional unanticipated costs may be incurred following consummation of the Acquisition in the course of the integration of the business of opTricon into our business. We cannot be certain that the realization of efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term or any losses from undiscovered liabilities not covered by an indemnification from the sellers of opTricon.
25
ITEM 6.
EXHIBITS
Number Description



3.1*
 
ArticlesAmended and Restated Bylaws of Incorporation, as amended. (1)
Chembio Diagnostics Inc.
3.2 Bylaws and Bylaw Amendments. (2)
3.3
31.1
 
Certificate of Designation of Series D Preferred Stock (13)
4.1
2008 Stock Incentive Plan, as amended. (3)
4.2
Form of Option, for 2008 Stock Incentive Plan (4)
4.3
2014 Stock Incentive Plan (5)
4.4
Form of Option, for 2014 Stock Incentive Plan (6)
4.5
Rights Agreement, dated as of March 8, 2016 (7)
4.6Form of Warrant (to be filed by amendment)
10.1*
Employment Agreement dated effective as of March 13, 2017 with John J. Sperzel III (15)
10.2*
Employment Agreement dated March 5, 2016 with Javan Esfandiari (8)
10.3*
Employment Agreement effective May 22, 2017 with Sharon Klugewicz
10.4
Sales Agreement dated as of  June 27, 2017, between Chembio Diagnostics, Inc. and Cantor Fitzgerald & Co. (9)
10.5*
Employment Agreement dated January 9, 2017 with Magentiren Vajuram (15)
10.6*
Employment Agreement dated January 9, 2017 with Avijit Roy (15)
10.7
HIV Barrel License, Marketing and Distribution Agreement, dated as of September 29, 2006, by and among the Registrant, Alere and StatSure. (10)
10.8
HIV Cassette License, Marketing and Distribution Agreement, dated as of September 29, 2006, between the Registrant and Alere. (10)
10.9
Non-Exclusive License, Marketing and Distribution Agreement, dated as of September 29, 2006, between the Registrant and Alere. (10)
10.10
Joint HIV Barrel Product Commercialization Agreement, dated as of September 29, 2006, between the Registrant and StatSure. (10)
10.11
2015 Omnibus Agreement (11)
10.12
Amended And Restated Stock Purchase Agreement, dated as of December 7, 2016, by and among Chembio Diagnostics, Inc., RVR Diagnostics Sdn Bhd, Avijit Roy and Magentiren Vajuram (14)
14.1
Ethics Policy (12)
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
2002.
31.2 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002.
32 
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
 * Previously filed

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1Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 29, 2010.
2
Incorporated by reference to the Registrant's registration statement on Form SB-2 (File No. 333-85787) filed with the Commission on August 23, 1999 and the Registrant's Forms 8-K filed on May 14, 2004, December 20, 2007 and April 18, 2008.
3Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on August 3, 2012.
4Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014.
5Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on April 29, 2014.
6Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014.
7Incorporated by reference to the Registrant's registration statement on Form 8-A filed with the Commission on April 7, 2016.
8Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on March 14, 2016.
9Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 27, 2017.
10Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006.
11Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 5, 2015.
12Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006.
13Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 7, 2016.
14Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 10, 2017.
15Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 9, 2017.
(*)An asterisk (*) beside an exhibit number indicates the exhibit contains a management contract, compensatory plan or arrangement which is required to be identified in this report.



SIGNATURES

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



Chembio Diagnostics, Inc.
  Chembio Diagnostics, Inc.
   
Date:November 8, 20172018
By: /s//s/ John J. Sperzel III
  
John J. Sperzel III
  
Chief Executive Officer and President
(Principal Executive Officer)
   
Date:November 8, 20172018
By: /s / Richard J. LarkinNeil A. Goldman
  Richard J. LarkinNeil A. Goldman
  
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)


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