CHEMBIO DIAGNOSTICS, INC. (Form: 10-Q, Received: 08/07/2014 08:18:01)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10 - Q

_______________________________

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2014

□ 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'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 x 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 x No □

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

	Large accelerated filer □	Accelerated filer □
	Non-accelerated filer □	Smaller reporting company x
	(Do not check if a smaller reporting company)

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

Yes □ No x

As of August 5, 2014, the Registrant had 9,611,139 shares outstanding of its $.01 par value common stock.

Quarterly Report on FORM 10-Q

For The Quarterly Period Ended

June 30, 2014

Table of Contents

Chembio Diagnostics, Inc.

		Page

Part I. FINANCIAL INFORMATION:
	Item 1. Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	2

	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2014 and 2013	3

	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013	4

	Notes to Condensed Consolidated Financial Statements (unaudited)	5

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	13

	Item 4. Controls and Procedures	23

Part II. OTHER INFORMATION:

	Item 6. Exhibits	24

SIGNATURES		25

EXHIBITS

PART I

Item 1. FINANCIAL STATEMENTS

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF

- ASSETS -
	June 30, 2014			December 31, 2013
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,835,057		$	9,650,275
Accounts receivable, net of allowance for doubtful accounts of $24,000 at June 30, 2014 and December 31, 2013 , respectively		5,423,418			4,592,121
Inventories		4,079,206			3,188,726
Prepaid expenses and other current assets		1,144,404			1,099,379
TOTAL CURRENT ASSETS		17,482,085			18,530,501

FIXED ASSETS , net of accumulated depreciation		2,126,956			1,978,232

OTHER ASSETS:
Deferred tax asset, net of valuation allowance		3,816,007			3,590,207
License agreements, net of current portion		273,125			326,875
Deposits on manufacturing equipment		94,506			16,410
Deposits and other assets		264,381			44,367

TOTAL ASSETS	$	24,057,060		$	24,486,592

- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	3,795,872		$	4,309,490
TOTAL LIABILITIES		3,795,872			4,309,490

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock – 10,000,000 shares authorized; none outstanding		-			-
Common stock - $.01 par value; 100,000,000 shares authorized; 9,611,139 and 9,324,783 shares issued and outstanding for June 30, 2014 and December 31, 2013 , respectively		96,112			93,248
Additional paid-in capital		47,326,969			46,875,027
Accumulated deficit		(27,161,893	)		(26,791,173	)
TOTAL STOCKHOLDERS' EQUITY		20,261,188			20,177,102

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	24,057,060		$	24,486,592

See accompanying notes to condensed consolidated financial statements

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended						For the six months ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
REVENUES:
Net product sales	$	7,248,470		$	5,061,691		$	12,152,635		$	11,374,881
License and royalty revenue		6,971			-			7,131			-
R&D, milestone and grant revenue		167,156			331,831			1,075,904			696,794
TOTAL REVENUES		7,422,597			5,393,522			13,235,670			12,071,675

Cost of product sales		4,440,046			3,112,347			7,980,508			7,096,610

GROSS MARGIN		2,982,551			2,281,175			5,255,162			4,975,065

OPERATING EXPENSES:
Research and development expenses		1,268,653			1,500,645			2,466,275			2,545,904
Selling, general and administrative expenses		1,946,763			1,160,256			3,404,491			2,322,336
		3,215,416			2,660,901			5,870,766			4,868,240
(LOSS) INCOME FROM OPERATIONS		(232,865	)		(379,726	)		(615,604	)		106,825

OTHER INCOME (EXPENSE):
(Loss) Gain on sale of fixed asset		(5,707	)		7,500			(5,707	)		7,500
Interest income		1,561			897			3,391			2,235
Interest expense		-			-			-			(335	)
		(4,146	)		8,397			(2,316	)		9,400

(LOSS) INCOME BEFORE INCOME TAXES		(237,011	)		(371,329	)		(617,920	)		116,225

Income tax (benefit) provision		(91,030	)		(130,340	)		(247,200	)		40,090

NET (LOSS) INCOME	$	(145,981	)	$	(240,989	)	$	(370,720	)	$	76,135

Basic (loss) earnings per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	0.01

Diluted (loss) earnings per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	0.01

Weighted average number of shares outstanding, basic		9,555,944			9,259,506			9,448,160			8,664,478

Weighted average number of shares outstanding, diluted		9,555,944			9,259,506			9,448,160			9,230,840

See accompanying notes to condensed consolidated financial statements

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

(Unaudited)

	June 30, 2014			June 30, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers and grants	$	12,404,373		$	12,998,825
Cash paid to suppliers and employees		(14,943,293	)		(12,197,954	)
Interest received		3,391			2,235
Interest paid		-			(335	)
Net cash (used in) provided by operating activities		(2,535,529	)		802,771

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits on fixed assets		(516,869	)		(415,649	)
Net cash used in investing activities		(516,869	)		(415,649	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from option exercises		237,180			31,432
Proceeds from sale of common stock, net		-			5,512,500
Expenses from sale of common stock		-			(104,038	)
Payment of loan obligation		-			(133,483	)
Net cash provided by financing activities		237,180			5,306,411

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,815,218	)		5,693,533
Cash and cash equivalents - beginning of the period		9,650,275			2,951,859

Cash and cash equivalents - end of the period	$	6,835,057		$	8,645,392

RECONCILIATION OF NET (LOSS) INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES:

Net (Loss) Income	$	(370,720	)	$	76,135
Adjustments:
Depreciation and amortization		343,799			282,334
Deferred taxes		(225,800	)		36,081
(Recovery of) doubtful accounts		-			(34,000	)
Share based compensation		217,626			221,931
Changes in assets and liabilities:
Accounts receivable		(831,297	)		961,150
Inventories		(890,480	)		(1,360,224	)
Prepaid expenses and other current assets		(45,025	)		17,080
Deposits and other assets		(220,014	)		-
Accounts payable and accrued liabilities		(513,618	)		625,508
Customer deposits and deferred revenue		-			(23,224	)
Net cash (used in) provided by operating activities	$	(2,535,529	)	$	802,771

Supplemental disclosures for non-cash investing and financing activities:
Deposits on manufacturing equipment transferred to fixed assets	$	59,798		$	294,813

See accompanying notes to condensed consolidated financial statements

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

NOTE 1 — DESCRIPTION OF BUSINESS:

Chembio Diagnostics, Inc. (the "Company" or "Chembio") and its subsidiary, Chembio Diagnostic Systems, Inc., develop, manufacture, and market rapid diagnostic tests that detect infectious diseases. The Company's main products are three rapid tests for the detection of HIV antibodies in whole blood, serum and plasma samples, two of which were approved by the FDA in 2006; the third is sold for export only. Lateral Flow Rapid HIV tests represented 45 % of the Company's product revenues in the first six months of 2014. The Company's products based on its patented Dual Path Platform (DPP®) platform represented approximately 52 % of the Company's product revenues in the first six months of 2014. The Company also has other rapid tests that together represented approximately 3 % of sales in the first six months of 2014. The Company's products are sold to medical laboratories and hospitals, governmental and public health entities, non-governmental organizations, medical professionals and retail establishments, both domestically and internationally. Chembio's products are sold under the Company's STAT PAK®, SURE CHECK® or DPP® registered trademarks, or under the private labels of its marketing partners. All of the Company's products that are currently being developed are based on its patented DPP®, which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a)	Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of June 30, 2014 and for the three- and six-month periods ended June 30, 2014 and 2013, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 , previously filed with the SEC.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company's condensed consolidated financial position as of June 30, 2014 , its condensed consolidated results of operations for the three- and six-month periods ended June 30, 2014 and 2013, respectively, and its condensed consolidated cash flows for the six-month periods ended June 30, 2014 and 2013 , 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.

Revenue Recognition

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

For certain contracts, the Company recognizes revenue from non-milestone payments and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. As of June 30, 2014 and December 31, 2013, respectively, all advanced revenues had been earned.

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.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

Inventories:

Inventories consist of the following at:

	June 30, 2014		December 31, 2013
Raw materials	$	2,087,691	$	1,710,627
Work in process		709,290		464,481
Finished goods		1,282,225		1,013,618
	$	4,079,206	$	3,188,726

Earnings Per Share:

Basic earnings per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities, presented on a common share equivalent basis for the three - and six-month periods ended June 30, 2014 and 2013, have been included in the earnings per share computations:

	For the three months ended		For the six months ended
	June 30, 2014	June 30, 2013	June 30, 2014	June 30, 2013
Basic	9,555,944	9,259,506	9,448,160	8,664,478

Diluted	9,555,944	9,259,506	9,448,160	9,230,840

The following securities, presented on a common share equivalent basis for the three and six-month periods ended June 30, 2014 and 2013, have been included in the diluted per share computations as the exercise prices of these securities were less than the stock price as of June 30, 2014 and 2013, respectively:

	For the three months ended		For the six months ended
	June 30, 2014	June 30, 2013	June 30, 2014	June 30, 2013
1999, 2008 and 2014 Plan Stock Options	-	532,523	-	566,362

There were 737,183 and 167,458 options outstanding as of June 30, 2014 and 2013, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended June 30, 2014 and 2013, respectively. There were 858,769 and 169,662 options outstanding as of June 30, 2014 and 2013, respectively, that were not included in the calculation of diluted per common share equivalent for the six months ended June 30, 2014 and 2013, respectively, because the effect would have been anti-dilutive as of June 30, 2014 and 2013, respectively.

Employee Stock Option Plan:

The Company had a 1999 Stock Option Plan ("SOP"). The total number of options available under the SOP was 375,000. As of June 30, 2014, there were no outstanding options under this SOP. No additional options may be issued under the SOP because it is more than 10 years after its adoption.

Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), initially with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, 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 June 30, 2014, there were 336,826 options exercised and 355,877 options outstanding under the SIP.

On March 13, 2014, the Company issued 206,868 stock options to its new CEO under a NASDAQ Rule, which allows for the issuance of options outside of a plan for newly hired employees. These options are still outstanding as of June 30, 2014 and reflected in the stock option activity table below.

Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("2014-SIP"), with 800,000 shares of Common Stock available to be issued. Under the terms of the 2014-SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, 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 June 30, 2014 , there were no options exercised, 93,750 options outstanding and 706,250 options or shares still available to be issued under the 2014-SIP.

The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the six-month periods ended June 30, 2014 and 2013 was $2.42 and $5.39 per share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon the historical volatility of our stock. The expected term is based on historical information.

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

	For the three months ended		For the six months ended
	June 30, 2014	June 30, 2013	June 30, 2014	June 30, 2013
Expected term (in years)	4.5	3.5	5.8	3.5
Expected volatility	61.50%	93.80%	61.50 % - 86.67 %	93.80 %- 101.30%
Expected dividend yield	0%	0%	0 %	0 %
Risk-free interest rate	0.83%	0.34%	0.83 % - 1.33 %	0.34 % - 0.40%

The Company's results for the three-month periods ended June 30, 2014 and 2013 include share-based compensation expense totaling $148,300 and $84,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($200 and $26,000, respectively), research and development ($9,400 and $22,000, respectively) and selling, general and administrative expenses ($138,700 and $36,000, respectively). The results for the six-month periods ended June 30, 2014 and 2013 include share-based compensation expense totaling $218,000 and $222,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($3,000 and $56,000, respectively), research and development ($28,000 and $62,000, respectively) and selling, general and administrative expenses ($187,000 and $104,000, respectively). The income tax benefit has been recognized in the statement of operations for share-based compensation arrangements.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

Stock option compensation expense for the three and six-month periods ended June 30, 2014 and 2013 is based on the estimated fair value, at the date of issuance, of options outstanding, which is being amortized on a straight-line basis over the requisite service period for each vesting portion of the award, except for those that vested immediately and for which the estimated fair value was expensed immediately.

The following table provides stock option activity for the six months ended June 30, 2014:

Stock Options	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2013		656,398		$	2.57	1.65 years	$	801,888

Granted		343,750			3.43
Exercised		(318,750	)		1.04
Forfeited/expired/cancelled		(24,903	)		3.15
Outstanding at June 30, 2014		656,495		$	3.62	4.42 years	$	110,112

Exercisable at June 30, 2014		223,495		$	3.62	2.38 years	$	83,062

As of June 30, 2014, there was $785,000 of net unrecognized compensation cost related to stock options that have not vested, which is expected to be recognized over a weighted average period of approximately 2.63 years. The total fair value of stock options vested during the six-month periods ended June 30, 2014 and 2013 was approximately $165,000 and $174,000, respectively.

Geographic Information:

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

The Company produces only one group of similar products known collectively as "rapid medical tests". Management believes that it operates in a single business segment. Net product sales by geographic area are as follows:

	For the three months ended				For the six months ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Africa	$	418,343	$	1,009,899	$	1,249,805	$	1,857,221
Asia		23,711		31,353		74,757		50,619
Europe		34,966		69,324		71,025		76,929
North America		2,769,529		2,464,060		6,532,678		5,285,578
South America		4,001,921		1,487,055		4,224,370		4,104,534
	$	7,248,470	$	5,061,691	$	12,152,635	$	11,374,881

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

	June 30, 2014		December 31, 2013
Accounts payable – suppliers	$	1,861,955	$	1,815,369
Accrued commissions		500,220		371,905
Accrued royalties / license fees		675,932		1,028,286
Accrued payroll		289,276		328,564
Accrued vacation		264,168		203,444
Accrued bonuses		-		317,372
Accrued expenses – other		204,321		244,550
TOTAL	$	3,795,872	$	4,309,490

h) Recent Accounting Pronouncements Affecting the Company

Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606" (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2017 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statement.

NOTE	3 — COLLABORATIVE RESEARCH AND DEVELOPMENT ARRANGEMENTS:

National Institutes of Health (NIH) Grant:

In March 2011, the Company received a $2.9 million, three-year grant from the United States National Institutes of Health to complete development of a test for Tuberculosis. Grants are invoiced after expenses are incurred. The Company earned $248,300 and $331,000 for the six-month periods ended June 30, 2014 and 2013, respectively from this grant. The Company earned $2,714,300 from this grant from inception through June 30, 2014, of which $964,200 was paid to sub-contractors.

Battelle/CDC DPP® Influenza Immunity Test:

In April 2013, the Company entered into a follow-on, milestone-based development agreement of up to an additional $472,000, resulting in a total amount of $953,000, based on Chembio's previous successful initial development of a multiplex rapid point-of-care ("POC") influenza immunity test utilizing its patented Dual Path Platform (DPP®) technology. The agreement contemplates an additional period of approximately nine months in which the follow-on development activity is to be completed. The Company earned $64,200 and $265,000 for the six-month periods ended June 30, 2014 and 2013, respectively from this agreement. The Company earned $985,250 from this grant from inception through June 30, 2014.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

NOTE 4 — LOANS PAYABLE:

On April 30, 2013, the Company entered into a new demand loan agreement ("Demand Note") with HSBC Bank, USA ("HSBC"). The Demand Note allows the Company to draw on the line from time to time an amount up to an aggregate of $2,000,000 outstanding at any one time. The accrued interest on the Demand Note is payable monthly at an interest rate equal to one-quarter percent above prime per annum. The Company can repay any or all of the principal balance outstanding at any time. This is a demand note for which the bank lender can demand repayment of the entire loan, with accrued interest, at any time. The loan is subject to annual reviews, as well as an annual 30-day clean-up, during which there can be no amounts outstanding.

The HSBC Security Agreement, which is related to the Demand Note, contains covenants that place restrictions on the Company's operations, including covenants relating to mergers, debt restrictions, capital expenditures, tangible net worth, leverage, fixed charge coverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, restrictions on lease payments to affiliates, restrictions on changes in business, asset sale restrictions, restrictions on acquisitions and intercompany transactions, and restrictions on fundamental changes in the Company and in its business.

The Company currently maintains its operating, payroll, and primary cash accounts at HSBC. As of June 30, 2014, nothing had been drawn down on the Demand Note.

NOTE 5 — RIGHTS AGREEMENT:

In March 2010, the Company entered into a Rights Agreement dated March 8, 2010 (the "Rights Agreement") between the Company and Action Stock Transfer Corp., as Rights Agent. Pursuant to the Rights Agreement, the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The Board of Directors set the payment date for the distribution of the Rights as March 8, 2010, and the Rights were distributed to the Company's shareholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.

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

Separation and Distribution of Rights . The Rights will be evidenced by the certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate rights certificates until the earlier to occur of (i) the close of business on the tenth business day following a public announcement that an Acquiring Person (as defined in the Rights Agreement) acquired a Combined Ownership (as defined in the Rights Agreement) of 15 % or more of the outstanding shares of the Common Stock (the "Shares Acquisition Date") or (ii) the later of (A) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date that a tender or exchange offer or intention to commence a tender or exchange offer by any person is first published, announced, sent or given within the meaning of Rule 14d-4(A) under the Securities Exchange Act of 1934, as amended, the consummation of which would result in any person having Combined Ownership of 15 % or more of the outstanding shares of the Common Stock, or (B) if such a tender or exchange offer has been published, announced, sent or given before the date of the Rights Agreement, then the close of business on the tenth business day after the date the Rights Agreement was entered into (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person); (the earlier of such dates referred to in (i) and (ii), which date may include any such date that is after the date of the Rights Agreement but prior to the issuance of the Rights, being called the "Distribution Date").

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

NOTE 6 — COMMON STOCK, WARRANTS AND OPTIONS:

The Company entered into an employment agreement, effective March 13, 2014 ("Employment Agreement"), with Mr. Sperzel to serve as the Company's Chief Executive Officer, which included issuing incentive and non-incentive stock options to purchase 250,000 shares of the Company's common stock. Of these stock options, options to purchase 50,000 shares vest on each of the first five anniversaries of the effective date of the Employment Agreement. The exercise price for these options was to be equal to the volume-weighted average trading price for the Company's common stock on March 13, 2014, which was $3.4163 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.

NOTE 7 — COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS:

Economic Dependency:

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

		For the three months ended						For the six months ended						Accounts Receivable as of
		June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013			June 30, 2014		June 30, 2013
		Sales	% of Sales		Sales	% of Sales		Sales	% of Sales		Sales	% of Sales
Customer 1	$	1,462,460	20	$	2,305,729	46	$	4,165,432	34	$	4,895,683	43	$	538,934	$	905,829
Customer 2		1,215,872	17		*	*		2,217,242	18		*	*		689,250		-
Customer 3		3,964,903	55		650,221	13		4,166,801	34		1,869,096	16		3,137,726		712,950

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

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

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

	For the three months ended						For the six months ended						Accounts Payable as of
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013			June 30, 2014		June 30, 2013
	Purchases		% of Purc.	Purchases		% of Purc.	Purchases		% of Purc.	Purchases		% of Purc.
Vendor 1	$	341,534	13	$	239,539	6	$	622,220	14	$	565,384	9	$	90,469	$	67,945
Vendor 2		496,167	18		*	*		731,061	17		*	*		-		-

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

The Company currently buys materials which are purchased under intellectual property rights agreements and are important components in its products. Management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect operating results.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

Governmental Regulation:

All of the Company's existing and proposed diagnostic products are regulated by the United States Food and Drug Administration, United States Department of Agriculture, certain U.S., state and local agencies, and/or comparable regulatory bodies in other countries. Most aspects of development, production, and marketing, including product testing, authorizations to market, labeling, promotion, manufacturing, and record keeping, are subject to 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.

Employment Agreement:

The Company has employment contracts with three key employees. The contracts call for salaries presently aggregating $929,500 per year. The Sperzel contract expires in March 2017, the Klugewicz contract expires in May 2015, and the Esfandiari contract expires in March 2016 . In connection with the contract that expires in March 2017, the Company issued, in March 2014, 250,000 options to purchase common stock, with one-fifth vesting on each of the first five anniversaries of the grant. In connection with the contract that expires in May 2015, the Company issued, in May 2013, 5,000 options to purchase common stock, with one-half vesting on each of the first and second anniversaries of the grant. In connection with the contract that expires in March 2016, the Company issued, in March 2013, 30,000 options to purchase common stock, with one-third vesting on each of the first, second and third anniversaries of the grant.

NOTE 8 — INCOME TAXES:

The Company's interim (benefit) for income taxes is estimated based on our calculated effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax (benefit) on a year-to-date basis and may change in subsequent interim periods. Our effective tax rate for the six-months ended June 30, 2014 was a benefit of 40.0%. We calculated the current portion to be 8.6% of the (benefit), or $(21,400), which was attributable to income tax (receivable) and the balance of $(225,800) (increased) the carrying value of the deferred tax asset for the six months ended June 30, 2014. The 40.0% benefit rate is less than the 47.8% provision rate used for the year ended 2013 primarily as a result of a change in the percentage impact of nondeductible expenses.

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

The terms "Chembio", "Company,", "we", "us", and "our" refer to Chembio Diagnostics, Inc. and its subsidiary as a consolidated entity, unless the context suggests otherwise.

Overview

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly from December 31, 2013.

In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income are dependent upon our ability to develop and sell our products, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential", "continues" or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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

All of the Company's future products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology. The Company has completed development of several products that employ the DPP® technology which are currently marketed under Chembio's label (DPP® HIV 1/2 Screening Assay and DPP® HIV 1/2 –Syphilis Assay), or which may be marketed pursuant to private label license or distribution agreements such as those with the Oswaldo Cruz Foundation ("FIOCRUZ"), Labtest, RVR and Bio-Rad.

Research and development ("R&D"), milestone, and grant and royalty revenues for the three months ended June 30, 2014 decreased to $167,000 from $332,000 in the prior-year period, while these categories of revenues for the six months ended June 30, 2014 increased to $1,076,000 from $697,000 in the prior-year period, which was the result in the first quarter of a focus towards contract services and/or partnerships utilizing Chembio's patented Dual Path Platform (DPP®) technology for the detection of multiple analytes or biomarkers. More specifically, a key factor in the increase in these categories of revenue relates to the agreement announced in February 2014 with RVR Diagnostics SDN BHD ("RVR"), a privately-held company in Malaysia, to support Chembio's strategy of establishing a market presence in Asia, and provides for collaboration with RVR as a licensee, distributor, and contract manufacturer of the DPP® platform. This agreement granted exclusive distribution rights to RVR in certain countries in the region and enables RVR to manufacture Chembio's DPP® HIV 1/2 Assay and Chembio's DPP® HIV-Syphilis Assay, as well as potentially other products developed by Chembio incorporating its patented DPP® technology.

R&D expenses in the second quarter of 2014 were $1.27 million, compared with $1.50 million in the prior-year period, while R&D expenses in the first six months of 2014 were $2.47 million, compared with $2.55 million in the prior-year period. Development work continues on several assays utilizing Chembio's DPP® platform, including the DPP® HIV multiplex test that is designed to detect acute (early stage) HIV infection by means of detecting P24 antigen, as well as antibodies, to HIV1/2, and the DPP® HCV point-of-care rapid test.

Sponsored Research & Development

DPP® Febrile Illness Multiplex test – During the second quarter of 2013 we entered into a cooperative research project agreement with a U.S. government agency for up to $750,000 for an eight-month development project. The project is to develop a rapid POC diagnostic test for five infectious diseases associated with febrile illness and to multiplex them into one assay. The project also contemplates that the test would be optimized for use with a mobile reader that incorporates cell phone technology to enable the results to be recorded, transmitted and monitored remotely via a cloud system, in real-time. This research project supports our efforts in developing multiplex products using our proprietary DPP ® technology. Our DPP ® technology, when combined with the mobile reader being used in the project, will enable real-time data collection and monitoring capabilities. As these infectious diseases can all exhibit similar clinical symptoms, a rapid multiplex test that could distinguish them would be very useful, particularly in field conditions, so that correct diagnosis and treatment could be provided on a timely basis. We have completed R&D activities for this project as anticipated, and have provided a total of 10,000 devices, pending results of a multi-center clinical trial in multiple countries. We continue to explore commercial opportunities outside the scope of the government agreement for this application.

DPP® Tuberculosis – In February 2011, we were awarded a three-year, $2.9 million Small Business Innovative Research (SBIR) Phase II grant from the United States National Institutes of Health (NIH) to continue our successful Phase I grant work to develop a simple, rapid, accurate, and cost-effective serological test for active tuberculosis that can be utilized in resource-limited settings. During 2012, several additional antigens were identified to enhance antibody detection by the DPP® test prototype designed in our Phase I studies. Antigen reagents have been finalized, and test prototype evaluation using well-characterized clinical specimens is in progress.

Chembio's work to finalize the DPP® assay design using various fusion proteins has been completed and production of an evaluation lot is in progress. These tests will be used for verification studies, internal and external evaluations at the selected collaborative sites (see below), QC protocol validation, and accelerated stability study. The target sensitivity is 80% and specificity is 95%. Study sites for external evaluations of DPP® assay include Bangladesh, Brazil, China, Haiti, Peru, Venezuela, and South Africa. The grant application has been extended to September 2014, and is progressing on track.

In addition to the above-mentioned research and development work sponsored by governmental agencies and/or their contractors, we continue to seek additional opportunities for sponsored research and development activity in our efforts to foster innovation and identify opportunities for new product development and commercialization.

Regulatory Activities

FDA Approval for DPP® HIV 1/2 Screening Assay for Use with oral fluid or blood samples – We received FDA approval of our Pre-Marketing Application (PMA) for this product on December 19, 2012 as we previously announced. The CLIA waiver was submitted in November 2013, and in February 2014 we received a letter from the FDA on the current status of review of our CLIA waiver application. Since that time, we have had multiple discussions with the FDA, and additional in-house laboratory studies were requested by the FDA to complete its review of the application for CLIA waiver. These in-house studies have been conducted and were submitted to the FDA in June 2014.

DPP® HIV-Syphilis – We have developed this product for international and U.S. marketing. For the international market, the product has been registered in Mexico. We have submitted this product both for evaluation by the CDC, acting on behalf of the United States Agency of International Development, and the WHO, which has accepted this product to be evaluated for pre-qualification in its global procurement scheme.

Our discussions with the FDA concerning the clinical studies that will be required for PMA submission indicate that the assay shows excellent performance with respect to those with active syphilis infections. However, there is a potential that infections that could become active may be missed based on the current clinical algorithm used in the United States to assess the syphilis component performance of this assay. Thus, we will need to modify the assay for the United States to meet FDA requirements.

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, and income taxes. For a summary of our significant accounting policies, which have not changed from December 31, 2013, see our Annual Report on Form 10-K for the twelve months ended December 31, 2013, which was filed with the SEC on March 6, 2014.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2014 AS COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2013

Income :

For the three months ended June 30, 2014, Loss before income taxes was $(237,000) compared to Loss before income taxes of $(371,000) for the three months ended June 30, 2013. Net Loss for the 2014 period was $(146,000) as compared to a Net Loss of $(241,000) for 2013. The decrease in net loss is primarily attributable to increased gross margin, partially offset by increased operating expenses. Gross margin increased in the three months ended June 30, 2014, as compared with the three months ended June 30, 2013, by $701,000, or 30.8%. This increased gross margin was partially offset by increased operating expenses, the most significant of which was an increase in commissions of $389,000 along with increased wages and related expenses of $260,000, which accounted for most of the change in net loss.

Revenues:

Selected Product Categories:	For the three months ended
	June 30, 2014		June 30, 2013		$ Change			% Change

Lateral Flow HIV Tests and Components	$	1,886,909	$	4,158,354	$	(2,271,445	)		-54.62	%
DPP Tests and Components		5,167,025		694,816		4,472,209			643.65	%
Other		194,536		208,521		(13,985	)		-6.71	%
Net Product Sales		7,248,470		5,061,691		2,186,779			43.20	%
License and royalty revenue		6,971		-		6,971			100.00	%
R&D, milestone and grant revenue		167,156		331,831		(164,675	)		-49.63	%
Total Revenues	$	7,422,597	$	5,393,522	$	2,029,075			37.62	%

Revenues for our lateral flow HIV tests and related components during the three months ended June 30, 2014 decreased by approximately $2,271,000 from the same period in 2013. This was primarily attributable to decreased sales to South America, of approximately $778,000, decreased sales to the U.S., of approximately $843,000, and decreased sales to Africa, of approximately $592,000. Revenues for our DPP® products during the three months ended June 30, 2014 increased by approximately $4,472,000 over the same period in 2013, primarily due to increased sales in Brazil to FIOCRUZ. The decrease in R&D, and in milestone and grant revenue, was primarily due to a reduction in revenue from certain development projects that are nearing completion. R&D revenues include funds, recognized on an "as expenses are incurred" basis, from a Phase II NIH grant for Leptospirosis, which was effective as of June 1, 2009, and from a Phase II grant for Tuberculosis, which was effective March 1, 2011, as well as a development contract with Battelle entered into in the fourth quarter of 2012.

Gross Margin:

	For the three months ended
Gross Margin related to Net Product Sales:	June 30, 2014			June 30, 2013			$ Change			% Change

Gross Margin per Statement of Operations	$	2,982,551		$	2,281,175		$	701,376			30.75	%
Less: R&D, milestone, grant, license and royalty revenues		174,127			331,831			(157,704	)		-47.53	%
Gross Margin from Net Product Sales	$	2,808,424		$	1,949,344		$	859,080			44.07	%
Product Gross Margin %		38.75	%		38.51	%

The gross margin dollar increase of $701,000 included a $859,000 increase in gross margin from product sales and was partially offset by a $158,000 decrease in non-product revenues. The increase in product gross margin of $859,000 is primarily attributable to the higher product sales compared to 2013. The product gross margin increase is comprised of two components, one is the increase in product sales of $2,187,000, which at the 38.51% margin percentage contributed $842,000 to the increase, and second, the increased change in margin percentage of .24% contributed the balance of $17,000 to the increase in our product gross margin.

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 three months ended
	June 30, 2014		June 30, 2013		$ Change			% Change
Clinical and Regulatory Affairs:
Wages and related costs	$	106,546	$	108,466	$	(1,920	)		-1.77	%
Consulting		22,089		7,463		14,626			195.98	%
Stock-based compensation		806		3,027		(2,221	)		-73.37	%
Clinical trials		29,712		421,768		(392,056	)		-92.96	%
Other		21,514		24,466		(2,952	)		-12.07	%
Total Regulatory		180,667		565,190		(384,523	)		-68.03	%

R&D Other than Regulatory:
Wages and related costs		614,897		538,789		76,108			14.13	%
Consulting		68,801		42,326		26,475			62.55	%
Stock-based compensation		8,631		19,334		(10,703	)		-55.36	%
Materials and supplies		288,438		251,716		36,722			14.59	%
Other		107,219		83,290		23,929			28.73	%
Total other than Regulatory		1,087,986		935,455		152,531			16.31	%

Total Research and Development	$	1,268,653	$	1,500,645	$	(231,992	)		-15.46	%

Expenses for Clinical & Regulatory Affairs for the three months ended June 30, 2014 decreased by $385,000 as compared to the same period in 2013. This was primarily due to a decrease of $392,000 in clinical trial expenses, partially offset by an increase in consulting.

R&D expenses other than Clinical & Regulatory Affairs increased by $153,000 in the three months ended June 30, 2014, as compared with the same period in 2013. The increases were primarily related to an increase in wages and related costs, and in material and supplies, to support our sponsored research and internal development programs.

Selling, General and Administrative Expenses:

Selected expense lines:	For the three months ended
	June 30, 2014		June 30, 2013		$ Change			% Change

Wages and related costs	$	638,377	$	452,103	$	186,274			41.20	%
Consulting		159,603		100,061		59,542			59.51	%
Commissions		481,276		92,002		389,274			423.11	%
Stock-based compensation		137,592		34,867		102,725			294.62	%
Marketing materials		41,114		22,294		18,820			84.42	%
Investor relations/investment bankers		41,277		39,023		2,254			5.78	%
Legal, accounting and compliance		83,450		73,587		9,863			13.40	%
Travel, entertainment and trade shows		111,914		69,554		42,360			60.90	%
Other		252,160		276,765		(24,605	)		-8.89	%
Total S, G &A	$	1,946,763	$	1,160,256	$	786,507			67.79	%

Selling, general and administrative expenses for the three months ended June 30, 2014, increased by $787,000 as compared with the same period in 2013, a 68% increase. Significant increases in commissions due to increased sales to Brazil, along with increases in wages and related costs, which for 2014 included the COO (not included in 2013), consulting and travel entertainment and trade shows, which were partially offset by a decrease in other expenses.

Other Income and (Expense):

	For the three months ended
	June 30, 2014			June 30, 2013		$ Change			% Change
Other income (expense)	$	(5,707	)	$	7,500	$	(13,207	)		-176.09	%
Interest income		1,561			897		664			74.02	%
Total Other Income and (Expense)	$	(4,146	)	$	8,397	$	(12,543	)		-149.37	%

Other income (expense) for the three months ended June 30, 2014 decreased approximately $12,000, to an expense of $4,000 from an income of $8,000 in the same period in 2013, as a result of the sale of a fixed asset partially offset by an increase in interest income.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2014 AS COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2013

Income :

For the six months ended June 30, 2014 , Loss before income taxes was $(618,000) compared to Income before taxes of $116,000 for the six months ended June 30, 2013 . Net Loss for the 2014 period was $(371,000) as compared to a Net Income of $76,000 for 2013. The decrease in net income is primarily attributable to increased operating expenses. Gross margin increased in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013 , by $280,000, or 5.6%. This increased gross margin was offset by increased operating expenses, the most significant of which was an increase in wages and related expenses of $570,000 along with an increase in commissions of $260,000 and consulting expenses of $218,000, which accounted for most of the change in net loss.

Revenues:

Selected Product Categories:	For the six months ended
	June 30, 2014		June 30, 2013		$ Change			% Change

Lateral Flow HIV Tests and Components	$	5,423,608	$	9,095,215	$	(3,671,607	)		-40.37	%
DPP Tests and Components		6,335,795		1,837,651		4,498,144			244.78	%
Other		393,232		442,015		(48,783	)		-11.04	%
Net Product Sales		12,152,635		11,374,881		777,754			6.84	%
License and royalty revenue		7,131		-		7,131			100.00	%
R&D, milestone and grant revenue		1,075,904		696,794		379,110			54.41	%
Total Revenues	$	13,235,670	$	12,071,675	$	1,163,995			9.64	%

Revenues for our lateral flow HIV tests and related components during the six months ended June 30, 2014 decreased by approximately $3,672,000 from the same period in 2013 . This was primarily attributable to decreased sales to South America, of approximately $1,963,000, decreased sales to the U.S. of $730,000, and of other North American sales of $293,000, along with decreased sales to Africa of $607,000. Revenues for our DPP® products during the six months ended June 30, 2014 increased by approximately $4,498,000 over the same period in 2013 , primarily for sales in Brazil to FIOCRUZ. The increase in R&D, and in milestone and grant revenue, was primarily due to $750,000 in revenue from the license contract we signed in February 2014 with RVR Diagnostics. This was partially offset by a reduction in revenue from certain development projects that are nearing completion. R&D revenues include funds, recognized on an "as expenses are incurred " basis, from a Phase II NIH grant for Leptospirosis, which was effective as of June 1, 2009, and from a Phase II grant for Tuberculosis, which was effective March 1, 2011, as well as a development contract with Battelle entered into in the fourth quarter of 2012.

Gross Margin:

	For the six months ended
Gross Margin related to Net Product Sales:	June 30, 2014			June 30, 2013			$ Change			% Change

Gross Margin per Statement of Operations	$	5,255,162		$	4,975,065		$	280,097			5.63	%
Less: R&D, milestone, grant, license and royalty revenues		1,083,035			696,794			386,241			55.43	%
Gross Margin from Net Product Sales	$	4,172,127		$	4,278,271		$	(106,144	)		-2.48	%
Product Gross Margin %		34.33	%		37.61	%

The gross margin dollar increase of $280,000 included a $106,000 decrease in gross margin from product sales and was offset by a $386,000 increase in non-product revenues. The decrease in product gross margin of $106,000 is primarily attributable to the change in product mix compared to 2013 . The product gross margin decrease is comprised of two components, one is the decreased change in margin percentage of 3.3% which contributed $399,000 to the decrease, and second, the increase in product sales of $778,000, which at the 37.6% margin percentage partially offset the decrease by $(293,000). The 3.3% decrease in the percentage, from 37.6% in 2013 to 34.3% in 2014 , was primarily due to a larger amount of unapplied overhead.

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 six months ended
	June 30, 2014		June 30, 2013		$ Change			% Change
Clinical and Regulatory Affairs:
Wages and related costs	$	212,689	$	213,957	$	(1,268	)		-0.59	%
Consulting		24,508		25,189		(681	)		-2.70	%
Stock-based compensation		3,231		14,632		(11,401	)		-77.92	%
Clinical trials		150,495		519,544		(369,049	)		-71.03	%
Other		39,758		28,544		11,214			39.29	%
Total Regulatory		430,681		801,866		(371,185	)		-46.29	%

R&D Other than Regulatory:
Wages and related costs		1,182,670		1,046,583		136,087			13.00	%
Consulting		113,351		52,163		61,188			117.30	%
Stock-based compensation		24,457		47,641		(23,184	)		-48.66	%
Materials and supplies		524,596		432,896		91,700			21.18	%
Other		190,520		164,755		25,765			15.64	%
Total other than Regulatory		2,035,594		1,744,038		291,556			16.72	%

Total Research and Development	$	2,466,275	$	2,545,904	$	(79,629	)		-3.13	%

Expenses for Clinical & Regulatory Affairs for the six months ended June 30, 2014 decreased by $371,000 as compared to the same period in 2013 . This was primarily due to a decrease of $369,000 in clinic al trial expenses.

R&D expenses other than Clinical & Regulatory Affairs increased by $292,000 in the six months ended June 30, 2014 , as compared with the same period in 2013 . The increases were primarily related to an increase in wages and related costs, and in material and supplies, to support our sponsored research and internal development programs.

Selling, General and Administrative Expenses:

Selected expense lines:	For the six months ended
	June 30, 2014		June 30, 2013			$ Change			% Change

Wages and related costs	$	1,328,879	$	893,575		$	435,304			48.71	%
Consulting		263,350		106,261			157,089			147.83	%
Commissions		511,711		251,910			259,801			103.13	%
Stock-based compensation		186,726		103,533			83,193			80.35	%
Marketing materials		65,100		29,257			35,843			122.51	%
Investor relations/investment bankers		88,109		113,886			(25,777	)		-22.63	%
Legal, accounting and compliance		296,430		313,644			(17,214	)		-5.49	%
Travel, entertainment and trade shows		151,462		97,305			54,157			55.66	%
Bad debt allowance (recovery)		-		(33,450	)		33,450			-100.00	%
Other		512,724		446,415			66,309			14.85	%
Total S, G &A	$	3,404,491	$	2,322,336		$	1,082,155			46.60	%

Selling, general and administrative expenses for the six months ended June 30, 2014 , increased by $1,082,000 as compared with the same period in 2013 , a 46.6% increase. Significant increases in wages and related costs, which for 2014 included the COO (not included in 2013), consulting expenses, the cost of the CEO search, and commissions due to increased sales to Brazil, which were partially offset by a decrease in investor relations/investment bankers, and a decrease in professional fees.

Other Income and (Expense):

	For the six months ended
	June 30, 2014			June 30, 2013			$ Change			% Change
Other income (expense)	$	(5,707	)	$	7,500		$	(13,207	)		-176.09	%
Interest income		3,391			2,235			1,156			51.72	%
Interest expense		-			(335	)		335			-100.00	%
Total Other Income and (Expense)	$	(2,316	)	$	9,400		$	(11,716	)		-124.64	%

Other income (expense) for the six months ended June 30, 2014 decreased approximately $11,700, to an expense of $2,300 from an income of $9,400 in the same period in 2013 , as a result of an increase in interest income and a decrease in interest expense due on the term loan with HSBC.

Income tax (benefit) provision:

For the six months ended June 30, 2014 the Company recognized a $(247,200) income tax benefit and increased its deferred tax assets by $(225,800). The Company maintains a full valuation allowance on research and development tax credits.

MATERIAL CHANGES IN FINANCIAL CONDITION

Selected Changes in Financial Condition	As of
	June 30, 2014		December 31, 2013		$ Change			% Change
Cash and cash equivalents	$	6,835,057	$	9,650,275	$	(2,815,218	)		-29.17	%
Accounts receivable, net of allowance for doubtful accounts of $24,000 at June 30, 2014 and December 31, 2013, respectively		5,423,418		4,592,121		831,297			18.10	%
Inventories		4,079,206		3,188,726		890,480			27.93	%
Fixed assets, net of accumulated depreciation		2,126,956		1,978,232		148,724			7.52	%
Deposits and other assets		264,381		44,367		220,014			495.90	%
Deferred tax asset, net of valuation allowance		3,816,007		3,590,207		225,800			6.29	%
Accounts payable and accrued liabilities		3,795,872		4,309,490		(513,618	)		-11.92	%

Cash decreased by $2,815,000 from December 31, 2013, primarily due to net cash used in operating activities for the six months of 2014. In addition there were increases in accounts receivable, net of allowance, of $831,000, inventories of $891,000, fixed assets of $149,000, deposits and other assets of $220,000 and deferred taxes of $226,000 . We experienced a decrease in accounts payable and accrued liabilities of $514,000.

The increase in accounts receivable was primarily attributable to the higher amount of credit sales at the end of June 2014 versus December of 2013. The increase in inventories is due to production for orders received to be shipped in the third quarter of 2014. The increase in fixed assets is primarily due to the new warehouse facility. The increase in deposits and other assets is due to additional rental deposits and related capitalized expenses. Deferred tax asset increase is related to the provision for income tax benefit.

LIQUIDITY AND CAPITAL RESOURCES

	For the six months ended
	June 30, 2014			June 30, 2013			$ Change			% Change

Net cash (used in) provided by operating activities	$	(2,535,529	)	$	802,771		$	(3,338,300	)		-415.85	%
Net cash (used in) investing activities		(516,869	)		(415,649	)		(101,220	)		24.35	%
Net cash provided by (used in) financing activities		237,180			5,306,411			(5,069,231	)		-95.53	%
(DECREASE) IN CASH AND CASH EQUIVALENTS	$	(2,815,218	)	$	5,693,533		$	(8,508,751	)		-149.45	%

The Company's cash as of June 30, 2014 decreased by $2,815,000 from December 31, 2013, primarily due to net cash used in operating activities for the six months of 2014.

The cash used in operations in 2014 was $2,536,000, primarily due to an increase in accounts receivable of $831,000, an increase in inventories of $890,000, a reduction in accounts payable and other accrued liabilities of $514,000, an increase in deposits and other assets of $220,000, an increase in prepaid and other current assets of $45,000, and a net loss net of non-cash items of $35,000. Net loss net of non-cash items includes net loss of $371,000, $226,000 in benefit for income taxes, partially offset by $344,000 in depreciation and amortization, and $218,000 in share-based compensation. The use of cash from investing activities is primarily the purchase of fixed assets. The increase in cash from financing activities was proceeds from option exercises.

The increase in cash in 2013 was $5,694,000, primarily due to the common stock funding completed in April 2013 which added $5,409,000. Excluding the financing, the increase in cash was $285,000. In addition there were decreases in accounts receivable, net of allowance, of $927,000, and deferred tax asset of $36,000. We experienced increases in inventories of $1,360,000, fixed assets of $416,000 and accounts payable and accrued expenses of $626,000.

Fixed Asset Commitments

As of June 30, 2014, the Company had paid deposits on various pieces of equipment aggregating $94,506, which is reflected in deposits on manufacturing equipment on the balance sheet. The Company has commitments for $147,322 in additional equipment purchase obligations.

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

During the second quarter, our revenue increased by 37.6% compared to the prior year, and our June 30, 2014 year-to-date revenue increased by 9.6% compared to the prior year.

Looking forward, we firmly believe our patented DPP® technology will be an important growth driver for the Company. The Chembio DPP® HIV 1/2 Assay is FDA-approved for use with oral fluid or blood samples. As we updated last quarter, the FDA agreed to review our CLIA waiver application for the DPP® HIV 1/2 Assay based on additional data from studies to be conducted at Chembio. The requested studies were completed on schedule, data was submitted to the FDA during Q2, and we anticipate a response from the FDA during Q3 2014.

Concurrent with this work, we achieved an important milestone in the U.S. by establishing a Chembio sales and marketing organization to serve end-user customers and distribution partners. While this effort is new and initially focused on Chembio's FDA-approved and CLIA-waived STAT-PAK HIV 1/2 Assay, we believe this initiative is important for future growth. The Company is currently in the process of hiring additional sales representatives to expand the commercialization team in anticipation of the potential CLIA waiver for the DPP® HIV 1/2 Assay. A CLIA waiver will allow Chembio to expand the current market for this product to include CLIA-waived sites, such as physician-office-lab (POL) facilities, clinics and other community healthcare providers.

Other important developments during the quarter include exploring opportunities to apply our DPP® technology not only within the infectious disease field but also across a wider spectrum of disease areas. While these discussions are early, we are thrilled to have the attention of a number of leading organizations, all of which share our commitment to improving healthcare through early and accurate diagnostic testing.

And, to facilitate future sales growth from current products or those in development, Chembio made essential investments in technology and the Company's manufacturing infrastructure during the second quarter. Importantly, we expanded our FDA-approved manufacturing facility in Medford, NY, which will significantly increase our production capacity.

Outside the U.S., Chembio continues to work with our partners to build successful markets in Latin America and Asia. Our partnerships in Latin America continue to contribute significantly toward the success of the Company. Our partnership with RVR (Malaysia) has the potential to be a key contributor for growth, allowing Chembio to expand its commercial presence in the Asia region.

As we reach the mid-point of the year, we are very pleased with our key accomplishments. Revenue increased on a quarterly and year-to-date basis, compared to prior-year periods. We successfully launched our U.S. commercial organization and expanded our production capacity. We are optimistically awaiting the FDA response to our CLIA waiver application for the Chembio DPP® HIV 1/2 Assay, which, if positive, would provide us access to significant new markets. Our international partners continue to build demand for our products overseas. And lastly, our leadership team is actively evaluating opportunities for new product development and strategic partnerships beyond infectious disease. We anticipate that the Company's progress in some or all of these areas will sustain Chembio's growth in the future.

ITEM 4. CONTROLS AND PROCEDURES

(a)

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

(b)

Changes in Internal Control over Financial Reporting . There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company's first six months of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 6. EXHIBITS

EXHIBITS INDEX

Number		Description
3.1		Articles of Incorporation, as amended. (1)
3.2		Amended and Restated Bylaws. (2)
4.1*		Form of Employee Option Agreement. (3)
4.2		1999 Equity Incentive Plan. (4)
4.3		2008 Stock Incentive Plan. (5)
4.4		Form of Option, for 2008 Stock Incentive Plan.
4.5		Rights Agreement, dated March 8, 2010 (6)
4.6		Form of Warrant (to be filed by amendment) [to be revised]
4.7		Form of Option, for 2014 Stock Incentive Plan.
10.1*		Employment Agreement dated March 13, 2014 with John J. Sperzel III
10.2*		Employment Agreement dated March 5, 2013 with Javan Esfandiari (10).
10.3*		Employment Agreement dated May 22, 2013 with Sharon Klugewicz (12)
10.3		HIV Barrel License, Marketing and Distribution Agreement, dated as of September 29, 2006, by and among the Registrant, Alere and StatSure. (8)
10.4		HIV Cassette License, Marketing and Distribution Agreement, dated as of September 29, 2006, between the Registrant and Alere. (8)
10.5		Non-Exclusive License, Marketing and Distribution Agreement, dated as of September 29, 2006, between the Registrant and Alere. (8)
10.6		Joint HIV Barrel Product Commercialization Agreement, dated as of September 29, 2006, between the Registrant and StatSure. (8)
10.8		Secured Revolving Demand Note, dated as of April 30, 2013, by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA (12)
10.9		Loan and Security Agreement, dated as of April 30, 2013, by and among the Registrant, Chembio Diagnostics Systems, Inc. and HSBC Bank, NA (12)
14.1		Ethics Policy (9)
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
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

1		Incorporated by reference to the Registrant's annual report on Form 10-KSB filed with the Commission on March 31, 2005.
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.
3		Incorporated by reference to the Registrant's annual report on Form 10-KSB filed with the Commission on March 12, 2008.
4		Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on May 11, 2005.
5		Incorporated by reference to the Registrant's definitive proxy statement on Schedule 14A filed with the Commission on April 14, 2008.
6		Incorporated by reference to the Registrant's registration statement on Form 8-A filed with the Commission on March 11, 2010.
7		Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on June 21, 2006.
8		Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on October 5, 2006.
9		Incorporated by reference to the Registrant's Annual Report on Form 10-KSB filed with the Commission on March 30, 2006.
10		Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Commission on March 7, 2013.
11		Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on April 25, 2013.
12		Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 8, 2013.
(*)		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.



Date:	August 7, 2014	By: /s/ John J. Sperzel III
		John J. Sperzel III
		Chief Executive Officer (Principal Executive Officer)




Date:	August 7, 2014	By: /s / Richard J. Larkin
		Richard J. Larkin
		Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit 4.7

CHEMBIO DIAGNOSTICS, INC.

2014 STOCK INCENTIVE PLAN

FORM OF STOCK OPTION AGREEMENT

Chembio Diagnostics, Inc. (the "Company"), pursuant to its 2014 Stock Incentive Plan (the "Plan"), hereby grants to the Optionee listed below ("Optionee"), an option to purchase the number of shares of the Company's Common Stock set forth below, subject to the terms and conditions of the Plan and this Stock Option Agreement. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Agreement.

I.	NOTICE OF STOCK OPTION GRANT ( The "Grant Notice")

Optionee:		___________________________________
Date of Stock Option Agreement:		___________________________________
Date of Grant:		___________________________________
Vesting Commencement Date:		___________________________________
Exercise Price per Share:		___________________________________
Total Number of Shares Granted:		___________________________________
Term/Expiration Date:		___________________________________

Type of Option:

Incentive Stock Option or Non-Qualified Stock Option

Vesting Schedule:

This Option shall become exercisable according to the following schedule of dates and numbers of Option Shares with respect to each date:

_______________________________________

II.

AGREEMENT

1. Grant of Option . The Company hereby grants to Optionee an Option to purchase the Total Number of Shares Granted (the "Option Shares") set forth in the Grant Notice, exercisable in accordance with the Vesting Schedule in the Grant Notice at the exercise price per share set forth in the Grant Notice (the "Exercise Price"). Notwithstanding anything to the contrary anywhere else in this Option Agreement, this grant of an Option is subject to the terms, definitions and provisions of the Plan adopted by the Company, which is incorporated herein by reference.

If designated in the Grant Notice as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code; provided, however , that to the extent that the aggregate Fair Market Value of stock with respect to which Incentive Stock Options (within the meaning of Code Section 422, but without regard to Code Section 422(d)), including this Option, exercisable for the first time by Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company, if any) exceeds $100,000, such options shall be treated as not qualifying under Code Section 422, but rather shall be treated as Non-Qualified Stock Options to the extent required by Code Section 422. The rule set forth in the preceding sentence shall be applied by taking options into account in the order in which they were granted. For purposes of these rules, the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted.

2. Exercise of Option . This Option is exercisable as follows:

(a) Right to Exercise.

(i) This Option shall be exercisable cumulatively according to the vesting schedule set out in the Grant Notice. For purposes of this Stock Option Agreement, Option Shares subject to this Option shall vest and thereby become exercisable based on Optionee's continued status as an Eligible Person.

(ii) This Option may not be exercised for a fraction of a Share.

(iii) In the event of Optionee's death, disability or other termination of Optionee's status as an Eligible Person, the exercisability of the Option is governed by Sections 7, 8 and 9 below.

(iv) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Grant Notice.

(b) Method of Exercise . This Option shall be exercisable by delivering properly completed and executed Exercise Notice (in the form attached as Exhibit A ). The Exercise Notice must state the number of shares with respect to which the Option is to be exercised and such other representations and agreements with respect to such Option Shares as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice must be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice must be accompanied by payment of the Exercise Price plus payment of any applicable withholding tax provided that an Option may not be exercised in part unless the aggregate purchase price for the Option Shares purchased is at least $1,000. This Option shall be deemed to be exercised upon receipt by the Company of such Exercise Notice accompanied by the Exercise Price and payment of any applicable withholding tax.

No Option Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with all relevant provisions of law and the requirements of any stock exchange upon which the Option Shares may then be listed. Assuming such compliance, for income tax purposes the Option Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Option Shares.

3. Optionee's Representations . If the Option Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this Option is exercised, Optionee shall, if requested by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B .

4. Method of Payment . Payment of the Exercise Price shall be by any of the following, or a combination thereof paid in U.S. Dollars:

(a) (i) Cash, check, bank draft, money order, or wire funds;

(i) if the aggregate purchase price of the Option Shares purchased by any Optionee at one time exceeds $5,000, the Compensation Committee, solely in its discretion, may permit all or part of the Exercise Price for the Option Shares to be paid by delivery to the Company of cancelled shares of the Company's Common Stock owned by the Optionee with the volume-weighted average price ("VWAP") for the ten-trading day period that ends on the first trading day immediately preceding the date of payment equal to the portion of the Exercise Price for the Option Shares that the Optionee does not pay in cash. The Compensation Committee also may permit an Optionee to elect to pay the Exercise Price upon the exercise of an Option by authorizing a third party broker-dealer in securities approved by the Compensation Committee to sell some or all of the Option Shares acquired upon exercise of an Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise; or

(b) In addition to the Option exercise procedures set forth in Sections 4(a)(i) and (ii) above, an Optionee may elect a "cashless" Option exercise for part or all of the portion of the Option being exercised. If an Optionee determines to undertake a cashless exercise, in addition to the Exercise Notice, the Optionee shall deliver to the Company written notice designating the "cashless" exercise and the number of Option Shares to which the cashless exercise applies. The number of Option Shares to which the Optionee is entitled will be equal to the quotient obtained by taking: [(A minus B) multiplied by (C)] and dividing that amount by (A) where: A equals Fair Market Value (determined as provided below) per share as of the date of receipt of the written notice for each Option Share; B equals the Exercise Price per share for each Option Share; and C equals the number of Option Shares to which the cashless exercise applies. For example, where A is $10, B is $1 and C is 25,000, the Optionee would receive 22,500 shares of Common Stock determined as follows: [($10 minus $1) multiplied by (25,000)] divided by $10 equals 22,500 shares of Common Stock.

(c) For purposes of a cashless exercise pursuant to Section 8(b) of the Plan, the price per share of the Option Shares shall be derived as follows: (i) if the Company's shares are publicly traded, the price of the Option Shares shall be the VWAP for the ten-trading day period that ends on the first trading day immediately preceding the date of the delivery of the written notice, or (ii) if the Company is, at the time of the written notice set forth in Section 7 of the Plan, no publicly traded, the price of the Option Shares shall be determined by their fair market value determined by the Company reasonably and in good faith.

(d) After payment in full for the Option Shares purchased under the Option has been made, the Company shall take all such action as it is necessary to deliver appropriate share certificates evidencing the Option Shares purchased upon the exercise of the Option as promptly thereafter as is reasonably practicable.

(e) with the consent of the Compensation Committee, any method of payment, or combination thereof that is permitted in the Plan.

5. Restrictions on Exercise . If either the issuance of Option Shares upon exercise of part or all of the Option or the method of payment for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, then the Option may not be exercised. The Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation before allowing the Option to be exercised.

6. Termination of Relationship . If Optionee ceases to be an Eligible Person (other than by reason of Optionee's death or the total and permanent disability of Optionee as defined in Code Section 22(e)(3)), and if a portion of the Option (the "Vested Portion") was vested and exercisable at the date on which Optionee ceases to be an Eligible Person, then (1) Optionee may exercise the Vested Portion, but only within _____ days [MAXIMUM OF 90 DAYS] from such date (and in no event later than the expiration date of the term of this Option set forth in the Grant Notice), and (ii) if Optionee does not exercise pursuant to the foregoing clause (i) within the time period specified therein, this Option shall become, or continue to be, a non-qualified stock option until _____ [days/months/year] from such date, but not later than the expiration date of the term of this Option set forth in the Grant Notice. To the extent that the Option is not vested and exercisable at the date on which Optionee ceases to be an Eligible Person, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

7. Disability of Optionee . If Optionee ceases to be an Eligible Person as a result of his or her total and permanent disability as defined in Code Section 22(e)(3), Optionee may exercise the Option to the extent the Option was vested at the date on which Optionee ceases to be an Eligible Person, but only within _____ days from such date (and in no event later than the expiration date of the term of this Option as set forth in the Grant Notice). To the extent that the Option is not vested and exercisable at the date on which Optionee ceases to be an Eligible Person, or if Optionee does not exercise such Option within the time specified herein, the Option shall terminate.

8. Death of Optionee . If Optionee ceases to be an Eligible Person as a result of the death of Optionee, the vested portion of the Option may be exercised at any time within _____ days following the date of death (and in no event later than the expiration date of the term of this Option as set forth in the Grant Notice) by Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. To the extent that the Option is not vested and exercisable at the date of death, or if the Option is not exercised within the time specified herein, the Option shall terminate.

9. Non-Transferability of Option . This Option may not be transferred in any manner by the Optionee, either voluntarily or involuntarily, except by will or the laws of descent and distribution. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee.

10. Term of Option . This Option may be exercised only within the term set out in the Grant Notice.

11. Restrictions on Option Shares . Optionee hereby agrees that Option Shares purchased upon the exercise of the Option shall be subject to such terms and conditions as the Compensation Committee shall determine in its sole discretion. Such terms and conditions may, in the Compensation Committee's sole discretion, be contained in the Exercise Notice with respect to the Option or in such other agreement as the Compensation Committee shall determine and which the Optionee hereby agrees to enter into at the request of the Company.

(Signature Page Follows)

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one document.

CHEMBIO DIAGNOSTICS, INC.

By:________________________________

Name:______________________________

Title:_______________________________

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF OPTION SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 2014 STOCK INCENTIVE PLAN, WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE AND WITH OR WITHOUT PRIOR NOTICE, UNLESS THE COMPANY AND THE OPTIONEE HAVE AGREED OTHERWISE IN WRITING.

Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof. Optionee hereby accepts this Option subject to all of the terms and provisions hereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive, and final, all decisions or interpretations of the Compensation Committee upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

Dated: __________________

Name: ____________________________________

Address: __________________________________

EXHIBIT A

CHEMBIO DIAGNOSTICS, INC.

2014 STOCK INCENTIVE PLAN

EXERCISE NOTICE

Chembio Diagnostics, Inc.

Attention: Richard J. Larkin

12. Exercise of Option . Effective as of today, ___________, _____, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Option Shares") of Chembio Diagnostics, Inc. (the "Company") under and pursuant to the Company's 2014 Stock Incentive Plan (the "Plan") and the Stock Option Agreement dated _____________________ (the "Option Agreement"). Capitalized terms used herein without definition shall have the meanings given in the Option Agreement.

Date of Grant:		______________________________
Number of Option Shares as to which Option is Exercised:
Exercise Price per Share:		$____________
Total Exercise Price:		$____________
Certificate to be Issued in Name of:
Payment Delivered Herewith:	¨	$____________

Type of Option: ¨ Incentive Stock Option ¨ Non-Qualified Stock Option

14. Representations of Optionee . Optionee acknowledges that Optionee has received, read, and understood the Plan and the Option Agreement. Optionee agrees to abide by and be bound by their terms and conditions.

15. Rights as Shareholder . Until the stock certificate evidencing such Option Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Option Shares subject to the Option, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued. Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the Option Shares of the Company. Upon such exercise, Optionee shall have no further rights as a holder of the Option Shares.

16. Tax Consultation . Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase of the Option Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase of the Option Shares and that Optionee is not relying on the Company for any tax advice.

17. Restrictive Legends and Stop-Transfer Orders .

(a) Legends . Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Option Shares together with any other legends that may be required by state or federal securities laws:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND ARE 'RESTRICTED SECURITIES' AS THAT TERM IS DEFINED IN RULE 144 UNDER THE 1933 ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY THROUGH REASONABLE MEANS AS DETERMINED BY THE COMPANY, INCLUDING AN OPINION OF SELLER'S COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY."

(b) Stop-Transfer Notices . Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(c) Refusal to Transfer . The Company shall not be required (i) to transfer on its books any Option Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Option Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Option Shares shall have been so transferred.

A-1

18. Successors and Assigns . The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, representatives, administrators, successors and assigns.

19. Interpretation . Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or committee thereof that is responsible for the administration of the Plan (the "Compensation Committee"), which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Compensation Committee shall be final and binding on the Company and on the Optionee.

20. Governing Law; Severability . This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

21. Notices . All notices, requests, demands, directions and other communications ("Notices") concerning this Agreement shall be in writing and shall be mailed, delivered personally, sent by telecopier or facsimile, or emailed to the applicable party at the address of such party. When mailed, each such Notice shall be sent by first class, certified mail, return receipt requested, enclosed in a postage prepaid wrapper, and shall be effective on the fifth business day after it has been deposited in the mail. When delivered personally, each such Notice shall be effective when delivered to the address for the respective party, provided that it is delivered on a business day and further provided that it is delivered prior to 5:00 p.m., local time of the party to whom the notice is being delivered, on that business day; otherwise, each such Notice shall be effective on the first business day occurring after the date on which the Notice is delivered. When sent by email, telecopier or facsimile, each such Notice shall be effective on the day on which it is sent provided that it is sent on a business day and further provided that it is sent prior to 5:00 p.m., local time of the party to whom the Notice is being sent, on that business day; otherwise, each such Notice shall be effective on the first business day occurring after the date on which the Notice is sent. Each Notice shall be addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party.

22. Further Instruments . The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

23. Delivery of Payment . Optionee herewith delivers to the Company the full Exercise Price for the Option Shares as set forth above in Section 1, as well as any applicable withholding tax.

24. Entire Agreement . The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof.

Accepted by:	Submitted by:

CHEMBIO DIAGNOSTICS, INC.	OPTIONEE


By:
Name:	Name:
Its:	Address:

A-2

EXHIBIT B

INVESTMENT REPRESENTATION STATEMENT

OPTIONEE : ______________________

COMPANY : Chembio Diagnostics, Inc.

SECURITY : Common Stock

AMOUNT : ______________________

DATE : ______________________

In connection with the purchase of the above-listed shares of Common Stock (the "Securities") of Chembio Diagnostics, Inc. (the "Company"), the undersigned (the "Optionee") represents to the Company the following:

(a) Optionee represents, warrants and agrees as follows: (a) that all Option Shares are being acquired solely for investment for his own account and not on behalf of any other person or entity; (b) that no Option Shares will be sold or otherwise distributed in violation of the Securities Act of 1933, as amended, or any other applicable federal or state securities laws; (c) that he or she will report all sales of Option Shares to the Company in writing on a form prescribed by the Company; and (d) that if he or she is subject to reporting requirements under Section 16(a) of the Exchange Act, (i) he or she will not violate Section 16(b) of the Exchange Act, (ii) he or she will furnish the Company with a copy of each Form 4 and Form 5 filed by him or her, and (iii) he or she will timely file all reports required under the federal securities laws.

(b) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act").

(c) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. Optionee understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under applicable state securities laws.

(d) Optionee is familiar with the provisions of Rule 144 promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions.

(e) Optionee further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event.

(f) Optionee shall immediately notify the Company in writing of any sale, transfer, assignment or other disposition (or action constituting a disqualifying disposition within the meaning of Section 421 of the Code) of any Securities acquired through exercise of an incentive stock option, within two years after the grant of such incentive stock option or within one year after the acquisition of such Securities, setting forth the date and manner of disposition, the number of Securities disposed of and the price at which such Securities were disposed.

Signature of Optionee:

Optionee

Date: _______________________, ____

B-1

EXHIBIT 31.1

CERTIFICATION

I, John J. Sperzel III, certify that:

1. I have reviewed this Form 10-Q of Chembio Diagnostics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2014 /s/ John J. Sperzel III _________________

John J. Sperzel III, Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Richard J. Larkin, certify that:

1. I have reviewed this Form 10-Q of Chembio Diagnostics, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2014 /s/ Richard J. Larkin

Richard J. Larkin, Chief Financial Officer

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q (the "Report") of Chembio Diagnostics, Inc. (the "Company") for the quarter ended June 30, 2014, each of the undersigned John J. Sperzel III, the Chief Executive Officer of the Company, and Richard J. Larkin, the Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigneds' knowledge and belief:

(1) This Form 10-Q for the quarter ended June 30, 2014 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in this Form 10-Q for the quarter ended June 30, 2014 fairly presents, in all material respects, the financial condition and results of operations of Chembio Diagnostics, Inc. for the periods presented therein.

Dated: August 7, 2014 /s/ John J. Sperzel III

John J. Sperzel III

Chief Executive Officer

Dated: August 7, 2014 /s/ Richard J. Larkin

Richard J. Larkin

Chief Financial Officer