Chembio Diagnostics Inc (CEMI) 2013 Q4 法說會逐字稿

Greetings and welcome to the Chembio Diagnostics fourth-quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Bobbie Coco. Thank you, Ms. Coco; you may begin.

Thank you. Good morning. This is Bobbie Coco with Chembio Diagnostics. Thank you all for participating in today's call. Joining me are Larry Siebert, Chief Executive Officer, and Richard Larkin, Chief Financial Officer. This morning, Chembio Diagnostics announced financial results for the fourth quarter of year 2013 and filed its annual report on Form 10-K with the SEC. These documents, as well as an updated investor presentation and fact sheet, may now all be viewed and downloaded by going to www.Chembio.com and selecting investors.

If you would like to be added to the company's distribution list, please call Chembio Diagnostics at 631-924-1135, extension 125, and ask for Susan Norcott or email her at snorcott at Chembio.com.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Chembio Diagnostics. I encourage you to review the Company's past and future filings with the Securities and Exchange Commission, including, without limitation, the Company's Forms 10-K and 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 6, 2014. Chembio Diagnostics undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, I would like to turn the call over to Larry Siebert. Larry?

Thanks, Bobbie. Good morning, everyone, and thanks for joining us. With another solidly profitable year on the books, Chembio has now achieved five consecutive years of profitability, in addition to over -- in addition to 10 years of double-digit revenue growth. I believe this growth should continue in 2014 as we have the best product portfolio we have ever had. We have expanded our commercial network. We have improved our manufacturing organization facilities, and we also have the strongest balance sheet with have ever had.

A growing number of markets are now available to and being actively pursued for our products in North America, including significant near-term new business opportunities in Mexico, as well as in South America and Africa. And we are now also entering the European and Asian markets as a result of investments begun in 2013, resulting in CE marking and also establishing new distribution and license partners, and with others that are still pending.

Our product development programs for our HIV, syphilis, and hepatitis C products, as well as our regulatory and commercial efforts with our current product portfolio made solid progress in 2013. And I am optimistic that we will achieve a number of strategic objectives this year relating to these products and programs, while also delivering strong growth in revenues and operating cash flows.

I'll have a few additional remarks on our current and planned activities for 2014, following the review of the fourth-quarter and full-year financial results and balance sheet by our chief financial officer, Rich Larkin. Rich?

Thanks, Larry. I will go over the 2013 results. For those interested in the fourth-quarter results, I will ask you to please see the press release we issued this morning and please review our 10-K filings for more details.

Our total revenues for the year were $29.55 million, a 15% increase compared with total revenues of $25.61 million in 2012. We had product sales of $27.52 million, a 13% increase compared with product sales of $24.33 million in 2012. And this was primarily due to stronger sales of our lateral flow technology products, particularly in South America. And these increases were partially offset by declines in DPP product sales in Brazil FIOCRUZ.

Our research and development milestone grant and royalty revenues for 2013 were $2.03 million, a 58% increase as compared to $1.28 million in 2012. Gross margins for 2013 increased 14% to $12.3 million compared with a $10.79 million for the prior year, due primarily to increase of our products sold. Our product gross margin for 2013 increased 8% to $10.27 million from $9.51 million in the prior year. Research and development expenses in 2013 were $5.83 million compared with $4.49 million in the prior year.

The 2013 year included $1.52 million of clinical trial expenses related to our DPP HIV 1/2 assay CLIA waiver study compared with $820,000 of total clinical trial expenses in the prior year. And this also included expenses associated with servicing the increased research and development contract revenues.

Selling, general, and administrative expenses in 2013 increased 13% to $5.46 million from $4.85 million in the prior year, largely due to wages and related expenses and other expenses which were partially offset by lower commissions paid on DPP product sales to Brazil. Some of the increased expenses relate to sales and marketing expenses associated with our expanded commercial activities in Africa, Europe, and the United States, and expenses associated with the Company's recruitment search of a new chief executive officer.

Our operating income for 2013 was $1 million compared with an operating income of $1.45 million in the prior year. Net income for 2013 was $531,000 or $0.06 per diluted share compared with that income of $941,000 or $0.11 per diluted share for the prior year. The Company's effective tax rate for the year 2013 increased from 35% to 47.8%, a 12.8% increase as a result of nondeductible expenses becoming a larger percentage of the income before income taxes, which was lower this year than last year. However, due to the large net operating loss carry forwards, only $29,000 of the income taxes expense is payable and the balance is an offset to our deferred tax asset.

We had cash and cash equivalents on December 31, 2013, of $9.65 million compared with $2.95 million as of December 31, 2012. The primary reason for this increase was net cash received from the April 2013 common stock funding of $5.4 million. Additional cash for the year was provided from net income plus non-cash expenses of $1.9 million, along with a decrease in accounts receivable of $263,000, an increase in accounts payable and other accrued liabilities of $982,000. Partially offsetting these provisions was a use of cash for increased inventories of $701,000 and other items totaling $162,000. Overall, working capital increased by $6.59 million during the year to $14.22 million.

As I mentioned earlier, the company recorded a deferred tax asset for its net operating tax loss carry forwards in 2011 and the balance as of December 31, 2013, was approximately $4.2 million net of valuation allowances. Thank you for your time. And now I will turn the call back over to Larry. Larry?

Thanks, Rich. In December 2012, we received FDA approval of our pre-marketing application for DPP HIV 1/2 assay for use with oral fluid or blood samples. And during 2013, we completed a 1000-patient clinical study in order to submit a CLIA waiver application to the FDA, which we did submit at the end of November 2013.

As a follow-up to the call we had with FDA in early February, when we reported in a press release some anticipated delays in our CLIA waiver, on February 28, just last week, we received a letter from the FDA on the current status of their review of our CLIA waiver application. And, consistent with our earlier report, the letter from FDA confirmed that additional information is needed to complete their review of the Chembio CLIA waiver application. In particular, during the blinded perspective clinical study, a disproportionate number of the new infections that our test identified were found at one clinical site due to the lower than expected prevalence at two other sites.

We're currently in discussion with FDA to finalize the protocol to collect additional data to produce those additional findings. Upon receiving guidance on our proposed protocol, we anticipate that we will be able to update the timeline of the activities for the CLIA waiver of the DPP HIV 1/2 essay.

While we have therefore experienced some delays in our US DPP development and commercialization efforts, as a result of our expanded international commercialization activities, we should still grow our overall business in 2014 just as we did in 2013. Our ability and experience in global markets is one of Chembio's strengths, making us relatively less dependent on the US market and regulatory agencies. However, these international revenues are at lower margins than what we would see for our US business from comparable products. But it is still very good business for the Company while we work to bring our new products in the US -- into the US and other developed markets through the development of the regulatory approval process.

One of our international success stories of 2013 and we believe 2014 as well, was and will be this year our multiplex DPP HIV-syphilis products. We've developed this product for international as well as US marketing.

There are significant risks related to transmission of syphilis from a pregnant mother to child, just as there are through transmission of HIV. Therefore, we believe there is a significant opportunity to improve prevention efforts in pregnant mother to child transmission testing programs, or PMTCT, in international settings that are currently not doing any or nearly enough testing for syphilis even though they are testing for HIV and those programs. And we are now seeing such an opportunity being realized in Mexico as we speak.

In the United States, we believe there is also a significant need and opportunity for this product in some of the highest HIV prevalence populations such as among men that have sex with men -- MSM -- as data show high degrees of HIV and syphilis co-infection in this segment of the population.

While the FDA reviewed timeline for this product, which we originally anticipated would be in mid-2014, has also now been shifted to late 2014 with CLIA waiver now not anticipated until 2015, we are very excited about the international market opportunities we are realizing for this product this year, and, ultimately, in the US as well. We anticipate strong sales in Mexico throughout 2014 and we have a number of entered additional international registrations, evaluations, and sales opportunities in progress for 2014 for this product globally.

Another one of our successful international strategies has been to enter into private label license and distribution agreements in selected international markets. As you know, we have done this with FIOCRUZ and Labtest in Brazil, and these programs are continuing in 2014.

Most recently, in February, this year, Chembio entered into a technology transfer and license agreement with RVR Diagnostics, a privately held company that is in Malaysia. The agreement with RVR we just executed and this supports our strategy of establishing a market presence in Asia where we had none, in collaboration with RVR as a licensee, distributor, and contract manufacturer. The agreements grant RVR exclusive distribution rights subject to certain minimums and other conditions to market selected products in certain countries in the region and enable RVR to manufacture Chembio's assays, including our HIV and syphilis assays, and potentially other products developed by Chembio, incorporating our patented DPP technology.

So even though we believe our long-term success will be significantly driven by commercializing the Chembio brand in the United States and other key markets, the international developing world markets in Asia also provide us with significant growth opportunities, and we are increasingly well-positioned to capitalize on them.

In the US market, in 2014, we intend to begin to sell under the Chembio brand our DPP HIV 1/2 assay for use with oral fluid or blood samples, as well as additional products in our pipeline as they come through regulatory approval next year. In addition, while we have a robust pipeline of products that will complement this initial offering, including our HIV-syphilis, hepatitis C, and fourth-generation HIV test and development, we may also seek to distribute additional products that we can license or acquire.

I also want to note that in 2013 we continued the strong sponsored research and development effort that we have had historically, generating a 58% increase in our non-product revenues to over $2 million, primarily from three programs for influenza immunity, tuberculosis, and febrile illness. As a result of the milestones earned already this year to date, plus other opportunities we have, we believe that we can continue a strong level of non-product revenues in 2014. And we believe there are some significant commercial opportunities associated with some of these sponsored programs.

Finally, we remain committed more than ever to improving our manufacturing operation and gross margins. Our cost of goods in 2013 was significantly impacted by our limited capacity and space, which resulted in many inefficiencies, including, but not limited to, multiple shifts and overtime, and this was exacerbated by some inefficiencies in material usage which occurred during some of our busiest production periods.

So as we anticipated when we did our fundraising last year and as we orient ourselves toward a more direct sales model in the US, in February we entered into a lease for approximately 21,500 additional square feet in a facility in Holbrook, New York, which is very close to our Medford, Long Island facility. The new space will be utilized to eliminate warehouse space use in our Medford facility as well as used at third-party off-site warehouses that we have utilized, and this will enable us to free up space in our Medford location to make our facility more productive and more efficient.

In summary, we are very pleased with having another solidly profitable year at Chembio, which we can add to a long track record of success. And during 2014 and our strongest financial position with our strongest product portfolio ever. And with a commercial organization and plan that will deliver long-term growth from global market opportunities. Thank you all for listening, and now we are happy to take your questions.

(Operator Instructions) Bill Bonello, Craig-Hallum.

Nice quarter on the revenue front. Just a couple of questions. I don't think I missed it. Did you talk at all, or could you talk a little bit more about your latest thinking on the US distribution and sales strategy? (multiple speakers)

Yes. So we haven't announced anything with respect to Alere. Alere has done a great job with our products and sales have continued, obviously, to this year. And certainly, if we have an announcement to make regarding that, we will, but there is no further resolution of the situation as I am here today. But we have had obviously, irrespective of that, we have had delays with our DPP assays so that certainly gave us some pause to assess our strategy. And I am not saying that -- there is no -- nothing new I have to say on that today.

Okay. And you don't have any sense, at this point, of sort of how things are going with Alere's efforts to get their tests clearly CLIA waived, do you?

I don't have any information that says that the CLIA waiver that they are seeking is imminent, but I don't know. So, I can't really comment with any knowledge. And they certainly haven't disclosed anything publicly -- if there was some -- I don't have any information.

Okay. All right. That is helpful. And then, also, on just the CEO transition, any color you can give us there.

Not today. We indicated way back when we first initiated the process, that I would be retiring from my employment at Chembio -- not retiring more than that -- it may when my contract is up. So the hope and expectation has been and remains that somebody would be in here who, I think we have said, by the end of the first quarter. So, I am hopeful that we can meet that timetable and, certainly, (technical difficulty) through the reporting of our year-end results given some of the regulatory requirements in any case. But nothing more to report on that at this point in time.

Okay. Thanks. And then just two last ones if I can. Can you expand a little bit on the international initiatives for the syphilis test? Where, beyond Mexico, might we be selling the test in 2014, and how do we, ex-US, think about the potential for that test over the next couple of years -- how much could that be contributing?

Well, I don't have specific numbers. What I can tell you is that, in most of the donor-funded programs that are being funded by PEPFAR, that are being funded by the Global Fund, and being funded, in many cases, by the countries themselves, whether it be Mexico, Brazil, other countries that have some of their own resources, there is no syphilis testing being done in these pregnant mother to child transmission testing programs where women are being tested for HIV. And so there is a significant opportunity in all of those programs where people are being tested -- women are being tested for HIV and not for syphilis.

So, we have opportunities, as I have discussed already, in Mexico. We are pursuing them in various parts of South America, including, but not limited to, Brazil. Certainly, many of the markets in Africa, the donor-funded markets in sub-Saharan Africa as well as other parts of Africa where our products and other companies' products that are just rapid HIV tests are established, but there are no multiplex products. So those are all significant opportunities for us.

And, then, of course, we have Asia and, specifically, the company, RVR, that we entered into this agreement with recently is specifically interested in the HIV-syphilis product where we, and they believe, there is a significant market opportunity in the market that they, under our agreement with them, have the right to address.

Okay. Very helpful. And then just the last question. I know there is a lot of moving parts right now that make it sort of hard to have visibility into maybe what 2014 looks like, but in some of the areas where maybe things are little bit more certain, just any thoughts on, for instance, Brazil? Do we see FIOCRUZ sort of stable? Do we see ramp up in your other relationships there and is there anything material moving around in Africa?

Okay. So Brazil, based upon what we know now about Brazil for 2014, should be stable. And there may be some upside opportunity if we are able to get some new programs there. Mexico, we are experiencing a material new revenue stream from Mexico that we hope will continue throughout the year. As it relates to Africa, we invested in some additional sales and marketing resources in order to develop opportunities in countries that we had no participation whatsoever. I don't want to get into specific countries, but there is an significant investment that we have made over these last six months in order to increase our penetration in that market -- in those markets.

And that may be, in certain cases, we have significant new opportunities for the rapid HIV test that we have had good success with in Africa, historically. In other cases, we are hopeful in getting into those markets as a result of the HIV-syphilis product. It is such a different kind of market, Bill, as compared to the developed world market where it is so binary. And, as you have seen in our business, and it is just one of the challenges, is until you are in, you are out. And then, when you are in, of course they want the product yesterday.

So, we have got some significant opportunities that are moving forward to a decision point. And we are hopeful that some of those decisions will be made in our favor. So that is as best as I can say. I mean, some of those markets that we are talking about are markets that have multimillion test demand over the course of a year. And it is a screening test. It is a confirmatory test. It is going to be different in terms of the volume. The HIV-syphilis will be different, but there are new programs that are in the offing for HIV-syphilis. Part of being initiated because of the availability of a product like ours. So I know maybe you want more specific numbers, but that is as much as I can give you at this point.

Sure. No. That is very helpful. Thank you very much.

Jan Wald, Benchmark Company.

Congratulations on the quarter. I guess I have a few questions left after the last [set that] was asked. I guess, looking at revenues and thinking about what happened last year with FIOCRUZ and things like that, how do you see the revenues growing and going in 2014? Are you -- it looks like you are making up for some of the loss but you haven't quite made up for it. What do you see happening in 2014?

When you say we haven't made up for the loss, our revenues were up last year as compared to 2012 and the --

I am thinking more of the quarterly.

Oh. Quarterly. It is kind of connecting some of the statements I made before where our business is very difficult to look at on a quarterly basis. I mean, I know that is part of the game of being a public company, but we really need to look at our revenues on an annual basis so long as we are going to be involved in these large donor-funded programs. And as I said in my prepared remarks, we have delivered double-digit revenue growth every year since we have been a public company, the last 10 years. And I am optimistic that we can continue that.

And so last year was not unlike many years were where we got that double-digit revenue growth from revenue sources that were not the way we anticipated that we would at the beginning of last year. But we continue to put more shots on goal, which is what you need to do. And I think we have made a significant effort these last several months in order to create more opportunities and more chances for success. And have also more products in our portfolio that are more differentiated such as our HIV-syphilis product.

So, we don't give guidance. We certainly -- I certainly very much appreciate the challenge or the frustration of not being able to measure ourselves from quarter to quarter. And as we develop more business opportunities in markets where that kind of metric is possible, then we can do that. But we really need to look at our business on a year-over-year basis.

Well, then, maybe if I could ask the question this way. If you look at your business for 2014, how much of it is predictable right now? What percentage is predictable? In other words, you kind of know you have got it versus unpredictable. You don't know you have got it. You got shots on goal you are bidding and things like that.

Well, our business in the US, certainly if we remain status quo with Alere, is -- has been growing and is predictable. We have a very well established market share. There is no binary nature to that. Obviously, there are potential competitive threats, as we have talked about, but that business has been predictable over the last several years and has grown at a reasonable clip. I think that, as I indicated in the previous answer to Bill Bonello's question, I believe that, based upon what we know today, that Brazil is predictable this year to be on par or thereabouts with what we delivered last year to Brazil, which was about $6 million. So, those are two aspects that I think are predictable.

I also know that we have this significant new revenue stream from Mexico that is new, but it is happening. And then we have certain markets in Africa where we have been historically and where we continue to be this year that certainly will generate a few million dollars of revenue. I can't be specific, but that is kind of the number where it has been in the several million dollar range over these last few years.

So -- but that doesn't get you to revenue growth, let alone even to the level that we had last year. So there are -- there needs to be additional revenue opportunities that we generate whether they be repeats from markets that we were successful in last year or new markets, so -- or both.

That's no different than any year that we have faced in the past. Sometimes you never know where it is going to come from, but I can tell you that we are always out there shaking the bushes and have been successful in bringing in that revenue each year.

Yes. I guess so. I was just looking for something like what the pipeline was versus what you have to give out and when for the year. I guess another question is, in terms of your build out in Europe and even your build out in the United States, just looking at SG&A expenses, for example, how do you see those expenses going forward the rest of 2014?

Well, until we get CLIA waiver, we are going to be pretty cautious about ramping up those expenses, although we have made certain investments and we don't -- we do believe that we will get CLIA waiver although we are somewhat delayed. But we can begin to sell our DPP test now and the market is much smaller than what it will be once it is CLIA waived. But we think that we can start to develop opportunities for that product now and we are doing that.

So over the last few months, we did hire a director of sales for the US. We also hired a global director of marketing -- two positions that are new, that are obviously going add to our expenses and -- but, these are positions that are needed. Obviously, the global marketing director is something that we needed anyway. And so, once we get CLIA waiver -- to get closer to CLIA waiver, we may ramp up that organization more. And then, of course, it depends on some of the other products that we may bring to regulatory approval, whether it be HIV-syphilis product, hepatitis C, other products, and then potentially the products that we could elect to sell that are currently marketed by Alere.

In the European and Asian markets, are you -- do you feel yourself pretty well set or is there going to have to be some growth there as well in terms of salespeople or other expenses?

Yes. So, we -- last year, and that is why there is somewhat of an uptick in our expenses -- part of the reason why there is an uptick in our expenses last year in sales and marketing, more so related to the people that we invested in internationally, one person in Africa and one person in Europe. And these are regional managers that are, in turn, working with distribution partners. So, we have a number of new distribution partners and others pending in both of those markets. We don't anticipate any additional expenses onto our payroll other than what we have invested. And then, we have this new program in Asia which is different, and we actually have received money in exchange for having granted rights to our technology and those markets. And so that is actually a cash flow income item for us.

So (inaudible) one last question on the CLIA waiver. It sounded like your problem was due to one of the trial sites. How do you think you correct that? I know you are in discussions, but what is the issue behind what is going on, and how do you think one corrects the kind of issue?

Well, obviously, it is -- well, maybe not obvious. It is by doing an additional study in accordance with the protocol that we agreed with FDA on, which is what we are in the process of doing. And that is agreeing on the protocol. We haven't started the study, but we are in the process of ramping up anticipated sites for those additional studies. So it was -- it wasn't really a problem with any one site. It was a disproportionate number of new infections being identified at one site. But it wasn't a problem with that one site. It was the lower than anticipated prevalence at the other sites, which were two. So I guess you could say there was a problem with two sites, but it wasn't really a problem. It was just there was a lower than anticipated prevalence that occurred compared to what we had anticipated.

So it is this study likely to be smaller and shorter?

Yes.

(inaudible) or is it -- okay.

Yes. We spent well over $1 million last year on the CLIA waiver study, and we anticipate this would be, you know, hopefully no more than 50% of that cost.

Okay, thank you very much.

Joe Munda, Sidoti & Company.

A lot of my questions were answered, but, Larry, I was wondering if you could give us some color on the are indeed are indeed R&D grants going forward as well as some of the milestones that could be reached? Any expectation there would be helpful modeling.

Well, we have some ongoing research grants. We also have received some license income from our agreement with RVR. And so that, together, has gotten us off to a good start this year. We are working on additional opportunities, including follow-on proposals with respect to some of the existing programs. So, the last few years we have averaged to between $1 million and $2 million. Last year we were up. I expect us to be in that same range if all goes according to plan, but there are some things that will still need to happen in order for that to be the case.

Okay. I know you weren't commenting on the CEO search, per se. But I was wondering what type of criteria, if you know, offhand, that the Board is looking for? Are they looking for somebody who is familiar with the space, manufacturing, any idea of the criteria for the search would be helpful.

Yes. The search is -- has been conducted utilizing a number of criteria that certainly include leadership experience, familiarity with the point-of-care diagnostic space, and the capabilities associated with running a company that has plans for building a sales and marketing organization globally as well as supporting increased manufacturing in research and development. So, you are not going to necessarily find all those things in one person, but those are some of the boxes that I believe the search committee is doing their best effort to check.

Okay.

(multiple speakers) (inaudible).

As far as commercialization goes, once you have CLIA waiver approval, wondering -- you know, you hired a director of sales. What type of number of reps do you feel comfortable with going out into the marketplace once you do have CLIA waiver approval?

We are going to take that step by step. I have said in the past that we would anticipate having a pretty small organization that would address -- that would be focused on addressing the public health space, which has limited distribution -- organizations that service it. So it is the best way to manage it, to address it. But, other than that, we would use distribution partners for the hospital market or the growing physician office market. So, I said kind of five. And that would include director of sales and that would be after some time. So it may not get to that number this year, given where we are today. But I think in terms of cost, it could be $1 million, $2 million cost, ultimately, once you get to that level, annualized.

Okay. As far as the agreement with RVR diagnostics in Malaysia, can you give us a -- I know you mentioned they are a private company, but any sense of their revenue run rate as well as the market reach that they have in Asia? Can you give us some sense of how far their reach is in Asia?

Well, they are a new company, and they were established by a couple of Malaysian-Americans, actually, who have the experience in that market as well as in the US diagnostic market and life sciences market. And so, they have no revenues at this time. But they have a lot of experience, a lot of -- a strong commitment to succeed in that market, both from a manufacturing and bringing down cost standpoint as well as distribution. And they also have gotten significant support from academic as well as government organizations in terms of some of their financing as well as private investors.

Okay. Do you know if they have any agreements with anybody else in this space? Are you there so their sole agreement?

I don't know that, although, to my knowledge, that our agreement is the first agreement that they have executed. But they may be working on others.

Okay. That's helpful. No. I'm sorry. Go ahead.

I am not aware of any others. I don't believe there are any, but I could be wrong.

And then, as far as -- my last question here. As far as the new space is concerned and the improvement in gross margin, I guess my first question, what is the current capacity utilization at the new facility and how does that new facility translate into gross margins going forward? I am assuming they are going to get better, but I just want to get a sense of how much better.

Well, just to clarify and maybe -- obviously, we talk a lot about of it. But, we are actually going to be expanding our manufacturing here, which is -- I am in Medford today. And we don't plan on actually doing any significant, if any, manufacturing at that facility. The idea is to free up additional space here in Medford since this is where we have our regulatory approval. So it is certainly a key -- has been a key consideration for us. And so by freeing up some warehouse space here, we can expand our manufacturing capacity here and make that more productive and more efficient. We also utilized some off-site warehouses that we would be able to eliminate. So we have -- it will be -- we signed a lease, but that is about all we have done so far in terms of -- we have a plan over these next few months to vacate some of the space here and make it available to manufacturing, but it could take us some time to make all that happen and then to validate and so forth.

If you could appreciate, a lot of the international business requires us to ship large quantities. They don't want small quantities shipped at a time so it does require quite a bit of warehousing. And we have had to take warehousing space, renting at other facilities around the island, and it becomes very, very inefficient. This way, we have better control of one facility. It will allow us, also, to be prepared to do distribution from that location into the United States to support the sales and marketing organization that we plan on. And in addition, having everything continue to remain here in Medford makes regulatory hurdles a lot lower to overcome than if we were to go to a new space.

How much capacity is freed up by that move for manufacturing?

Basically, what the plan is, is we are going to be able to actually double our manufacturing space.

Okay. Thank you.

Paul Nouri, Noble Equity Funds.

The operating expenses, probably it is a high level for the Company. And, looking forward, you're going to have new products that you are looking to bring forward to the FDA. And you're going to have to build some kind of salesforce for the new products you hope to introduce in the US. Is this level that we saw in the fourth quarter of operating expenses a new base level to think about going into next year?

Well, if you are including operating expenses, the R&D expenses, which certainly included a significant amount associated with the clinical trial, then that is an extraordinary item that obviously depends upon where we have to still spend this year and how those things play out on a quarter-to-quarter basis. But that was a significant expense that we had last year relative to 2012, which, certainly, if we had been able to successfully complete that trial would not be repeated at all this year.

In terms of the other expenses -- sales and marketing expenses, those are new expenses that we have and will continue to incur in order to generate the sales that we believe will grow our business. So you cannot invest in -- generate the sales growth without investing in the sales resources. So, that is what we decided to do, and we are quite optimistic that those investments will give us a nice payback.

Okay. And I was browsing in the 10-K. I believe it said that you still hope to come out with the oral product this year. Is that true?

Yes.

Okay. Also, something I saw was that -- I take it the commercialization of products through Labtest was pushed out to 2015. Can you talk about that a little bit?

Yes. That has gone more slowly than we had hoped. They have had to acquire -- import some of the equipment that they need -- needed to put in place in order to bring our products through and submit them to ANVISA, which is their regulatory agency in Brazil. And their plan now is to get the equipment in place. I mean, the equivalent is there, and get the products assembled and manufactured using that equipment. And then submit it to ANVISA and, hopefully, by the end of this year, early next year, have the products available in the market. That is definitely slower than what we had anticipated. And it is disappointing, but it is what it is. There is nothing that we can do about it.

Okay. Thanks.

[James Keane], a private investor.

Go to the next caller.

Brian Marckx, Zacks Investment Research.

Nice quarter. Regarding the tech transfer agreement with FIOCRUZ, have they given you any kind of indication relative to when they would plan on triggering the tech transfer for the products where they have met the minimum purchase requirements?

I think that we outlined that in the 10-K and, certainly, if you have any questions after looking at that, feel free to call me, Brian.

It is pages 6 and 7 lays it out as to which ones they have and haven't. The ones that they haven't, obviously we don't know when. But it lays it out for you there.

Yes. I did see that, and I appreciate you guys putting that in there. I guess the question relates more to, have you had discussions with them and have they given you any feedback where they -- on those products where they have met the requirements? For example, the HIV test, it looks like they bought $3.3 million in excess in 2013. So for example, that product, have they given you any kind of indication of when they would potentially trigger the agreement, I guess?

We have been -- obviously, we were in close dialogue with them. And you are right that the technology transfer can be completed on certain of those products. However, they have had delays, and they are having a facility for certain other products ready that -- they have a new facility that was under construction. And it is a large facility that has, I guess, the building of the Olympic Park has taken precedence over the completion of this facility. But -- just kidding. But it has had delays and so even with the technology transfer being triggered down to the agreement, they still need to have a place to manufacture it, on the one hand.

On the other hand, they need to be able to continue to supply their customer, which is the Ministry of Health of Brazil. So that has resulted in our getting additional orders, even for those products for which the technology transfer would otherwise be completed. And my colleague was just down there and our latest understanding is that they will be in that facility around the end of this year. And so that is why, as I indicated earlier, I believe that our volume level with FIOCRUZ this year, absent any new programs that we might enter into with them, should be about level with what we did last year.

Okay. Great. One on the RVR agreement. Can you tell us the countries within Asia that the agreement covers, and can you tell us what the royalty rate is?

We really would like to keep that information confidential because it has potential competitive implications. So, I can tell you that it does not include China and -- but we have confidential agreement with RVR at this point, but it certainly gives us access to several countries -- into about six countries on the list. But it doesn't include China. Obviously, it does include Malaysia, and beyond that, I am unable to comment on that at this time.

Okay. On the DPP HIV-syphilis test, and purchases through the donor-funded programs, how does demand for that test affect, if at all, demand for the other HIV tests that you sell through those programs?

It can affect it. There are cases where it is additional testing that is being done, but certainly to the extent that they are replacing an existing PMTCT program using an HIV-only test with a combination HIV-syphilis test, it would be -- there would be an offset. Obviously, many of the opportunities -- actually, all of the opportunities that we are pursuing are new business so they are markets where we already -- we don't already have a presence.

Okay. So this would be -- the vast majority of sales of this test would be essentially incremental.

Correct.

Okay. Great. Perfect. Thanks, guys.

[James Keane, Keane Securities].

I was disconnected before. I'm sorry. But, I was involved in the Company about 15 years ago with [Udi Saldano] and you did some seed financing. And one question and I'd like to -- I am a little disappointed. Each quarter, I see that you sell a block of stocks, exercising cheap warrants, and I don't think I've ever seen you buy any. That's a little discouraging. Can you comment on that?

I have bought shares, and I don't know what you are referring to. I didn't buy any shares last year, but --

No. I see every quarter you are selling a block of stock.

No. Maybe you're thinking of somebody else. That is not me. So I'm sorry, but I have not sold shares every quarter. I also have two kids in private colleges. So the largest I am stockholder of the Company. I have over $2 million of my own money invested in the Company. And I don't think my commitments and confidence -- commitments to and confidence in this Company can be any more clearly demonstrated than what I have done. So, I have the right to sell shares from time to time. Sometimes I have a need to do that, but I believe very strongly in the long-term success of this Company.

And in regard to exercising options, I believe the only options he ever exercises are the ones that are ready to expire. So rather than lose them, you exercise them.

Okay. That I know. Maybe -- this could be wrong, too. Okay. Thank you very much.

My pleasure.

[Randy Shafer], a private investor.

My question is regarding the FDA-approved DPP product. When you talked about -- okay, so we don't have the CLIA waiver. You talked about the market opportunity for what it is cleared for now being significantly smaller. Is it too small to generate any revenue, or do we have any plans to explore those avenues that are available to us right now?

It is small, but not too small to explore revenues. And I think it is a wave for us to get the product evaluated, get it into the market, get established performance. And so, it is something that we can and are doing -- can do and are doing.

Okay. And, with regards to the pipeline and other products -- the HCV is under development and what not. I have tried to get answers from the investor relations department with regards to ongoing clinical trials, whether it is just the syphilis-only test. Do we have anything in clinical trials right now? I remember that that trial was suspended. Or is it a matter of refocusing to do the HIV-syphilis combo? Where are we at with the pipeline and clinical trials in general?

Well, I mean, I think it is fair to say that we have been -- we have had delays. In the US market for FDA-approved products, we have had delays. On the HIV-syphilis product, if that is what you are asking me about for the US market, we think that there is a significant opportunity for that product in the US, just like there is internationally. But we have to deal with the issues relating to the algorithm that is used for the HIV-syphilis test. Right now, there is a new algorithm that is in place in the United States that we are in discussions with the FDA as to whether our test needs to comply or compare, I should say, against that new algorithm as opposed to the traditional algorithm that has been in place for decades.

So, we have had discussions with FD -- we started some clinical trials on that last year. As you may recall, we reported. But we had to suspend that activity until we know from FDA. We just submitted to the FDA a formal request to have a discussion concerning that, and we expect that by probably when we report our first quarter that we will have some feedback on that. It is on a 90-day feedback timeframe.

So unfortunately, we can't find out any sooner, but the good news is that there is some willingness at least to hear some of our arguments as to why the traditional algorithm is all we should be comparing to, which is the way the test was designed. And the test actually did perform very well in trials that we did do last year as a relates to that traditional algorithm.

So there is no issue with the product. And obviously, the product is what we are getting such nice feedback on -- from in some of these other markets internationally, the same product. So -- but, it is frustrating and part of it is not so much the development capabilities, but a lot of the regulatory requirements and so forth. But I am not going to say that we haven't had some delays. We have.

Okay. Thank you.

That is all the time we have for questions. I would like to turn the floor back over to management for any closing remarks.

Thank you very much, operator. Thank you all very much for listening, and have a great day. Thank you.

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