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Chembio Diagnostics (NASDAQ:CEMI)

Q4 2013 Earnings Call

March 06, 2014 10:00 am ET

Executives

Bobbi Coco

Lawrence A. Siebert - Executive Chairman, Chief Executive Officer, President, Chairman of Chembio Diagnostic Systems Inc, Chief Executive Officer of Chembio Diagnostics Inc and President of Chembio Diagnostic Systems Inc

Richard J. Larkin - Chief Financial Officer, Principal Accounting Officer and Chief Financial Officer of Chembio Diagnostic Systems Inc

Analysts

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Jan David Wald - The Benchmark Company, LLC, Research Division

Joseph P. Munda - Sidoti & Company, LLC

Paul Nouri - Noble Equity Funds

Brian Marckx - Zacks Investment Research Inc.

Operator

Greetings, and welcome to the Chembio Diagnostics Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Bobbi Coco. Thank you. Ms. Coco, you may begin.

Bobbi Coco

Thank you. Good morning. This is Bobbi 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 be 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@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 identify 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 undertakes 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?

Lawrence A. Siebert

Thanks, Bobbi. Good morning, everyone, and thanks for joining us. With another solidly profitable year in the books, Chembio has now achieved 5 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've ever had, we've expanded our commercial network, we've improved our manufacturing organization and facilities and we also have the strongest balance sheet we've ever had. A growing number of markets are now available too 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 HIV-Syphilis and Hepatitis C products as well as our regulatory commercial efforts with our current product portfolio made solid progress in 2013. And I'm 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 a review of the fourth quarter and full year financial results and balance sheet by our Chief Financial Officer, Rich Larkin. Rich?

Richard J. Larkin

Thanks, Larry. I will go over the 2013 results. For those interested in the fourth quarter results, I'll 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 for FIOCRUZ. Our research and development milestone grant and royalty revenues in 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 of 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 net 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 tax, which was lower this year than last year. However, due to the large net operating loss carry forwards, only $29,000 of the income tax 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 assets for its net operating tax loss carryforwards 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?

Lawrence A. Siebert

Thanks, Rich. In December of 2012, we received FDA approval of our pre-marketing application for our DPP HIV 1/2 Assay for use with oral fluid or blood samples. And during 2013, we completed 1,000-patient clinical study in order to submit a CLIA waiver application to the FDA, which we did submit at the end of November of 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 the 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 prospective 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 2 other sites. We're currently in discussion with the FDA to finalize the protocols 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 Assay.

While we have, therefore, experienced some delays in our U.S. 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 U.S. market and regulatory agencies. However, these international revenues are at lower margins than what we would see for our U.S. business from comparable products. But is still -- it is still very good business for the company while we work to bring our new products in the U.S -- into the U.S. and other developed markets through development and regulatory approval process. One of our international success stories of 2013 and we believe 2014 as well, well, is -- was in -- will be this year our multiplex DPP HIV-Syphilis product. We've developed this product for international as well as U.S. marketing. There are significant risks related to transmission of syphilis from a pregnant mother to child, just as there are for 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 in 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 coinfection in this segment of the population. While the FDA review timeline for this product, which we recently 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 U.S. as well. We anticipate strong sales in Mexico throughout 2014, and we have a number of 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've done this with FIOCRUZ and Labtest in Brazil and these programs are continuing in 2014. Most recently, in February of this year, Chembio entered into a technology transfer and license agreement with RVR Diagnostics, a privately held company that's in Malaysia. The agreement with RVR we've 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 a 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 U.S. 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 the 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've have historically, generating a 58% increase in our non-product revenues to over $2 million, primarily from 3 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 in space, which resulted in many inefficiencies including but not limited to multiple shifts and overtime. And this was exacerbated by some inefficiencies and 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 U.S., in February, we entered into a lease for approximately 21,500 additional square feet at a facility in Holbrook, New York, which is very close our to our Medford -- Long Island facility. The new space will be used to eliminate warehouse space used in our Medford facility as well as used at third-party offsite warehouses that we've 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're very pleased with having another solidly profitable year at Chembio, which we can add to a long track record of success. Entering 2014 in our strongest financial position with our strongest product portfolio ever. And with the commercial organization and plan that will deliver long-term growth from global market opportunities.

Thank you, all, for listening, and now happy to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Bill Bonello of Craig-Hallum.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

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 U.S. distribution and sales strategy [indiscernible] with Alere?

Lawrence A. Siebert

Well, yes. 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've had delays with our DPP assay so that certainly gave us some pause to assess our strategy and it's not saying that, that -- we're going to -- there's no -- nothing new I have to say on that today.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

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 CLIA waived, do you?

Lawrence A. Siebert

I don't have any information that says that the CLIA waiver that they're 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. And if there were some, I don't have any information.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

I understand. All right, that's helpful. And then also just on the CEO transition, any color you can give us there?

Lawrence A. Siebert

Not today. I've -- 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, in May when my contract is up. And so the hope and expectation has been and remains that somebody would be in here who, I think, we've said by the end of the first quarter. So I'm hopeful that we can meet that timetable and certainly [indiscernible] as we [indiscernible] 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.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, just 2 last ones, if I can. Can you expand a little bit on the international initiatives for the syphilis tests, sort of where beyond Mexico might we be selling the test in 2014? And how do we sort of ex-U.S. think about the potential for that test over the next couple of years? How much could that be contributing?

Lawrence A. Siebert

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 -- thus far that are being funded by The Global Fund, that are being funded in many cases by the countries themselves, whether it be Mexico, Brazil, other countries that have some of their own resources, there are -- there's no syphilis testing being done in these pregnant mother-to-child transmission testing programs where women are being tested for HIV. And so those are -- there's 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've discussed already in Mexico. We're 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 test, 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 that there's significant market opportunity in the markets that they, under our agreement with them, have the right to address.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

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

Lawrence A. Siebert

Okay. So Brazil, I -- based upon on what we know now about Brazil for 2014, should be stable and then maybe some upside opportunity if we're able to get some new programs there. Mexico, we're 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's a significant investment that we've made over these last 6 months in order to increase our penetration in that market, in that -- in those markets. And that may be, in certain cases, we have significant new opportunities for the rapid HIV test that we have -- had a good success with in Africa, historically. In other cases, we're hopeful in getting into those markets as a result of the HIV-Syphilis product. It's such a different kind of market build as compared to the developed world market where it's so binary. And as you've seen in our business, and it's just one of the challenges, is until you're in, you're out. And then when you're in, of course, they want the product yesterday. So we've got some significant opportunities that are moving forward to a decision point. And we're hopeful that some of those decisions will be made in our favor. So that's -- as best as I can say. I mean, some of those markets that we're talking about are markets that have multi-million test demand in the course of 1 year. And it's a screening test, it's confirmatory testing, it was going to be different in terms of the volume, the HIV, this will be different but there are new programs that are in the offing for HIV-Syphilis, part are being initiated because of the availability of a product like ours. So I know you -- maybe you want more specific numbers, but that's as much as I can give you at this point.

Operator

The next question is from Jan Wald of Benchmark Company.

Jan David Wald - The Benchmark Company, LLC, Research Division

I guess I have a few questions left after the last set 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're making up for some of the loss but you haven't quite made up for it. What do you see happening in 2014?

Lawrence A. Siebert

When you say we haven't made up for the loss, I mean, our revenues were up last year as compared to 2012. And the...

Jan David Wald - The Benchmark Company, LLC, Research Division

I'm thinking more of it quarterly.

Lawrence A. Siebert

Oh. I mean, it's kind of connecting some of the statements I've made before where -- our business is very difficult to look at on a quarterly basis. I mean, I know that's 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're going to be involved in these large donor-funded programs. And as I said in my prepared remarks, we've delivered double-digit revenue growth every year since we've been a public company in the last 10 years. And I'm optimistic that we can continue that. And last year was not unlike many years 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've 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 I -- 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.

Jan David Wald - The Benchmark Company, LLC, Research Division

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, do you kind of know you've guided versus unpredictable? You don't know, you've guided to -- you got shots on goal, you're bidding and things like that.

Lawrence A. Siebert

Well, our business in the U.S., certainly, if we remain status quo with Alere, is -- has been growing and is predictable. We have a very well established market share. There's no binary nature to that. Obviously, there are potential competitive threats as we've 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 2 aspects that I think are predictable. I also know that we have this significant new revenue stream from Mexico that is new but it's 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's kind of the number, it's 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'd be repeats from markets that we were successful in last year or new markets. So or both, hopefully.

Richard J. Larkin

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

Jan David Wald - The Benchmark Company, LLC, Research Division

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

Lawrence A. Siebert

Well, until we get a CLIA waiver, we're 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. The market is much, 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 U.S. We also hired a Global Director of Marketing. Two positions that are new, that are obviously going to add to our expenses, and -- but these our positions that are needed. Obviously, the Global Marketing Director is something that we needed anyway. And so once we get CLIA waiver -- we get closer to CLIA waiver, we may ramp up that organization more and then, of course, depends on some of the other products that we may bring to regulatory approval, whether it would 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.

Jan David Wald - The Benchmark Company, LLC, Research Division

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

Lawrence A. Siebert

Yes so we -- last year, and that's why there's somewhat of an uptick in our expenses -- part of the reason why there's an uptick in our expenses last year in sales and marketing, is more so related to the people that we invested in internationally, 1 person in Africa and 1 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 on to our payroll other than what we've invested in. 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's actually a cash flow income item for us.

Jan David Wald - The Benchmark Company, LLC, Research Division

And I guess, 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're in discussions, but what's kind of the issue behind what's going on and how do you think one corrects that kind of issue?

Lawrence A. Siebert

Well, obviously, it's -- or maybe not obvious, it's by doing an additional study in accordance with the protocol that we agreed with FDA on, which is what we're 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 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 2. So I guess you could say there was a problem with 2 sites but it wasn't really a problem, it's just that there was a lower than anticipated prevalence that was -- occurred compared to what we anticipated.

Jan David Wald - The Benchmark Company, LLC, Research Division

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

Lawrence A. Siebert

Yes.

Jan David Wald - The Benchmark Company, LLC, Research Division

Or is it -- okay.

Lawrence A. Siebert

Yes. It's -- we spent well over $1 million last year on a CLIA waiver study and we anticipate this would be no -- hopefully, no more than 50% of that cost.

Operator

The next question is from Joe Munda of Sidoti & Company.

Joseph P. Munda - Sidoti & Company, LLC

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

Lawrence A. Siebert

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

Joseph P. Munda - Sidoti & Company, LLC

Okay. I know you weren't commenting on the CEO search per se, but I was wondering, what type of criteria, if you know off hand, 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.

Lawrence A. Siebert

Yes. The search is -- has been conducted utilizing a number of criteria. That's certainly include leadership experience, familiarity with the point-of-care diagnostics 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 and research and development. So you're 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. Also, [indiscernible]

Joseph P. Munda - Sidoti & Company, LLC

Okay. As far as commercialization goes, once you have CLIA waiver approval, I'm wondering, 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?

Lawrence A. Siebert

We're going to take that step by step. I've 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's the best way to manage it, to address it. But other than that, we would use distribution partners for the hospital market for the growing physician office market. So I've said kind of 5, and that would include Director of Sales and that would be after some time. So it may not -- we 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.

Joseph P. Munda - Sidoti & Company, LLC

Okay. As far as the agreement with RVR Diagnostics in Malaysia, can you give us -- I know you guys have mentioned they're 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, I guess, in Asia?

Lawrence A. Siebert

Well, they're a new company. And they were established by a couple of Malaysian-Americans, actually, who have experience in that market as well as in the U.S. 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 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.

Joseph P. Munda - Sidoti & Company, LLC

Okay. Do you know if they have any agreements with anybody else in this space, or are you their sole agreement?

Lawrence A. Siebert

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.

Joseph P. Munda - Sidoti & Company, LLC

Okay, that's helpful. Now I'm sorry, go ahead.

Lawrence A. Siebert

No, I'm not aware of any others. I don't believe there are any others but I could be wrong.

Joseph P. Munda - Sidoti & Company, LLC

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 -- what's the current capacity utilization at the new facility and how does that new facility translate into gross margins going forward? I'm assuming that it's going to get better, but I just want to get a sense of how much better.

Lawrence A. Siebert

Well, just to clarify, and maybe, obviously, to talk a lot about it, but we're actually going to be expanding our manufacturing here, which is, I'm 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's 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'll also utilize some offsite warehouses that we would be able to eliminate. So we have -- it'll be -- we signed the lease but that's about all we've done so far in terms of we're in the -- we have a plan over these next few months to vacate some of the space here and make it available to manufacturing, but it going to take us some time to make all that happen and then to validate and so forth. But...

Richard J. Larkin

You can 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 1 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.

Joseph P. Munda - Sidoti & Company, LLC

Well, how much capacity is freed up by that move for manufacturing? Your...

Richard J. Larkin

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

Operator

The next question is from Paul Nouri of Noble Equity Funds.

Paul Nouri - Noble Equity Funds

I guess the operating expenses probably hit a high level for the company. And looking forward, you're going to have new products that you're looking to bring forward to the FDA and you're going to have to build some kind of sales force for the new products you hope to introduce in the U.S. Is this level that we saw in the fourth quarter of operating expenses a new base level to think about, going into next year?

Lawrence A. Siebert

Well, if you're including in operating expenses, the R&D expenses, which is certainly included a significant amount associated with the clinical trial, then that's an extraordinary item that -- I mean, it obviously depends upon what we have to still spend this year and how those things play on, 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, yes, 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 the -- you cannot invest and generate this sales growth without investing in sales resources. So that's what we've decided to do. And, yes, we're quite optimistic that those investments will give us a nice payback.

Paul Nouri - Noble Equity Funds

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

Lawrence A. Siebert

Yes.

Paul Nouri - Noble Equity Funds

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

Lawrence A. Siebert

Yes. That's gone more slowly than we had hoped. They've 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 equipment 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 or early next year, have the products available in the market. And that is definitely slower than what we had anticipated and it's disappointing. But it is what it is. There's nothing that we can do about it.

Operator

The next question is from Brian Marckx of Zacks Investment Research.

Brian Marckx - Zacks Investment Research Inc.

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've met the minimum purchase requirements?

Lawrence A. Siebert

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

Richard J. Larkin

It's -- 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.

Brian Marckx - Zacks Investment Research Inc.

Yes, I did see that, and I appreciate you guys putting that in there. And I guess, the question is -- relates more to have you had discussions with them and have they given you kind of 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 on when they would potentially trigger the agreement, I guess?

Lawrence A. Siebert

Yes. So we've been -- obviously, we were in a close dialogue with them and you're right, the technology transfer has -- can be completed on certain of those products. However, they have had delays, and they're having a facility, for certain other products, ready, that they have a new facility that was under construction. And it's 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 delays. And so even with the technology transfer being triggered under the agreements, 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 our -- 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's 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.

Brian Marckx - Zacks Investment Research Inc.

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?

Lawrence A. Siebert

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, I think there are about 6 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.

Brian Marckx - Zacks Investment Research Inc.

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?

Lawrence A. Siebert

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

Brian Marckx - Zacks Investment Research Inc.

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

Lawrence A. Siebert

Correct. Okay, one more question.

Operator

And the next question is from James Keenan [ph] of Keenan [ph] Securities.

Unknown Analyst

I was involved in your company about 15 years ago with Uzi Saldano [ph] when you did some seed financing. And one question that I'd like to -- I'm a little disappointed. Each quarter, I see you, Mr. Siebert, that you sell a block of stock exercising cheap warrants, and I don't think I've ever seen you buy it either. It's a little discouraging. Can you comment in it?

Lawrence A. Siebert

I have bought shares. And I don't know what you're referring to. I haven't -- I didn't buy any shares last year. But...

Unknown Analyst

And I see that every quarter, you're selling a block of stock.

Lawrence A. Siebert

No, that is -- maybe you're thinking of somebody else, that's not me. So I'm sorry, but I have not sold shares every quarter. I also have 2 kids in private colleges. So I am the largest stockholder of the company. I have over $2 million of my own money invested in the company. And I don't think my commitment and confidence -- commitment to and confidence in this company can be any more clearly demonstrated than what I've 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.

Richard J. Larkin

And then, he can [indiscernible] to exercising our options. I believe the only options he ever exercised are the ones that are ready to expire. So rather than lose them, you exercise them.

Unknown Analyst

Okay, that I know. Okay, this could be wrong.

Lawrence A. Siebert

One more.

Operator

The next question comes from Randy Schaffer [ph], a private investor.

Unknown Shareholder

My question's regarding the FDA-approved DPP product. When you talked about -- because we don't have the CLIA waiver, you talked about the market opportunity for what it is clear 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?

Lawrence A. Siebert

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

Unknown Shareholder

Okay. And with regards to the pipeline and other products, the HCV is under development and whatnot, I've tried to get answers from the Investors Relations department with regards to ongoing clinical trials. Whether it's just the syphilis only test? Has that -- do we have anything in clinical trials right now, remember that, that trial was suspended? Or is it a matter of refocusing to do the HIV-Syph combo? Where we at with the pipeline and clinical trials in general?

Lawrence A. Siebert

Well, I mean, I think it's fair to say that we've been -- we've had delays in the U.S. market for FDA-approved products. We have had delays. The -- we did -- on the HIV-Syphilis product, if that's what you're asking me about for the U.S. market, we think that there's a significant opportunity for that product in the U.S., just like there is internationally, but we have to deal with the issues relating to the algorithm that's used for the HIV-Syphilis test. Right now, there's a new algorithm that's in place in the United States that we're 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's been in place for decades. So we have had discussions with FDA. We started some critical trials on that last year as we -- as you may recall we've reported. But we had to suspend that activity until we know from FDA. We just submitted to FDA a formal request to have a discussion concerning that, and we expect by probably, the time that we report our first quarter that we'll have some feedback on that. It's on a 90-day feedback timeframe. So unfortunately, we can't find out any sooner, but the good news is that there's some willingness that leads 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 the trials that we did do last year as it relates to that traditional algorithm. But there's no issue with the product and obviously, that product is what we're getting such nice feedback on from -- in some of these other markets internationally, it's the same product. So -- but it's a frustrating and part of it is not so much the development capabilities but a lot of the regulatory requirements and so forth. So -- but there's -- we have -- I'm not going to say that we haven't had some delays, we have.

Operator

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

Lawrence A. Siebert

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

Operator

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

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