Chembio Diagnostics, Inc.
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Greetings, and welcome to the Chembio Diagnostics Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Sperzel, Chief Executive Officer for Chembio Diagnostics. Thank you. Mr. Sperzel, you may begin.

[John J. Sperzel:]

Good morning and thank you for participating in today’s call. Joining me today is Rich Larkin, our Chief Financial Officer. Before we begin, I’d like to caution that comments made during this conference call today, today, November 7, 2014, will contain forward-looking statements within the meaning of the Securities Act of 1933, concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. Our third quarter was extremely productive. We achieved third quarter revenue of $7.31 million, which was consistent with our second quarter revenue of $7.42 million. Our DPP product sales continue to show significant growth, accounting for nearly 75% of our total revenue for the quarter and over 50% of our total revenue for the nine-month period. We worked closely with the Food and Drug Administration and last week that work resulted in a significant milestone, the receipt of the DPP HIV CLIA Waiver. We signed agreements with three leading distribution organizations to support the sales of DPP HIV and HIV STAT-PAK assays in the U.S. market. I was just informed that the third leading U.S. distributor signed and informed us this morning, so our press release did say too. It’s verdict fluid as you can imagine. And we formed collaborations to develop DPP assays for Ebola, dengue fever and a specific form of cancer. I’ll provide a more detailed overview of our recent and anticipated milestones following the review of the third quarter and nine-month financial results by Rich. Rich?

[Richard J. Larkin:]

Thanks, John. I will briefly go over the third quarter and nine-month 2014 results. Please refer to our 10-Q filing for more details. I’ll begin with the results for the third quarter. Our total revenues for the 2014 third quarter consisted of product sales of $7.25 million, compared with $9.04 million in the prior-year period. And R&D, milestone, grant and royalty revenues of $66,000 compared with $573,000 for the prior-year period. The decrease in product sales is due primarily to the shipment in 2013 of $3.87 million from a single $5.3 million STAT-PAK order, which has not recurred. Our gross margin, for the 2014 third quarter, was $2.65 million compared with $4.06 million in the prior-year period. Product gross margin for 2014 third quarter was $2.58 million compared with $3.48 million for the prior-year period. Both decreases are due primarily to the non-recurrence of the STAT-PAK order I described earlier and also to product mix. Research and development expenses for the 2014 third quarter were $0.97 million compared with $1.6 million for the prior-year period. Selling, general and administrative expenses for the 2014 third quarter were $1.94 million compared with $1.38 million for the prior-year period, largely due to higher investment in sales and marketing personnel, increased commissions and related costs. The operating loss for the 2014 third quarter was $262,000 compared with an operating income of $1.074 million for the prior-year period. Net loss for the 2014 third quarter was $271,000, or $0.03 per diluted share, compared with net income of $717,000, or $0.07 per diluted share for the prior-year period. Now I’ll go over the year-to-date results. Our total revenues for the 2014 first nine months consisted of product sales of $19.4 million compared with $20.42 million for the prior-year period. R&D, milestone and grant and royalty revenues for the 2014 first nine months were $1.149 million compared with $1.270 million for the prior-year period. The decrease in product sales, again, is due primarily to the shipment in 2013 of $4.64 million from the single non-recurred STAT-PAK order we described earlier. Our gross margin for the 2014 first nine months was $7.91 million compared with $9.03 million for the prior-year period. Product gross margin for the 2014 first nine months was $6.76 million compared with $7.76 million for the prior-year period. Again, both decreases are primarily due to the non-recurrence of the STAT-PAK order described earlier and also to product mix. Research and development expenses for the 2014 first nine months were $3.44 million compared with $4.15 million for the prior-year period. Selling, general and administrative expenses for the 2014 first nine months were $5.34 million compared with $3.7 million for the prior-year period, largely due to higher investment in sales and marketing personnel, increased commissions and related costs. Our operating loss for the 2014 first nine months was $878,000 compared with operating income of $1.181 million for the prior-year period. The net loss for the 2014 first nine months was $641,000, or $0.07 per diluted share, compared with net income of $793,000, or $0.08 per diluted share for the prior-year period. Company had cash and cash equivalents of $3.67 million as of September 30, 2014, compared with $9.65 million as of December 31, 2013. The decrease was primarily due to net cash used in investing activities to fund deposits on and purchases of fixed assets of $1.06 million as well as net cash used in operating activities of $5.15 million, which included an increase in accounts receivable of $3.72 million, an increase in inventory of $0.79 million and a reduction in accounts payable of $0.49 million. Our working capital decreased by $1.04 million during the year from $14.22 million to $13.18 million. That concludes the financial review and I will now turn the call back over to John. John?

[John J. Sperzel:]

Thank you, Rich. As stated at the beginning of the call, our third quarter was marked by strong product sales, particularly our DPP product sales. Continued interaction with the FDA, which resulted in last week’s DPP HIV CLIA Waiver, and new collaborations that are intended to support our current commercial effort and strengthen our future development pipelines. Our total third quarter revenue remained robust, generating $7.31 million consistent with our total second quarter revenue of $7.42 million. And as Rich explained, while overall sales decrease compared to the same period in 2013, that was primarily due to the shipment in 2013 of $3.87 million from a single $5.3 million STAT-PAK order, which is not recurred. In particular, we’re thrilled that the DPP product sales of $5.4 million accounted for nearly 75% of our revenue for the quarter, a significant increase over DPP product sales of $1.88 million for Q3 2013. We view this growth as an important indicator of how customers are adopting DPP technology and products. As mentioned in August, we expected a positive response to the CLIA Waiver submission for our DPP HIV asset. And last week, that is exactly what we received, the DPP HIV CLIA Waiver. Throughout the review process, we had excellent communication with the FDA and the review committee and we’re thrilled with the result. Chembio’s DPP HIV Assay was FDA approved previously and the CLIA Waiver will allow us to expand its sales into important new channels that are closest to patient care including physician office lab facilities, clinics and other community healthcare providers. Our CLIA Waiver’s DPP HIV Assay, which can use oral fluid, finger stick and venous whole blood, combines excellent sensitivity and specificity, simple and safe sample collection and exceptional ease of use. We believe this combination will lead to more testing, which will result in increased detection, earlier treatment and lower exposure rates. In anticipation of receiving the DPP HIV CLIA Waiver, we began interviewing additional sales representatives and we now intend to expand our U.S. sales team. We also initiated discussions with several leading distributors to expand the sales of our DPP HIV and HIV STAT-PAK assays in the U.S. We are pleased that prior to this morning, two of these important distribution agreements were signed subsequent to the third quarter, significantly adding to our sales reach in the U.S. market. And as I mentioned earlier, I was just notified that we received the third signed agreement with a leading distributor this morning. We look forward to updating you on the U.S. sales and marketing progress and customer adoption in the coming months. In August, we shared with you our internal product development priorities all based on our patented DPP technology. One; DPP HIV Syphilis Assay for the U.S. market, two; DPP oral fluid enhancements, three; DPP HIV antibody antigen assay, and four, DPP HCV assay. We also informed you that we would pursue partnerships to exploit our patented DPP technology that we had interest within and outside of infectious disease and although the discussions were early, we’re optimistic. It’s important to remember the unique characteristics of the DPP technology that make it well suited for such collaborations. DPP is patented. DPP may offer improved sensitivity versus traditional lateral flow technology. DPP has unique multiplexing capabilities that is to test multiple disease types with a single-patient sample. And DPP has the ability to measure blood and/or oral fluid as well as having unique sample collection system. Last week, we announced three development collaborations and I would like to address each of them today. First, our DPP Ebola project; on October 27, we announced a partnership with Integrated BioTherapeutics, a biotechnology company located in Gaithersburg, Maryland. We believe IBT is well characterize Ebola antibodies when combined with Chembio’s patented DPP technology, can produce a point-of-care diagnostic test for Ebola. Dr. Javad Aman, the Founder of IBT, characterized the current Ebola outbreak as a humanitarian crisis, and we agree. Therefore, the immediate need is to have a standalone Ebola assays available for testing in a very short period of time. While it may appear we were late in announcing our plan to develop a point-of-care test for Ebola, we chose to first focus on securing access to critical Ebola antibodies, hence the partnership with IBT, which is exclusive for point-of-care product development. In addition, we felt it was important to test IBT’s antibodies on the DPP platform. Based on our early findings, we believe it is possible to develop a standalone DPP Ebola assay. Yesterday, Peter Loftus published a story in The Wall Street Journal titled the Race Is On to Detect Ebola Faster. We believe our DPP technology is ideally suited as it requires no sophisticated instrument, is simple to use, note the recent DPP HIV CLIA Waiver does not require refrigerator storage, is cost effective and can be taken to the patient rather than requiring patients or patient samples to be transported to an instrument. The longer term need, and this is important. Once the current Ebola outbreak is behind us, is to have a point-of-care multiplex DPP febrile illness that includes a test for Ebola, as well as other febrile illnesses. Imagine the utility of a multiplex point-of-care assay that could quickly and cost effectively identify Ebola, dengue fever and a number of other illnesses that present with high fever, using a single sample of blood or oral fluid. We believe that a DPP febrile illness assay is also possible with a combination of IBT, Chembio and the DPP technology. And I point you back to the announcement that we made in May of 2013 where we partnered with a U.S. government agency to develop just that, a multiplex point-of-care febrile illness assay and we did that project in less than eight months. The DPP Ebola project is funded by Chembio as is the partnership with IBT, and we are also in discussions with a number of organizations regarding funding to accelerate our efforts. Next our DPP dengue fever project. On October 28, we announced a partnership to develop a point-of-care DPP dengue fever assay. As stated in the press release, the World Health Organization estimates there are 3 billion people living in dengue-endemic countries. And the CDC estimates, there are over 400 million dengue virus infections annually, making dengue virus a leading cause of illness and death in the tropics and subtropics. We believe a standalone DPP dengue fever assay and a dengue fever test as part of the DPP febrile illness assay will be useful tools in combating this deadly disease. The DPP dengue fever project is funded by our partner who, as mentioned in the press release, is not disclosed. Lastly, our DPP cancer project. Last week, we announced a partnership to develop a point-of-care DPP cancer assay for a specific type of cancer. While we’re currently unable to identify our international diagnostics partner, or the specific type of cancer, we’re thrilled that an industry leader has recognized the potential value of DPP within the oncology market. The DPP cancer project is also funded by our partner. In addition to these collaborations, our existing relationship with RVR in Malaysia is making great progress. The site renovation is complete. I personally seen it and the RVR team is in the midst of manufacturing equipments setup and validation. We expect to begin pilot lot production of our DPP HIV assay in Malaysia, before the end of the year. And lastly, our partnerships in Latin America continue to generate strong, consistent sales for our DPP HIV and DPP HIV Syphilis products. As mentioned earlier, we’re encouraged by the growth of our DPP products and we look forward to sharing future successes related to these products. To summarize, the third quarter was extremely productive and we delivered on a number of promises made during the previous quarter. In Q3, we saw significant growth in DPP product sales, our recent receipt of the CLIA Waiver for our DPP HIV assay. We are immediately expanding our U.S. sales and marketing organization to reach a much broader healthcare market. To support this effort, we’ve signed agreements with three leading distribution organizations for the sale of DPP HIV assay and HIV STAT-PAK product in the United States. With the CLIA Waiver and these agreements in place, we expect a further positive impact to DPP sales going forward. And while we take these steps to expand our markets, and continue our focused internal product development efforts, we’ve signed three new agreements to develop point-of-care DPP assays for Ebola, dengue fever and a specific type of cancer. The third quarter was exceptionally productive and we look forward to executing on the opportunities that have been set in motion. This concludes the prepared remarks for today. I’d now like to open the call for any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Bill Bonello from Craig-Hallum. Please proceed with your question.

[William B. Bonello:]

Thanks. Good morning, guys, and thanks for all that color. It was very helpful. Just a follow-up question on the CLIA Waiver and the DPP HIV, do you have a sense at this point, of the magnitude of sort of the oral fluid market for HIV testing in the U.S.? And then I have kind of a follow-up to that.

[John J. Sperzel:]

Well, I think the oral fluid market is dominated by one competitor today. They announced their financials yesterday. They showed a decrease in their HIV sales quarter-on-quarter and year-on-year. And we hope that that trend continues.

[William B. Bonello:]

Okay. But presumably some of that revenue is that revenue, if not all, oral collection I assume to level [indiscernible].

[John J. Sperzel:]

So close.

[William B. Bonello:]

Okay. And then, having – just when you think about selling into a customer case, I mean, even for customers where – are there customers who they are using oral fluid and they’re using blood and having the broad sort of suite of opportunity put you in a better position to win to your business or the customers tend to either want to use oral fluid as opposed to blood rather than both?

[John J. Sperzel:]

So, two questions there. First thing is, the CLIA Waiver absolutely expands our market opportunity with the exception of the hospital market which does a number of, what we call, moderately complex diagnostic test. HIV test that get traction in the U.S. market are CLIA Waived, period. So the CLIA Waiver is essential for us to get traction with our DPP HIV product. In terms of the question about oral fluid, certainly blood and oral fluid products when it comes to HIV, coexist in the market. Some customers prefer blood, some customers prefer oral fluid. Performance is what matters, and we believe the performance of the DPP assay, both for blood and oral fluids specimens, achieves the sensitivity and specificity requirements that our customers have.

[William B. Bonello:]

Okay. And that’s helpful. All right. I’ll just hop back in the queue. Thank you.

[John J. Sperzel:]

Thank you, Bill.

[Operator:]

Our next question comes from the line of Paul Nouri from Noble Equity Fund. Please proceed with your question.

[Paul Nouri:]

Do you have an ample amount of inventory of the oral product?

[John J. Sperzel:]

Yes.

[Paul Nouri:]

You do? Okay. And when you talk about expanding the U.S. team, over the next quarters, is that’s the magnitude of like a couple more people. Are you going to kind of do it gradually to see how demand comes along, or what’s your on this?

[John J. Sperzel:]

I think you could describe it as systematic. Prior to getting the DPP HIV CLIA Waiver, we were selling the HIV STAT-PAK product predominantly to the public health market. And as I mentioned in prior calls, we’re able to reach that market with two sales reps. I think what you could anticipate is that we would increase our direct sales reps in the U.S. from two to probably six within the fourth quarter.

[Paul Nouri:]

Okay. And going into next year, if everything kind of – if all the stars align and everything goes well the earlier patent rolls off, which should improve the gross margin on those products and your production goes up. What is the upper bound to gross margin we can look for in the next couple of years, kind of go up to like the 50% range?

[John J. Sperzel:]

Well, we wouldn’t give guidance on what the margins are going to look like, but I think it’s fair to say, given the product mix that we have and the portfolio of products that we have, that is certainly a reasonable target.

[Paul Nouri:]

Okay. And turning to R&D, it’s come down quite a bit to where it has been for a number of quarters. And thinking about the number of projects that we’re talking about, is that going to ramp back up a little bit to where it has been or stay in that kind of 1 million to 1.2 million range?

[John J. Sperzel:]

So, before we talk about the numbers, it’s important to just go back to something that I’ve said in recent investor meetings and I alluded to in the last earnings call and that is how we structure and how we execute in research and in development. And as we talked last time, what we do in diagnostics is a whole lot of D and very little R. Chembio is a bit unique here, because we have a pretty good track record of getting research-based grants. Now, admittedly those efforts have not always been focused and that is absolutely changing. So you think about the discussions we had in the last quarter and this quarter, we have four internal development projects which I mentioned before. HIV Syphilis combo assay for the U.S., oral fluid enhancements, and antibody antigen based HIV test, and an HCV assay. Those four projects reporting to our Chief Operating Officer, they have dedicated teams focused on them. And it’s all about execution. On the research side of our business, research projects that we bring in to the company, reports to our Chief Science & Technology Officer. They are generally funded by our partners, with a few exceptions, as I mentioned the IBT partnership that we have for the Ebola assay. And so, when we think about the investments that we’re going to make in the product development, the majority of those will be for those four projects that I mentioned initially and for any others that we might add to that group as we start to achieve certain milestones on those four. And Rich, do you want to make any other comments?

[Richard J. Larkin:]

Yeah. Paul, I just also wanted to point out if you also look at our MD&A in the 10-Q, we give some details as to some of the components that makeup R&D. And our R&D is made up of two major components, which is our clinical and regulatory affairs and then our R&D other than regulatory. And in the nine-month period, we had in excess of $868,000 decrease in clinical trials. So the decrease you see is mostly due to the clinical trials not being, not recurring right now in this period.

[Paul Nouri:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Jan Wald from The Benchmark Company. Please proceed with your question.

[Jan David Wald:]

Hi. Good morning, everyone. I guess my first question is, you mentioned that you’re going to increase your internal sales force, and you also hired up some distributors. How do you see the sales force growing and what’s the role of the internal sales force, what’s the role of the distributors going forward?

[John J. Sperzel:]

So, it’s probably important to define what a distributor is, because in the past we had an exclusive U.S. partner, which was technically a manufacturer. So, when we reference having two or in the case of this morning, three distributors that we have established partnerships with, we’re talking about distribution companies that provide medical surgical products and diagnostic products to end-user customers. So it’s quite common to have that as part of the supply chain. They supply products. They carry receivables. They handle the logistics. They inventory product. And those distribution companies, in order to be successful in my 25 plus years of experience, need manufacturer sales reps to support them, to have end-user discussions and to help close business. So, think about those two coexisting and supporting each other.

[Jan David Wald:]

Okay. And secondly, I guess, the new business opportunities that you mentioned. They sound interesting and most of them, in your terms, [indiscernible], how do you see them sort of coming out in terms of a timeline and supporting revenues? Is it 2016-2017 type timeframe? What’s your sense there?

[John J. Sperzel:]

So, they’re all very early. We just announced them last week. So it would be premature to get timelines. The one exception that I will make to that is with respect to Ebola, because as you know there is a crisis. And we are going to accelerate our efforts to develop a standalone Ebola assay to help with that particular crisis. Important thing to remember is, several illnesses’ not something new for Chembio. This is not something that we stepped into in the last four weeks. You really have to go back to the middle of 2013 and the partnership that we had with the U.S. government agency to develop a multiplex febrile illness assay. That will have utility, globally, well beyond the current Ebola crisis.

[Jan David Wald:]

Okay. And just my last question, excuse me, this is sort of a modeling question. So maybe you’ve already answered, but it seems like you do have a nice opportunity to CLIA Waiver, now that you’ve got it. In terms of our model, how do we sort of grow that revenue? Is this something that’s going to happen quickly, now that you’ve got it, is it something that’s going to take time? How do we understand what the opportunity is for you?

[John J. Sperzel:]

Well, I think the first thing to say is, we are going to add sales resources. We have a number of distribution partnerships already in hand. We are now focused on execution. It will absolutely take time. Our competitors are very good companies with very good products and these customers tend to buy under contract. So, these contracts are not broken overnight. And I think you can expect a slow, but steady ramp when it comes to our DPP HIV products in the U.S. market. These are not one in large tenders as they are in some of the parts of the world. They are one customer-by-customer, account-by-account.

[Jan David Wald:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Raymond Myers from The Benchmark Company. Please proceed with your question.

[Raymond Myers:]

Yes. Thank you. And just to be clear on the one’s with Benchmark and with earlier financial which I should also be clear has no relation to the former partner, Chembio, that earlier incorporated. So, John, my first question is, you mentioned you’re adding four more sales reps in the current quarter. Since two recovering public health, what will the new four sales people will be targeting?

[John J. Sperzel:]

So I wouldn’t think of them as two people doing one thing and four people doing another. And just it’s a little bit an estimate on the number too because we have to find the right people and we have to find them in the right geographies to make sure that we get good geographic coverage to support the distributors that we just partnered with. So, it’s really a generalist sales model. We won’t have two people calling on public health, two people calling on physician offices and a few people calling on the hospital market. We will have a number of people that sell our HIV STAT-PAK product and our DPP HIV product that’s for blood and oral fluid, the generalist sales model.

[Raymond Myers:]

Okay. Sounds good. You mentioned that you’ll be developing several new tests, but I don’t believe you gave a timeline. So, could you give a sense of the timing of how long it would take to develop the Ebola, the dengue fever and cancer tests?

[John J. Sperzel:]

It would be premature to give a timeline on those.

[Raymond Myers:]

Is that a – can you give us kind of a bracket, is it a two to three-year development process or three to five, can you give us any sense at all?

[John J. Sperzel:]

I think for rapid diagnostic tests, you’re in the ballpark.

[Raymond Myers:]

Okay, great. Actually in the ballpark, the first – the former or the latter?

[John J. Sperzel:]

Well, I bracketed the whole thing, Ray.

[Raymond Myers:]

Okay. Well, you covered it all. Do you have a sense of how much remaining inventory Chembio has that are still held for distribution by your former partner Alere Incorporated?

[John J. Sperzel:]

We do.

[Raymond Myers:]

And will you share it?

[John J. Sperzel:]

They have notified customers few different times of the likely inventory that they would have i.e. when they might run out. We believe that the end of that road will happen during the fourth quarter of this year. Interestingly, we also get visibility to end-user sales by our partner on the SURE CHECK product and our former on the STAT-PAK product by the way has rights to sell their existing STAT-PAK inventory. And what we see is pretty consistent volume in total when you look at SURE CHECK and STAT-PAK combined. The mix is a little bit different over time, but the overall volume at the end-user level is pretty consistent which is a great sign. Remember, we did get facts at the both products and we either get revenue or royalties or a percentage of sales on both products as well.

[Raymond Myers:]

Yeah. Sure. It sounds good. One final question, John, well things starting to come together. What anti-takeover provisions thus Chembio have to protect the company?

[John J. Sperzel:]

I’ll ask Rich to respond to that.

[Richard J. Larkin:]

If you look at our footnotes, in our financial statements, we do have a discussion in Note 5 of our rights agreement, then that discusses the, if you will, the poison fellow we have against someone trying to takeover.

[Raymond Myers:]

Okay. Sounds good, gentlemen. Thank you.

[John J. Sperzel:]

Thank you, Ray.

[Operator:]

Our next question comes from the line of Larry Haimovitch from HMTC. Please proceed with your question.

[Larry Haimovitch:]

Good morning, John.

[John J. Sperzel:]

Hi, Larry. How are you?

[Larry Haimovitch:]

Great. How are you doing today?

[John J. Sperzel:]

Perfect.

[Larry Haimovitch:]

So, congrats on all the progress, great update as well. Last quarter, as you recall, there was a lot of talk about the word lumpiness, as you remember, and the international orders. I don’t think I heard anything about international in the call, wondered if there were any significant orders. Didn’t look like there was give that DPP was $5 million of the approximately $7 million, but can you update us at all on international, particularly Brazil, where you did very well last quarter?

[John J. Sperzel:]

So, you did not hear the lumpiness, you actually heard the word consistent. I probably said couple of times.

[Larry Haimovitch:]

Yeah.

[John J. Sperzel:]

And we did that between the second quarter and the third quarter, almost to the dollar. We saw strong performance in Latin America during the second quarter, and we saw strong performance in Latin America during the third quarter. And that as you deliver that within our part, and a strong partnership on the part of our partners there.

[Larry Haimovitch:]

So, John, of the approximately $5 million of DPP revenue in Q3, how much is domestic and how much is international? Can you break that down for us?

[John J. Sperzel:]

Well, domestic was almost nothing, Larry. I would say it’s all international.

[Larry Haimovitch:]

Okay. Bu that will begin to change obviously with the CLIA Waiver that you just got, correct?

[John J. Sperzel:]

Absolutely.

[Larry Haimovitch:]

And as I recall from discussions we’ve had, you should be able to begin shipping or perhaps already have begun shipping that DPP product once you got the approval.

[John J. Sperzel:]

We said in the Q2 earnings call, at the day we got the CLIA Waiver, we would be ready to shift and we absolutely were.

[Larry Haimovitch:]

To distributors?

[John J. Sperzel:]

To distributors or end-user customers.

[Larry Haimovitch:]

Okay, great. And then, balance sheet, Rich mentioned receivables were up significantly. Was there any issue with receivables in the quarter, Rich?

[Richard J. Larkin:]

We did have, you know what, as you know our partner in Brazil had the World Cup going on and had elections going for President, which seem to slow things down, but we are seeing things picking back up now.

[Larry Haimovitch:]

Meaning the receivables should go down in Q4 and help the source of cash?

[Richard J. Larkin:]

Yes.

[Larry Haimovitch:]

Okay, thanks. I’ll get back in queue.

[John J. Sperzel:]

Thank you, Larry.

[Operator:]

Our next question comes from the line of Joe Munda from Sidoti. Please proceed with your question.

[Joseph P. Munda:]

Good morning, guys. Can you hear me okay?

[John J. Sperzel:]

Hi, Joe. We sure can.

[Joseph P. Munda:]

John, couple questions. Seems like you guys have a lot of different opportunities here, a lot of shots on goal, I know you were brought in originally to help commercialize DPP. You feel that you guys have enough resources to execute on all the possible opportunities that you have laid out for us today, or you feel like you’re going to have to take on partnerships in order to basically commercialize all the other new opportunities you have mentioned?

[John J. Sperzel:]

That’s a great question, Joe. And it sounds like several questions within one. So I’m going to try to take that in thesis. First of all, with the exception of the comments I made about adding sales resources for our U.S. initiatives, I would absolutely say we have what we need to execute on what we have today. That said, maybe just take a moment to talk about the number of employees that we have in the company. At the end of the year, so 12/31/2013, we had 206 people in the company. Today, we have 163. So it’s about a 20% reduction, most of those came in the operation side of our business in our efforts to become more efficient. The other exception I would make beyond sales is, as we sign collaboration agreements like we mentioned on dengue fever or the specific form of cancer and others that we’re in discussions on, we may need to bring in more resources on the R side of our business. However, it’s important to note that those projects are primarily funded by our partners. So in essence they would pay to that work and they would pay for those people.

[Joseph P. Munda:]

Okay. That’s helpful. John, can you also remind us the patent term on DPP and how long until that runs out?

[John J. Sperzel:]

Those patents were issued in 2007.

[Joseph P. Munda:]

Okay. As far as Latin America is concerned, I know you guys did reference in the FIOCRUZ they, I didn’t see you mention of Labtest, any developments there or any color that would be helpful.

[John J. Sperzel:]

So, Labtest continues to go through the registration process, which you know can be lengthy. And we continue to provide great support for that process.

[Joseph P. Munda:]

Okay. Any thoughts on when that process could come to fruition or any thoughts there?

[John J. Sperzel:]

I wouldn’t want to guess, Joe.

[Joseph P. Munda:]

Okay. As far as Latin America is concerned, I mean, there were questions in the past to whether the orders would continue to add an opportunity, I think there was an option in the contract to continue as well. I mean how should we look at Latin America going forward? Do you see it coming back to the level it was historically or any color that would be great?

[John J. Sperzel:]

I would look at that as a very important market for Chembio, one where we put a lot of energy and a lot of effort and a lot of resources into managing those partnerships. As I said in prior calls, we treat the partners in Latin America the same way we treat any customer in any part of the world where it’s not just about a one-time event, a one-time product sale or one-time tech transfer. We continue to bring new interesting technologies to these markets and some of these projects that we are leading internally or some of the ones that we are developing through partnerships, we will maintain distribution rights for certain territories and we expect to exploit those efforts in regions including Latin America.

[Joseph P. Munda:]

Okay. And Rich actually mentioned the World Cup, I mean, how much of an impact did it actually have on the quarter’s results in South America? I mean, did you see just a surge in orders for Latin America because of the World Cup, any color that would be great.

[John J. Sperzel:]

I would say it actually didn’t affect sales, it affected the receivables and it wasn’t just the World Cup, it was also the election that was held and people just being a bit paralyzed because of it.

[Joseph P. Munda:]

Okay. And then, I guess, my final question on the gross margin side of the business, I’m assuming DPP has a higher margin than what you guys were doing in lateral flow. So I’m just – where you guys just unable to absorb the decrease in revenue from your former partner and is that the core reason as far as why gross margin came down in the quarter?

[Richard J. Larkin:]

There’s various reasons for the decrease. Again, product mix was one of the issues. Certainly not having the U.S. partner sales, has a negative impact on us. While you’re right, in general DPP would have higher margins. There are certain products that that do not have as higher a margin, so there is a bit of a product mix situation going on there as well, plus the volume. Compared to last year, we had a lot of volume going through the business and that helps to absorb a lot of overhead, less volume is absorb less overhead.

[Joseph P. Munda:]

Okay. And I guess, just one follow-up to that. Actually, no, I’m good. Thank you.

[John J. Sperzel:]

Okay. Thank you, Joe.

[Operator:]

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

[Brian Marckx:]

Hi, guys. Congratulations on the quarter and all the progress.

[John J. Sperzel:]

Thank you, Brian.

[Brian Marckx:]

The DPP international sales have been, I guess, tremendous the last couple of quarters. And I think about twice that relative to the best quarter prior to Q2, any kind of more insight that you can provide relative to the recent strength, I guess, in the DPP international sales.

[John J. Sperzel:]

DPP HIV, DPP HIV Syphilis and the other products that we’re developing on the platform are terrific products and they’re being very well received by the customer. I think what you see in the discussion that we’ve had whether it’s the prepared remarks or the Q&A is that we are putting our efforts on the DPP technology, whether it’s internal development efforts, whether it’s collaboration efforts, or whether it’s commercial efforts, it’s about DPP. It’s patented. It’s versatile. And we believe that it has application in a broad range of point-of-care applications. So, we’re really focused on it, Brian.

[Brian Marckx:]

Okay. Do you say that the level of sales kind of the $5.2 million or $5.3 million that you’ve done internationally with DPP in the last couple of quarters. Is that, do you think, that that fit sustainable going forward I guess?

[John J. Sperzel:]

I wouldn’t want to give guidance on that, Brian.

[Brian Marckx:]

Okay. Okay. All right. Anything more that you can talk about relative to the status of development of the DPP HIV Syphilis tests for the U.S. market and kind of your game plan for meeting FDA requirements?

[John J. Sperzel:]

It’s our top priority. Now that we have the DPP HIV CLIA Waiver behind us, we can focus on our regulatory team on the DPP HIV Syphilis product. We obviously have a successful HIV Syphilis combination assay that we sell in Latin America and we’re using those learnings as well as what we know from the discussions with the regulatory bodies to make sure that we make the current or the correct adoptions in the product so that we have a U.S. product. So we’re very focused on it. It’s our top internal priority.

[Brian Marckx:]

Okay. And one…

[John J. Sperzel:]

The other thing if I could for a second, Brian, is just to make a comment on the regulatory side of things, it’s also worth noting that Bio-Rad announced FDA approval of their Geenius HIV Confirmatory Assay, the same week as our DPP HIV Assay received the CLIA Waiver. Why that’s noteworthy is that Bio-Rad’s Geenius HIV Confirmatory Assay is licensed from Chembio that is DPP.

[Brian Marckx:]

Okay.

[John J. Sperzel:]

We received royalties on those sales.

[Brian Marckx:]

Great.

[John J. Sperzel:]

And I can say that the last comment about CLIA Waiver is, I said in my remarkets, we’re delighted to have the CLIA Waiver for oral fluid, for finger stick for venous whole blood. We now have three CLIA Waived three FDA approved HIV assays, more than any other firm.

[Brian Marckx:]

Yeah.

[John J. Sperzel:]

For those who are keeping score, I take full responsibility for stating we have the DPP HIV CLIA Waiver in the third quarter. We missed the target by 30 days and then I can assure you, we kept our eye on that target every single one of them.

[Brian Marckx:]

Yeah, absolutely. Okay. One on the febrile illness DPP test that you’re going to pursue, is there anything that you’ve learned, I guess, from the R&D with the U.S. grant for febrile illness that kind of translates into development of the DPP proprietary product that potentially moves that development forward accelerates it, I guess.

[John J. Sperzel:]

There absolutely is learning that is why we’re confident about the ability to develop a dengue fever assay that’s why we have confidence in the partnership with IBT about developing a dengue fever assay and other learnings that we had from that partnership with the U.S. government agency. So we are comforting in our ability to develop a multiplex DPP assay for febrile illness including both.

[Brian Marckx:]

And John, well the development of the new test that you’re pursuing, does that start essentially immediately?

[John J. Sperzel:]

Which test is that, Brian, for Ebola?

[Brian Marckx:]

For Ebola, febrile illness, dengue fever, the cancer test.

[John J. Sperzel:]

So, I would take those in parts. For Ebola, it’s already started. For dengue fever, it has started. I won’t say what all of the assays were in the febrile illness multiplex panel, but dengue fever was one, Ebola was not. So there are key learnings there that we know. And to be able to make an Ebola assay requires having the antibodies, which is precisely why we partner with IBT on an exclusive basis.

[Brian Marckx:]

Okay. All right. Thanks a lot guys.

[John J. Sperzel:]

Thank you, Brian.

[Operator:]

[Operator Instructions] Our next question is a follow-up question from the Paul Nouri from Noble Equity Group. Please proceed with your question.

[Paul Nouri:]

Would you say that your recent experience in appending the CLIA Waiver and the fact that it was delayed? Would you say that you’re more likely to go for products? Is that require a CLIA Waiver because may if you’ve learned the process a lot better and you can navigate it better, or is it something that you’ll look to stay away from?

[John J. Sperzel:]

Well, because something is difficult we certainly would not stay away from it. First thing is just actually, we have three PMA approved and three CLIA Waiver HIV assays, more than any other company, more than several companies combined. So we’re actually very good at this. We put forth a CLIA Waiver submission for oral fluid, for venous blood and for finger stick that is a very complicated CLIA Waiver application, more complicated than anybody has ever gone through and it was also under the new CLIA Waiver guidelines. So we are very, very happy, ecstatic even to have the CLIA Waiver knowing the rigor of the process that we went through, and it gives us confidence about the performance of the product and the ease of use. Every product has to stand on its own when it comes to PMA or 510(k) or CLIA Waiver. However, knowing that we have a CLIA Waived DPP HIV Assay, does give us confidence in the ease of use component of a CLIA Waiver that’s where there probably is some halo effect assuming that the procedure is the same from one DPP test to the other. The analytical performance, the level of detection, that will have to stand on its own assay by assay.

[Paul Nouri:]

Okay, great. Thanks.

[John J. Sperzel:]

Thank you, Paul.

[Operator:]

Our next question comes from the line of Matthew Campbell from Laridae Capital. Please proceed with your question.

[Matthew Campbell:]

Hey, John, it’s actually Laridae Capital. Great quarter. We haven’t heard or I don’t think you spoke about your relationship with the Malaysian company RVR, I was just curious how that is progressing?

[John J. Sperzel:]

Hi, Matt. It’s progressing very well. I mentioned in the earlier remarks that the team at RVR is highly motivated. They are building a manufacturing site that’s dedicated to Chembio products, initially our DPP HIV Assay. They have ordered equipment. They are setting up that equipment, validating that equipment and we expect to complete the first pilot lot production by the end of this year. So it’s on…

[Matthew Campbell:]

That’s great.

[John J. Sperzel:]

It’s on budget. And we’re very happy with that partnership. I’ve been there personally and seen the progress and on a number of occasions since doing a company had met with the team.

[Matthew Campbell:]

Good. And if I could follow-up, I just was curious and so, you’re going to have six sales people by the end of the year. Could you comment on what types of sales people they are, are they experienced, have they been in healthcare repo or are you looking for young kids out of college?

[John J. Sperzel:]

So, I’ve just put an approximate six to the number just so that’s not a hard number. Again it depends on where we folks, the quality of the people that we find. As far as hiring profile is concerned, we are hiring experienced sales reps with experience in infectious disease and in particular HIV. So you could, in a way say, we are buying talents and that’s important out of the gate.

[Matthew Campbell:]

Great. Thanks a lot, and a fantastic quarter.

[John J. Sperzel:]

Thank you, Matt.

[Operator:]

There are no further questions in queue. I’d like to hand the call back over to management for closing comments.

[John J. Sperzel:]

Thank you, again for your participation and continued support at Chembio Diagnostics. We look forward to updating you again next quarter. Have a great day.