Chembio Diagnostics, Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to your ChemBio second quarter 2020 earnings conference call and webcast. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.

Thank you, Operator. Thank you for joining and welcome to ChemBio's second quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. As a reminder, we're recording today's conference call. If you have any objections, you may disconnect at this time. Before we begin today, let me remind you that the company's remarks made during this conference call today, August 6, 2020, include forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs and expectations of the company. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, many of which are beyond ChemBio's control, including risks and uncertainties described from time to time in ChemBio's SEC filings. including those under risk factors and elsewhere in ChemBio's filings with the SEC, including its annual report on Form 10-K for 2019 and its quarterly report on Form 10-Q for the first quarter of 2020. ChemBio's results may differ materially from those projected. ChemBio undertakes no obligation to publicly revise or update any forward-looking statement made today. I encourage you to review all of the company's filings with the SEC concerning these and other matters. With that, I'd like to turn the call over to Rick Eberle, President and Chief Executive Officer.

Thank you all for joining us this afternoon. Before we begin, I must recognize that we continue to work amid challenging times as the COVID-19 pandemic persists in our communities. Thank you to the frontline healthcare workers who remain steadfast in their service and sacrifice, caring for those directly affected by this virus. Our thoughts are with all of you. Thank you also to our employees. I applaud your resilience and dedication in driving our products, aimed at being a part of the solution to the public health crisis we face. Today, I will provide updates on the initiatives we have undertaken to drive a new strategic direction for our business by bringing new products to new customers initially through the development of our COVID-19 testing products. Next, I will review our legacy infectious disease business and R&D services vertical before turning the call over to Neil for detailed financial results. After that, I will provide concluding remarks and open the call for questions and answers. I'd like to start by briefly reviewing key quarterly financial results. In the second quarter, as we previously described in our preliminary results release, we executed the initial steps to implement this new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management. In the second quarter of 2020, our total revenues were $5.1 million. This includes product revenue of $3.8 million and licensed royalty and R&D and grant revenue of $1.3 million. The FDA's revocation of the Emergency Use Authorization, or EUA, for our DPP COVID-19 IgM IgG system had a significant negative impact on our product revenues and gross product margins in the second quarter. The revocation triggered a recall of unused tests from customers in the United States, and we are aware that it was noted by international regulatory bodies. Based on that, We determined that it was not appropriate to recognize revenue in the second quarter for certain shipments of the COVID-19 system outside the United States. The cost of the ship's product is included in cost of sales and together with the impact of the foregone revenue resulting from the U.S. recall resulted in our reporting negative gross product margins for the second quarter of 2020. Neil will provide further comments on this accounting treatment. As I said during the July 7th conference call, we stand behind the real-world clinical data and performance of our original COVID-19 system. I can assure you that we are working closely and collaboratively with our customers with the intent to bring closure to these shipments outside the United States, including ultimately recognizing the revenue associated with them. From the onset of the pandemic, we recognized our proprietary DPP technology could provide value across several COVID-19-related testing applications. The DPP technology, in combination with our micro-readers, provides specific benefits that we believe make it well-suited to point-of-care testing. The system is portable, provides accurate results in 15 minutes from finger-stick blood or other samples, and is designed to detect multiple biomarkers simultaneously and discreetly. At the same time, the easy-to-use testing workflow is scalable. Clinicians can run multiple tests at the same time because test cartridges are only required to be inserted in the microreader for 15 seconds to obtain results following the 15-minute test incubation period. Our technology facilitates the decentralization of tests away from core labs. Moving the diagnostic results closer to patients and providers allows treatment and patient management decisions to be made more rapidly while also freeing up hospital and central laboratory resources. Additionally, offering tests at doctors' offices and urgent care centers that require only simple sample collection makes higher frequency testing more feasible and efficient. With a deeper understanding of this virus, many public health officials have determined that to better manage the health of the general population, the question is no longer whether we should be testing or what types of tests should be used, but rather how often we should be testing. The recent increases in case volumes has highlighted the need for both more tests and tests that can provide results much sooner after the onset of symptoms than the long waiting periods being experienced in parts of the country right now. We believe our point-of-care system addresses these market needs. The demand for COVID-19 testing products in the United States extends beyond our current customer base that utilizes our rapid HIV tests. We believe this provides us the opportunity to build a broader base of customers as we sell micro-rater analyzers to clinicians at hospitals, physician offices, urgent care centers, and other locations that provide healthcare. As we diversify our customer base, we intend to serve these new customers over the long term by expanding our menu of DPP tests to meet additional needs in the market for the detection of biomarkers to help identify respiratory, gastroenterology, and neurological conditions. We feel there are many tests we can develop over time to competitively address high-value and high-demand areas. This strategy represents a significant shift in our focus and business model. In the United States, we will be focused on driving recurring revenue. We will drive more frequent and regular GPP assay orders from many customers with micro readers, as opposed to the large, discreet, and in many cases, tender-driven orders placed by governments and NGOs that we experience in our legacy infectious disease business outside the United States. We feel this model represents an opportunity to grow revenues over time in a stable and predictable manner. Now I would like to discuss our plans to leverage ChemBio's technology to develop a portfolio of COVID-19 tests. We are encouraged by the exponential market growth observed as a result of the immense demand for various types of COVID-19 tests across a wide variety of settings and providers. This interest includes demand from areas outside of traditional healthcare verticals, such as companies seeking to establish back-to-work programs. We feel the advantages and versatility provided by our TPP assays and micro-readers creates an opportunity for us to take share and build a meaningful position in this market. Our success here is dependent on three factors, product development, regulatory clearance, and commercial execution. In product development, we are working on a complementary set of COVID-19 tests with unique capabilities to assist clinicians in all phases of virus detection and infection monitoring. We have two tests currently under development, the revised DPP COVID-19 IgM IgG system for antibody detection and the DPP COVID-19 antigen system for viral protein detection. Further along in development is a revised BPP COVID-19 IgM-IgG system serology test for the detection of two types of COVID-19 antibodies. In June, the FDA identified new performance criteria that serology tests must now meet to achieve EUA. These criteria include test performance as evaluated under a protocol that is part of a National Institutes of Health National Cancer Institute, or NCI, studies consisting of antibody detection across a panel of preselected samples. These defined standards have provided us with clarity and direction for our development objectives. The scientific and clinical knowledge base, along with our understanding of the virus and how it interacts with our technology, have both expanded significantly since our initial EUA was received. We are optimistic that with the clear definition of these requirements, combined with the expertise of our scientists and the flexibility of our platform, we can complete a revised system in a short period of time. We will remain on track to submit this revised system for EUA in this third quarter. At this stage, we are in the process of revising the test to meet or exceed the FDA's performance criteria, including the NCI panel. The next step includes completing preclinical and clinical studies and then providing performance meets or exceeds the criteria, submitting an EUA to the FDA for approval. The second separate offering in our COVID-19 testing portfolio will be the DPP COVID-19 Antigen System. This test is being designed for use in identifying viral proteins or active infections and patients at the point of care in 15 minutes using either a nasal or nasal pharyngeal swab sample, a DCP assay, and our micro-reader. We are honored that to assist in the development and pursuit of an EUA for this test, we were awarded a $628,000 contract from Pharma, the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services. Funding is being provided periodically over the coming months. Thus far, results from our feasibility studies have been positive. Our next step is to begin a pile of studies from which we will implement any changes before ultimately beginning clinical trials to generate the data for EUA submission. We were very excited about our future testing system and believe that collectively, their wide range of clinical utility could provide us with an opportunity to offer clinicians a highly efficient, convenient, and comprehensive point of care approach while using a single, portable analyzer. A less than $1,500 investment in a micro-reader combined with a suite of our GPP assays could help clinicians identify active infections, past infections, infection progression, research immunity status as vaccines are developed, and finally, conduct population surveillance research. With expanding knowledge and resources, the healthcare system is entering the next phase of testing in which the focus will expand beyond symptomatic patients to asymptomatic patients as well. We feel we are very well positioned to capitalize on this expanded opportunity through our platform, which we believe has the capacity to become one of the most comprehensive offerings in point of care testing. Transitioning now to the build out of our commercial infrastructure in the United States. As part of a broader corporate strategic shift, we will be targeting new customers in different healthcare markets. Addressing a much broader and decentralized market will require investments to increase our commercial footprint. To grow most efficiently, we will employ both an expanded direct sales force and partner with distributors. The initial focus for both of these teams will be on hospital laboratories, physician office laboratories, and local and state health departments. To lead our direct sales force, we hired Chuck Caso as Vice President of Sales and Marketing. Throughout his career, Chuck has achieved success in launching new diagnostic products, and he brings deep industry relationships to the team. We also remain engaged with Fisher Healthcare and will continue discussions with other distributors to focus on other channels beyond physicians' offices and hospital labs. To support our commercial efforts and support future growth, we are also adding to our marketing and customer service teams in a manner that is aligned with our growth expectations. Considering our prior experience in the market with our serology test, We anticipate the launch of the revised system to ramp up more quickly once regulatory approval has been obtained. There are many reasons we remain optimistic about our near-term opportunity for the modified serology system. These include, we received over 2,000 leads representing interest and purchasing systems based on our initial EUA prior to revocation. The team at Fisher has already been trained and we have developed strong rapport as our team will aid in field sales support. We've experienced no market pushback on the pricing for either the assays or micro readers. Customers confirmed reimbursement has been implemented by both CMS and commercial payers for both IGM and IGG test results, further increasing the value proposition of a multiplex test. Our mid-quarter direct sales run rate outside the United States shipment schedule demand indications from Fisher, and other opportunities, together implied second quarter sales in the range of $11 to $13 million prior to the EUA revocation. On the manufacturing and logistics front, we were prepared to accommodate this level of demand with additional capacity to scale accordingly. From what we have observed in the market, a similar opportunity exists for the antigen test. Right now, testing manufacturers cannot keep up with the demand for tests. As I described, once regulatory approval has been obtained, we plan to offer a complimentary set of tests, both utilizing DPP assays and micro readers to fulfill unmet needs and decentralized testing in the market. Before turning the call over to Neil, I will touch on our legacy business in terms of both the infectious disease vertical and the R&D services vertical. As we mentioned, demand for our HIV and fever and tropical disease tests has slowed as our government and NGO customers also focus their resources on efforts to combat COVID-19. In a positive sign, UNICEF placed an additional $1.5 million order under the previous long-term arrangement for the purchase of multiplex Zika, chikungunya, and dengue IgM IgG assays and micro-ears. Also notably, we received 510K FDA clearance for the DPP Zika IgM system. This represents the first FDA approval for a micro-reader that will be used with our COVID-19 test. The development of this test was also assisted by an award from BARDA. Regarding the PMA of our DPP HIV syphilis multi-flex system, we continue to dialogue with the FDA regarding their review of our reproducibility study. In the R&D services vertical, ChemBio has been selected to conduct a second research and development services program for Takeda Pharmaceutical Company Limited. The program utilizes ChemBio's DPP technology and microreader analyzers. As you likely know, Takeda is the largest pharmaceutical company in Asia and one of the largest in the world. Now I'll turn the call over to Neil for the details of our second quarter financial results. Thanks. I'm going to start with an overview of the results for the second quarter of 2020. Then, as Rick indicated, I will provide some comments on how the EUA revocation impacted our financial results. For the three months ended June 30, 2020, total revenue was $5.1 million, a decrease of 48.3% compared to the prior year quarter. Net product sales for the second quarter of 2020 were $3.8 million, an increase, excuse me, a decrease of 56.8% compared to the prior year quarter. License and royalty and R&D and grant revenues combined for the three months ended June 30, 2020 were $1.3 million, an increase of 19.7% compared to the prior year period. R&D revenue is related to the timing and cadence of program performance obligations which do not always occur in a certain period, but we continue to incur certain of the expenses. Compared to the three months ended June 30, 2019, net product sales experienced gains of 134.7% in the United States related to DPP COVID-19 IgM IgG systems that were sold and utilized by customers. Net product sales were relatively flat in Europe, the Middle East, and Asia. and we're down 76.4% and 84.1% in Africa and Latin America, respectively, related to the shift in our focus from HIV to COVID-19 tests. Gross product margins during the three months ended June 30, 2020, declined by $3.7 million compared to the prior year period. The reduction in gross product margins, and indeed the negative gross margin figure in the quarter overall, resulted from two things. First, cost of product sales includes the cost of COVID-19 systems that were produced and sold to customers in the U.S. and then were subsequently returned by those customers following the FDA's revocation of the EUA. Second, cost of product sales also includes the cost of COVID-19 systems that were produced and shipped outside the U.S. but for which revenue was not recognized in the quarter. This scenario is due to the requirement of U.S. generally accepted accounting principles, or GAAP, that we have a high degree of confidence that it is probable that a significant reversal in revenue will not occur. Many factors can affect that consideration, including, as examples, things outside our influence, actions of third parties, and evidence from similar situations. After considering all the information available to us, we decided we were unable to recognize the revenue from those shipments in the second quarter due to the hurdle that requires a high degree of confidence that it is probable that a significant reversal in revenue will not occur. We are certainly hopeful that in time, the factors that affect consideration will be satisfied to allow us to recognize this revenue on a future date. While recognition of the shipment revenue could happen in the third or fourth quarter of 2020, similarly, it is possible that recognition might not happen at all, and that is reflected in our accounting treatment at this time. One final point on the accounting implications of what I have been describing. Because we were required to recognize the cost of the product shipped in the second quarter in cost of sales, If the sales value of that inventory is recognized as revenue in the future, it will be at 100% gross product margin. As Rick said earlier, we stand behind the real-world clinical data and performance of our original COVID-19 system, and we are working closely and collaboratively with our non-U.S. customers with the intent to bring closure to these shipments, including recognizing the revenue associated with them. Now, I'll continue moving down the income statement. During the quarter, we made progress implementing Project Renaissance, which is the expense reduction program that we previously announced. We have taken measures to right-size the organization, reduce operating expenses, and remove other non-essential costs. As part of this evaluation, we have taken steps to retrench our Malaysian facility and the workforce there. We are preserving our corporation in Malaysia and the product registrations will remain active, allowing for continuing operations if needed in the future. At this time, investment there does not enable the profitable growth upon which we are focused. Other expenses, which includes research and development and selling general and administrative expenses combined, were $6.7 million for the three months ended June 30, 2020, compared to $6.2 million in the prior year period. R&D costs declined modestly by $0.3 million, excluding severance, restructuring, and other related costs of $0.4 million related to Project Renaissance. Selling general and administrative expenses increased by $0.3 million, or 7.3%, for the three months ended June 30, 2020, compared to the prior year period. Net loss in the quarter ended June 30, 2020 with $7.8 million or 42 cents per diluted share compared to a net loss of $3.2 million or 19 cents per diluted share in the prior year period. On the balance sheet, cash and cash equivalents as of June 30, 2020 totaled $36.4 million including net proceeds of $28.4 million from our public offering of common stock in May. Net working capital as of June 30, 2020, was $39.6 million. Now I'll turn the call back to Rick for concluding remarks. Thank you, Dale. To wrap up, in summary, we are driving towards creating a high-value point-of-care diagnostics company by expanding the menu of DPP assays that utilize our micro-retins. As we have proven our leadership internationally with infectious disease testing, We are excited to pursue a number of opportunities described today to do the same in the United States. Starting with our COVID-19 tests, we plan to gain regulatory approval from the FDA and then expand the base of customers using micro readers across new healthcare markets that can benefit from point of care testing over the long term. We look forward to growing these relationships with subsequent additional high-value tests in areas like gastroenterology and neurology. We are progressing along a defined strategic path and are confident that with our technology and team, we can execute on our priorities to diversify and expand upon our legacy business to drive sustained long-term growth, increase profitability, and create value. Again, I would like to thank our employees for their hard work and dedication, and thank you all for joining us today. We look forward to updating you on our next call. With that, operator, please open up the call to questions.