Chembio Diagnostics, Inc.

up to an aggregate of $60 million of shares of common stock. Subsequent to the event at the end of the second quarter, as of July 26, 2021, $36.9 million of gross proceeds have been raised for the company's ATM program from the issuance of 8,323,242 shares of common stock at a weighted average price of $4.43. Net of the placement fee and other transaction costs, the company realized estimated net proceeds of approximately $34.7 million. Net working capital as of June 30, 2021 was $15.9 million. As you likely saw from our press release this afternoon, we have determined the current and potential conditions many of which are outside our control, raise substantial doubt about the company's ability to continue as a going concern within one year after the date that our second quarter financial statements are to be issued, which we are planning to do by filing our Form 10-Q on Monday. To help people understand that, we elected to include a fair amount of detail about the going concern considerations in the press release we issued this afternoon, so please refer to that. The takeaway is that while we are pleased with the success we had in July in strengthening our liquidity position, particularly by raising capital through the ATM and finally receiving the significant purchase orders, the technical analysis under GAAP requires us to consider, for example, how the uncertainties around the delivery of the full number of tests covered by the new significant purchase orders and other customer orders may be affected by limitations of the company's supply chain, staffing and liquidity, uncertainties regarding the achievement of milestones and related recognition of revenue under government grants and other matters outside the company's control. However, under GAAP, the going discern analysis does not give effect to the prospect of raising additional capital pursuant to the ATM offering and other mitigating plans, many of which are beyond the company's control. Again, please refer to the press release for further details. I'll now turn the call back to Rick for concluding remarks. Thank you, Neil. To conclude, we are as confident as ever in ChemBio's ability to drive deeper penetration into the rapid point-of-care diagnostic testing market. We continue to invest resources to broaden our product portfolio, and we remain committed to our strategy of prioritizing high average selling price markets. We are laser-focused on driving long-term growth on a path to profitability. Recently, we made tremendous progress both on our regulatory and commercial fronts. We are encouraged by the recent large purchase orders we received for our DPP SARS-CoV-2 antigen test and our HIV-1.2 STATPAC test. We look to build on this recent positive momentum as we enter the second half of the year. We also look forward to working with the FDA, as well as other key stakeholders, such as BARDA, as we work our new products through the regulatory channels. With that, operator, please open up the call to questions. Thank you.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, you may press star 1 on your phone at this time to join the queue. If your question has been answered and you no longer wish to ask it, you may press star two to withdraw your question. We do request that if you are listening on speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone now. Our first question today is coming from Per Ostlund at Craig Hallam Capital Group. Your line is live.

Great, thanks and good afternoon, everybody. I want to start out with the sizable orders that you've announced here over the last couple of weeks and so first and foremost congratulations on those. Maybe a big picture I guess philosophical question if I I'll use that word for it. Given the order out of Brazil specifically the 28 million dollar order there that's obviously gigantic when juxtaposed against other orders you've received in the past and frankly just you know yearly revenue that you've generated. company-wide across geographies when you when you take an order like that how much do you consider or I guess feel you need to consider your ability to fulfill it and the reason I guess I asked that as you you called out some of the caveats from that press release you know like supply chain and staffing and liquidity I have to think that was such a large or a long-standing partner in BM and Gwinos that you want to be extra careful to get that right and not take on too much I guess generally speaking, what are your thoughts around that first and foremost?

Yes, Peter. Thank you for your congratulations. We certainly are delighted as a company for a couple of reasons. Number one, as you know and many know, the Brazilian company, Bia Manguinho's organization has been a long-standing partner dating back 15 to 20 years with ChemBio's history. So we were absolutely delighted to play a part in the Brazilian government's response. to the pandemic that's going on in Brazil. So some of the considerations we took into place here were our investments over the last one to two years in automation as well as the infrastructure we put in place in the organization to increase our efficiencies and so forth. We did talk in the prepared remarks about some of the decisions we had to make in the early part of the year relative to downsizing the manufacturing organization. But we were, you know, in anticipation of these large orders. We've been in discussions with BM&G since December of 2020 around their needs. It obviously took them a very, very long time to get to the point of actually committing to a contract and a purchase order. We had to make some decisions as management to continue production and produce some finished goods. as well as keep our supply chains going during the first half of the year. So we considered that and we considered how fast we could ramp a combination of our ongoing automation production of the product as well as the ability to scale up our manual production of that product as well. So as soon as we got the purchase order and even prior to that, we had put plans in place to look at how could we scale the organization through a combination of our automated lines as well as adding manual production to fulfill these orders. So that plan was well vetted by our operations team, our regulatory team, and now we have initiated already some shipments. to Brazil that we mentioned in the press release, and we are rapidly scaling our production to fulfill these orders. So philosophically is one way to look at it, but we looked at it as can we deliver on this if we get it? And so the plan was put together, well thought out. We're now working very, very closely with our supply chain partners to ensure their supply of the needed materials. from cassettes to biologicals to swabs, et cetera, et cetera, is in line with our expansion and production schedules. And here, this is Neil. I'll just add on to that. And that's why you heard me talking about, and you can read in the press release, and as you will in the 10-Q when that's filed on Monday, about why there are a number of factors that are outside of our control or any company's control that ramps up this quickly. to be able to respond to orders like this, and it's our responsibility to highlight those along with the opportunities that they create for the company.

Yeah, no, I agree. I think that's entirely reasonable. I mean, obviously, this is an order of size unlike anything you had seen, so I guess that was sort of what precipitated my question. Maybe related to that, assuming that the production and the delivery goes as planned, then you would expect all else being equal to 28.3 million for the Brazilian antigen, COVID antigen order, and then the Ethiopian HIV order. Those would be 2021 and 2022 revenue events, respectively. Is that fair to say?

The plan that we built, the internal plan, has the HIV delivery plan extending into early 2022. And so that gives you some indication of the delivery schedule for the HIV products. In terms of the COVID antigen products for Brazil, our plan is the production and delivery through 2021. And that is our current plan.

Okay. Let me ask you one more on these orders, or I guess more specifically the Brazilian order since that's the nearest end. To the extent you can speak to it, is there anything you can articulate as far as a product margin target that you're hoping for or an ASP that you're hoping for there? I guess it's probably in the contract, but anything you can tell us about that?

Yeah, Per, we have not disclosed the product margin for this particular order. Obviously for competitive reasons because we do have some competition in Brazil that we've been competing with for quite some time. So we haven't disclosed the pricing and or the product margins. largely due to, you know, number one, we didn't want our competitors to see that. Number two, the Brazilian Health Ministry is very sensitive to the commitments that they're making relative to the manufacturers that they're choosing to do business with, whether it's vaccines or diagnostics. So we wanted to respect the Brazilian Ministry of Health in that regards as well.

Okay, that's fair. That's kind of what I figured you'd say, but I figured I had to ask the question too. All right, one last one. Sure. With the proceeds raised here in July, I know you mentioned working capital and product development and commercial traction as sort of focal points there. Is there anything further, I guess, specifically from a near-end investment standpoint that you know, be it in supply chain, be it in, you know, inventory or, you know, what have you that you're really focused on, or was the nearest in issue just shoring up the balance sheet first and foremost?

Here, I'll take that, Neil. So, you know, certainly shoring up the balance sheet is part of that, but as you can go and review in the prospective supplement that we filed related to the at-the-market agreement, It describes the use of proceeds as working capital and other corporate purposes and our use of the proceeds are aligned with that. As we highlighted in the prepared remarks and Rick just touched on, we've made conscious decisions and we've talked about these on prior calls related to investing in inventory. in anticipation of both of these large orders, as well as our continuing business for our customers. And our leaders respond to them as we've done, we believe, validates those decisions. never happened as quick as you might like it to along the course of the year, but we're certainly very pleased to be at this point now and to be able to leverage that and our ability to move quickly in delivering product to Brazil is certainly being well received down there as you can imagine. I would add to that, Pierre, that one of the other things that we're very focused on is executing our longer range strategic plan. Dating back to last year when I joined Cambio, we talked about the importance of developing a future product portfolio that is for markets like the United States and Europe where the average selling price is much higher. than the traditional business we've had in the developing world around the world. So we will continue to execute on building a product portfolio beyond the respiratory antigen panel and into some of the other disease states where we have significant market presence and share. And so this will go to help us funding the longer-range strategic initiatives that we've been articulating for quite some time.

Okay, that sounds great. Thanks for all the answers and your patience as I hog the call. Thank you. No problem. Thank you, Bear.

Thank you. Our next question today is coming from Kyle Bowser at Colliers. Your line is live.

Hey, Rick and Neil. Thanks for all the detail in your updates today. Maybe I'll start with gross margin. know we had some previous inventory write downs in past quarters and I was thinking we could actually you know going forward potentially see a hundred percent gross margin on a gap basis on the product that you kept how should we think about gross margins I guess in general and being able to get back above zero percent I guess are there any other write downs expected in subsequent quarters? I guess just any sort of guidance on how we should be thinking of that. Thank you.

Well, I'll start stating the absolute patently obvious, which is zero percent is no bar. And I'll just leave that there. But if there were other things that we thought that would need to be recognized and we would be recognizing them now, that's how this process works. In this particular case, there were some products that had some regulatory approval opportunities associated with them internationally. There were products dating and expirations associated with that that still represented opportunities and commercial opportunities related to them. Like any assessment of inventory that happens from time to time, you change your estimates associated with the change in circumstances that occur and that's what happened in this case, pure and simple. As you can tell though, from a product margin standpoint, our overall product revenues during the quarter were down relative to levels at which they had been historically. So certainly there is a dimension in this related to simply the absorption of overhead and needing to cover that fixed manufacturing overhead that plays a factor into those amounts. Hopefully that helps clarify some things for you.

Got it. That's helpful. Maybe switching to the respiratory product offerings, how has the traction been, how have sales been for the in-licensing of the Princeton Biometatech respiratory test? Presumably, traction of this product will allow you to kind of understand what the demand in the marketplace looks like ahead of your own respiratory panel. So just kind of wondering, you know, how things are going with the in-license product.

Yeah, Kyle, from a strategic point of view, as we talked about on prior calls, our strategy here was to be in the market early on, ahead of the flu season, to be able to see the market, generate customer interest. Certainly, we're not in the flu season right now. So there's some limited market uptake based on the fact that we're not experiencing a flu season right now. But from a strategy point of view, we wanted to be in a position to have the product in our portfolio and begin to start selling it. So we have seen interest and we've seen orders. And most importantly now with the CDC's guidance that just recently came out within the last couple weeks, We're seeing a lot of physician office labs, urgent care centers, beginning to think about, you know, as we head into the flu season, how are they going to be positioned to be able to differentiate between COVID and flu? So we're beginning to see that interest level increase. And I think as we approach the flu season, we'll see the market begin to transition from COVID antigen-only testing to a multiplex respiratory panel.

Right. Got it. I appreciate that. And then just lastly, on the CLIA waiver, maybe you can provide some more color on how discussions have been going. Have you needed to answer questions, submit new data? I know timing is tricky here, but maybe what are some of the gating factors left before achieving that waiver?

Kyle, I think what we're excited about is that we're in active discussions with the FDA. We certainly can't talk about what those actual discussions are, but the fact that we're in active discussions with them and answering their questions, we believe the process is moving forward. And as soon as we, you know, have any decision for a CLIA waiver award or not, we'll communicate that. But I think we're all pretty excited that we're in that part of the review. And hopefully we'll have some news in the very near future.

Agreed. No, that sounds good. And I appreciate all the detail here. I'll jump back in queue.

Thanks, Kyle.

Thank you. Our last question today is coming from Bruce Jackson at the Benchmark Company. Your line is live.

Thank you. A couple of questions about Brazil. They've been a very good customer for tropical disease testing, tropical fever testing. Are they still going to be needing those tests, or has their focus shifted over to COVID-19 in terms of the immediate needs?

Yeah, so Bruce, thanks for the question. You know, obviously the COVID-19 pandemic in Brazil has taken a lot of their attention. in terms of how they're dealing with it. So the other tropical diseases, dengue, Zika, chikungunya, they still exist in the country, but we do see them seeing less attention right now given the seriousness of the COVID-19 pandemic. So most of our discussions with them over the last six months seven months has largely been around COVID-19. We continue to talk with them about HIV because they've been a very large HIV customer of ChemBio for a long, long time. But it appears, Bruce, that most of their attention is drawn to and funding the fight against the COVID-19 situation. Yeah, Bruce, what I can tell you is that through the pandemic, there has continued to be some level, which for obvious reasons I won't get into quantifying at that level of granularity, but there has continued to be some ongoing level and continues to be an ongoing level of other infectious disease tests that they're ordering and that we're making and shipping to them routinely.

Okay, good. And then in terms of the $28 million order, you were able to ship some of that out of inventory. How long will that hold them and how much time do you have to get production ramped up until they're going to need another shipment?

And so Bruce, as you might imagine, we've had lots of time to work with our friends in Brazil to map out a plan for that. So we're aligned with them on a plan that addresses their needs and that's what we're working towards. And it reflects the process of scaling up our production over the period of time that Rick described earlier to meet those needs. Having the ability to almost immediately after receiving the approved purchase order to be able to ship them finished product as well as having ongoing product and materials on hand to literally not miss a beat as we get started certainly is beneficial and is unquestionably valued by them as part of the business award and then it's now up to us as both Rick and I have talked about the prepared remarks and some of the earlier questions with our teams to scale up with our supply base the ongoing supply of materials needed to fulfill that order. Yeah, I would add to that, Bruce, Due to the collaborative relationship we have with BMA and Guiness, we've actually had staff down in Brazil recently since the award to ensure that as they scale up their internal operations to be able to accept the product, do their QC testing, release the product from BMA and Guiness, that that process goes smoothly. So we've synced up our scale-up plan with their ability to accept product. in Brazil as well. So it's been a very collaborative process and we feel good about the partnership with B&M Gingas and both their operational scale-up and our operational scale-up will be in harmony as we progress through the rest of the year. And as you might imagine, that's included both personnel from our team here in the U.S. as well as our team located at our subsidiary in Rio.

All right, that's it for me. Thank you.

Thank you, Bruce.

Thank you. We have no further questions in the queue at this time.

Okay. Thank you, operator, for your help there. That concludes our call today, and I just want to thank you for your time, and we will look forward to our next call.

Have a good afternoon.

Thank you ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.