Chembio Diagnostics, Inc.

Good afternoon, ladies and gentlemen, and welcome to the ChemBio fourth quarter 2021 earnings conference call and webcast. At this time, all participants have been placed in the listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Philip Taylor, with Amnesty Relations. Sir, the floor is yours.

Thank you, Operator. Before we begin, let me remind you that the company's remarks made during this conference call today, March 3, 2022, may include predictions, estimates, or other information that might be considered forward-looking. These forward-looking statements represent ChemBio's current judgment for the future. They are, however, 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 quarterly reports on Form 10Q for the second quarter and third quarters of 2021 and the current report on Form 8K filed with the SEC on July 19, 2021. 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, Philip. Good afternoon, everyone, and thank you all for joining us today. On today's call, we will discuss our commercial performance, provide an update on our product development and regulatory pipeline, and comment on our priorities for this year larry will go over the fourth quarter financial results and lay out our operational initiatives for 2022 then i will conclude and open the call for a q a session to start off i would like to highlight our record fourth quarter and full year performance in the fourth quarter we generated total revenue of 20.6 million dollars including product revenue of $17.4 million, representing growth of 101% and 154%, respectively, compared to the prior year period. For the full year 2021, we generated total revenue of $47.8 million, including product revenue of $34.7 million, representing growth of 47% and 40%, respectively, compared to 2020. Our performance was driven by several highlights across 2021, including the $28.3 million purchase order from BM&Ginos for DPP SARS-CoV-2 antigen tests in Brazil, a purchase order supported by the Global Fund for HIV tests shipped to Ethiopia, an award from BARDA for the development of COVID 19 tests and establishing distribution of third party COVID-19 tests in the United States. In 2021, we also strengthened the balance sheet and our board of directors. And in 2022, we have significantly added to our leadership team with our newly appointed CFO, Larry Steenborden, whom I will introduce today. On the product development front, we also achieved regulatory approval from Anvisa and CE Mark for our DPP COVID-19 test, along with completing submissions to the FDA for these products. Diving deeper into the quarter, product revenue growth reached an all-time high for ChemBio. Growth in the quarter was led by $12 million of product sales in the Latin American region, consisting mainly of DPP SARS-CoV-2 antigen test shipments to BMA-Guignols. We are on track to fulfill the remainder of this order in Q1, which will drive product revenues approaching Q4 levels in the quarter. Not only do we continue to deepen our relationship with BMA-Guignols, but we are also making progress marketing our tests to be sold through our Brazilian distributors that target the retail, state, and local healthcare systems, providing us with broad, complete coverage across the region. In the United States, we are pleased to further leverage our expanded commercial organization and distributor relationships. We are gaining traction with our distribution of a third-party COVID-19 detect antigen test, which drove U.S. sales of $3.2 million in the fourth quarter. The DPP HIV Syphilis system also supplemented U.S. sales, and we remain very excited about the market opportunity for this test as we progress towards achieving CLIA waiver for the product. The increase in accounts and broad distributor relationships are laying a foundation for continued growth in the United States. We are excited about the opportunity to cross-sell additional tests in these established channels as our product portfolio expands. In the EMEA region, we recognize $2.3 million of revenue driven by sales of the HIV StatPak assay shipped to Ethiopia as part of the order supported by the Global Fund. In Europe and Africa, we are excited about the potential to expand our HIV self-testing business, which will be a priority in 2022. To further bolster our commercial opportunity and leverage the infrastructure we've established for delivering point of care tests globally, we have a robust product development and regulatory pipeline. Our product portfolio expansion strategy includes two objectives. to develop tests on our DPP platform that are novel solutions for high value growth markets and to register existing products and additional geographies where we already have established commercial infrastructure. As we talked about before, we believe the receipt of a CLIA waiver for our PMA approved DPP HIV system HIV syphilis system would unlock a very large market opportunity by enabling use in 40 to 50,000 clinics that regularly perform STD testing. There are no other rapid combo tests for these infections despite the rise in infection and co-infection rates. In December, the FDA notified the company that it will require additional data for our CLIA waiver submission. We are diligently taking action to fulfill this request and are working to produce the data required to receive a CLIA waiver. Recently, we received CE Mark and InVisa approval for our DPP respiratory panel, which provides simultaneous, discrete, and differential detection of SARS-CoV-2, Flu A, and Flu B from a single patient respiratory specimen. This test helps clinicians decide the appropriate clinical care for common respiratory infections that present with similar symptoms. And visa approval allows us to commercialize the test through ChemBioDiagnostics Brazil in a country that has recently experienced a flu outbreak concurrent with the ongoing COVID-19 pandemic. CE Mark allows us to commercialize this product in Europe. Late in December, the FDA declined to review our EUA application for the respiratory panel. In order to address the near absence of influenza in the United States, the submission had included foreign sourced influenza positive samples preserved in viral transport media. The notice from the FDA informed us that in order to proceed, we will need to prospectively collect influenza A and influenza B samples, and then submit a new EUA application. Given the continued near absence of influenza in the United States, we are unsure of the timeline and the ability to complete the necessary trial. Our EUA for the DPP SARS-CoV-2 antigen test, which has received Anvisa and South African approval, as well as CE Mark, remains under review with the FDA. The SureTrac HIV self-test represents another growth driver in our product portfolio. The use of HIV self-tests around the world is increasing. This product has received WHO and Visa in Southeast Asia approval, along with a CE mark. Registration in the United Kingdom was recently completed. This year, we plan to market this test more aggressively and pursue commercialization through all the channels available to us. On the product development front, we've invested in feasibility work to potentially develop additional sexually transmitted infection and insect vector tests. The impetus for exploring product development in these categories is the identification of large, unfilled market needs. We are pleased with the progress of our pipeline and see strong potential for the R&D investments made over the past year to produce more profitable revenue over the long term. All this said, while we experienced tremendous revenue growth in 2021, we recognize we are not growing profitably. The magnitude of the recent orders has stressed our operations beyond our initial capacity. This has resulted in margins and earnings that are lower than expected. We are exploring every option to enhance our business model for greater efficiency down to P&L. To improve our profitability going forward, we have created the Global Competitiveness Program. I've talked about the first component of the program before, to focus on higher margin business in growth markets. We feel that the DPP platform offers advanced capabilities that will enable premium pricing as we expand our assay targets, starting with achieving CLIA waiver for the DPP HIV syphilis test. This will be an immediate step into higher margin business. Improving our product and geographic sales mix is only part of the solution. Let me be clear, the entire cost structure at ChemBio is under review. Looking at the gross margin line, we understand we need to increase manufacturing efficiency, and this will require more than just automation. Exploring and establishing low-cost manufacturing alternatives is a top priority. I will let Larry discuss the Global Competitiveness Program in more detail as this has been a principal focus for him since joining ChemBio. Our goal has always been and will remain to create value for shareholders and we are forging a new path forward towards profitability. Now, I would like to introduce Larry Steenborden, our newly appointed Executive Vice President and Chief Financial Officer. He joins us with deep healthcare financial leadership experience, including many years at Siemens Healthcare Diagnostics. We are excited about the insights he has offered in his early days, which will be material for value creation in the future. I will let him provide his assessment of the business after he provides details on our financial results. Now to you, Larry. Thank you, Rick. I'm really excited about the opportunity in front of us here at ChemBio. Before I describe the initiatives and our new operational plan, I'll cover the fourth quarter results. For the three months ended December 31st, 2021, total revenue was $20.6 million, representing growth of 101% compared to the prior year period. Product revenue for the fourth quarter of 2021 with $17.4 million, an increase of 154% compared to the prior year period. Government grant income, license, and royalty revenues, and R&D revenues combined for the three months ended December 31st, 2021 were $3.2 million, a decrease of 6% compared to the prior year period. Of that dollar amount, $2.9 million was earned by achieving milestones under our $12.7 million program with Florida, bringing our cumulative government grant income under this program through the fourth quarter of 2021 to $12.5 million. Our revenues were in compliance with the quarterly 12-month rolling minimum total revenue covenant in our credit agreement. Gross product margins during the three months ended December 31st, 2021 decreased by approximately $1.1 million compared to the prior year period. Gross product margin percent was negative 9.2% in the fourth quarter of 2021 compared to 7.2% in the fourth quarter of 2020. Gross product margin in the fourth quarter of 2021 was impacted by an unfavorable mix of average selling prices, increased labor costs, and an inventory write-down of $2.5 million. R&D costs increased by $.1 million compared to the prior year period to $3.4 million in the fourth quarter of 2021, primarily associated with clinical and regulatory affairs costs related to pursuing an EUA and 510 from the FDA for the DPP SARS-CoV-2 antigen test and an EUA for the DPP respiratory panel, each pursuant to a ward from BARDA. Selling, general and administrative expenses decreased by $0.3 million compared to the prior year period to $6.8 million in the fourth quarter of 2021. Net loss in three months ended December 31st, 2021 was $14 million or 47 cents per diluted share compared to a net loss of $7.1 million or 35 cents per diluted share in the prior year period. The net loss includes an impairment of goodwill and intangible assets for prior acquisitions of $4.6 million, or 15 cents per share, for the fourth quarter of 2021, compared to a de minimis amount in the prior year period. On the balance sheet, cash and cash equivalents as of December 31, 2021, totaled $28.8 million. the company did not sell any shares of common stock as part of the ATM offering in the fourth quarter of 2021. Net working capital as of December 31st, 2021 was $39.6 million. As Rick mentioned, reflective of the large current purchase orders we are working to fulfill, we expect product revenue in Q1 of 2022 to approach the level achieved in Q4 of 2021. We also expect revenue for the full year 2022 to be first half weighted. Now I would like to share my observations and analysis from my first month at the company and share our plans to improve profitability. The company has achieved significant revenue growth in recent years, but has not met expectations for improving profitability. There have been many headwinds throughout the pandemic on the regulatory front and with scaling up manufacturing production that have taken resources and attention away from profitability. But it is time to change that. From the start in my first months, this has been my main focus. We see great potential for ChemBio and are beginning to make the changes required to create meaningful value for shareholders. We have taken steps including investments in automation to mitigate labor availability headwinds and implementing operational efficiency targets to proactively monitor production to address volatile capacity planning, both with the overarching goal of profitable growth. To further accelerate and aggressively execute towards this goal of improved profitability, in the first quarter of 2022, we have initiated a global competitiveness program. Our global competitiveness program has been developed with the support of the company's executive leadership team to ensure cross-functional alignment, commitment, and accountability throughout the organization. The main pillars of the global competitiveness program include the following. One,