Chembio Diagnostics, Inc.

Good day, ladies and gentlemen, and welcome to the ChemBio first quarter 2022 earnings conference call and webcast. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Marissa Beisch. Ma'am, 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, May 5, 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 annual report on Form 10-K for the full year 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 would like to turn the call over to Rick Eberle, President and Chief Executive Officer.

Good afternoon and thank you all for joining us. On today's call, I will discuss our commercial performance, provide an update on our current product development and regulatory pipeline, and touch upon our operational priorities for the year. Larry will cover the first quarter financial results and updates on the Global Competitiveness Program. I will then provide closing remarks and open the call for a Q&A session. To start off, I would like to highlight our strong first quarter performance. In the first quarter, we generated total revenue of $18.8 million, representing growth of 116% compared to the prior year period. Total revenue included new record quarterly product revenue of $18.5 million, representing growth of 360% compared to the prior year period. We also significantly improved our gross product margins and cash burn as a result of improved operational productivity and working capital management. Our performance in the first quarter was driven by completing the shipment of the remaining units under the $28.3 million purchase order from B&M Guinness for DPP SARS-CoV-2 antigen tests in Brazil. Strong growth in the United States and continued shipments under the purchase order supported by the Global Fund, or HID-1-2 STATPAC, as they shipped to Ethiopia. Going into more detail, revenue was led by product sales in the Latin America region of $12.5 million, primarily consisting of a DPP SARS-CoV-2 antigen test, shipped to VM engineers and strong growth of product sales by ChemBio Diagnostics Brazil. We are pleased to have completed this entire purchase order in the first quarter. BMA Guinhos has been a strong partner and a long-time customer of ChemBio and we look forward to continuing to deepen our relationship and explore opportunities to address their testing needs. At the same time, we will continue to prioritize marketing our tests to be sold through our Brazilian subsidiary and distributors that target the retail, state, local healthcare systems, rounding out a comprehensive footprint across the country's healthcare markets. In the United States, we are leveraging our field sales representatives and distributor relationships to offer our diverse portfolio across healthcare and markets. Traction with the distribution of the third party manufacturer COVID-19 detect antigen test drove U.S. sales of $4.5 million in the first quarter, representing 530% growth compared to the same quarter last year. U.S. sales were supplemented by the DPP HIV syphilis system, which we continue to see as potentially our most attractive market opportunity pending CLIA waiver. In EMEA and Asia, we recognize $1.5 million of revenue driven by sales of the HIV-1.2 StatPak assay shipped to Ethiopia as part of the order supported by the Global Fund. In Europe, we are excited to be working with new distributors where we have expanded our distributor relationships in Europe to supply the SureCheck HIV self-tests in the UK and France. There are two main takeaways from the quarter I would like to highlight. First, the learnings from scaling test manufacturing to full capacity, supported by optimized automation to complete the Fiat-Maginia's order, will enable further manufacturing efficiency in the future. With these learnings, we were able, in the face of tight labor markets and supply chain challenges, to drive significant sequential product gross margin improvements relative to the fourth quarter. Second, as we expect waning demand for COVID tests internationally, we are refocusing our commercial efforts around the core product portfolio. As we have shared, our commercial resources are focused on our core products that represent higher value opportunities in higher growth markets. Our recent portfolio analysis supports our strategy to prioritize commercial efforts around DPP HIV syphilis in the United States and globally on the SURE-CHECK HIV-1-2 assay and self-test products. In the United States, SURE-CHECK HIV-1-2 is CLIA waived. In OMEGA in Asia and Africa, SURE-CHECK is WHO pre-qualified as a self-test. And in Brazil, the SureCheck HIV cell test has recently achieved approval for over-the-counter sale in retail pharmacies through our Brazilian subsidiary. In Brazil, SureCheck is now carrying in the top two major pharmacy chains. We are excited about the potential to expand our HIV self-testing business in Europe, focused on France and the UK, and across Africa and Brazil as a top priority for 2022. As we enter the summer in the United States, Brazil will enter their respiratory season. Separately, with InVisa approval of the DPP respiratory panel through our Brazilian subsidiary, We are in great position to serve the local, state, and retail pharmacy needs in the event of any COVID or flu outbreaks. In addition to our current portfolio of existing point of care products, we believe that our product development and regulatory pipeline will expand our available market opportunity as we leverage our improved commercial infrastructure. The strategy for our portfolio expansion has two main objectives. To develop novel solutions for high-value growth markets on our DPP platform and to register our existing products in additional geographies where we already have established commercial operations. As we mentioned previously, We continue to believe that the receipt of the CLIA waiver for our FDA PMA approved DPP HIV syphilis system would open up a significant market opportunity by providing access to 40,000 to 50,000 clinics that conduct regular STD testing. This opportunity is compounded by the fact that there are no other combination tests currently on the market despite the recent rise in infection and co-infection rates. Our team is making progress on providing data requested by the FDA as part of the CLIA waiver application. On DPP SARS-CoV-2 antigen test, which has received a CE mark as well as Anvisa and South African approval, has been submitted to the FDA for an EUA and 510 . It remains under active review for an EUA approval. On the product development side, we are engaged in feasibility work to potentially develop additional tests for sexually transmitted diseases and insect-borne disease states. We have identified large unfilled market needs for each disease state, which we believe can be addressed through the development of advanced multiplexed point-of-care tests in these categories. We are making progress on our pipeline and expect our investments in R&D will generate profitable revenue in the long term. Now, I will hand the call over to Larry to detail the first quarter financials and provide more details on our operational improvements under the Global Competitiveness Program. Thank you, Rick. For the three months ended March 31, 2022, total revenue was $18.8 million, representing growth of 116% compared to the prior year period. Product revenue for the first quarter of 2022 was $18.5 million, an increase of 360% compared to the prior year period. Government grant income, license and royalty revenues, and R&D revenues combined for the three months ended March 31, 2022 were $0.3 million, a decrease of 94% compared to the prior year period due to the expiration of previous partner development agreements. 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 March 31st, 2022 increased by approximately $2.8 million compared to the prior year period. It's 3.3 million. Gross product margin percent was 18% in the first quarter of 2022 compared to 12% in the first quarter of 2021. Subsequently, gross product margin percent for the first quarter of 2022 increased by 27 percentage points relative to the fourth quarter of 2021. The gross product margin increase was driven by increased product volume sold in the U.S. and Latin America at higher average selling prices and operational productivity. R&D costs decreased by $1.2 million compared to the prior year period to $1.7 million in the first quarter of 2022, primarily associated with the completion of development work for prior partnership development agreements. Selling, general, and administrative expenses increased by $.9 million compared to the prior year period to $6.9 million in the first quarter of 2022. Net loss in the three months ended March 31st, 2022 was $8.8 million or 29 cents per diluted share compared to a net loss of $4.5 million or 22 cents per diluted share in the prior year period. The net loss includes impairment, restructuring, severance and related costs of $3 million or 10 cents per share for the first quarter of 2022 compared to a de minimis amount in the prior year period. On the balance sheet, cash and cash equivalents as of March 31st, 2022 totaled $24.4 million. We were able to reduce cash usage in the quarter to $4.4 million for operational efficiencies and working capital management. The company did not sell any shares of common stock as part of the ATM offering in the first quarter of 2022. Net working capital as of March 31st, 2022 was $34.6 million. Looking forward, given the substantial nature of the COVID revenues over the past two quarters, we continue to expect revenue for the year will be first half weighted and will face challenging sales growth comparables to the third and fourth quarters of 2022. I will now touch on the global competitiveness program. Here, we are focused on four foundational priorities to guide our execution efforts as we forge a path to profitability. First, we are focusing on higher margin business and growth markets. We continue to pursue growth in markets with higher selling prices and have recently concluded an in-depth analysis of our product portfolio and profitability on both a product and geographic basis. The insight gained from this review is providing us with more visibility to support customer pricing, marketing strategies, and allows us to more accurately evaluate opportunities to increase our selling prices. In the first quarter, we undertook a reorganization of our international business, including appointing Chuck Caso as our Senior Vice President of Global Commercial Operations and establishing a new distributor relationship. We have identified a strong opportunity for our SureCheck HIV self-test in France, the UK, and Brazil, and have dedicated increased resources to this product. Second, we are looking to lower manufacturing costs. Automation and labor management are critical to our strategy of scaling unit volumes, in addition to other levers we have at our disposal to lower our manufacturing costs. In the first quarter, we achieved greater productivity with tighter controls on labor overhead, including reduced overtime hours. It is worth noting that we continue to experience the impact of inflation resulting in price increases from suppliers that are planning to accommodate the longer lead times for materials. In turn, we are evaluating appropriate price increases for our products to offset these impacts. Third, we are working to reduce infrastructure costs. Reduction of our infrastructure costs includes an in-depth analysis of all our support functions and external spend to reduce costs. Our investments in research and development will be more closely aligned with innovation strategy centered around the DPP system and the expansion of our product pipeline. Our goal is to be more disciplined in our approach to cost-benefit analysis, target markets, and competitive landscape and to have every dollar we spend go towards more profitable revenue generation. Fourth, we are actively proceeding with the strategic review of non-core businesses and assets. We are focusing on our subsidiaries in Brazil and Germany to reorient those businesses to achieve independent past profitability more closely aligned with our long-term strategic roadmap. In Brazil, We have enhanced our operations and bolstered our low-cost manufacturing resources to bring costs in line with local market dynamics. Specifically in Brazil, we have OTC packaging capabilities to maintain appropriate short-check supply levels. We are confident that taken together, these initiatives can place Cambio on an improved trajectory towards profitability. We are firmly committed to the Global Competitiveness Program, and we look forward to providing updates as we execute this comprehensive plan. I'll now turn the call back to Rick for concluding remarks. Thank you, Larry. Before I conclude, I would like to say a few words about Leslie Tiso Leekman, who has been nominated for election to the Board of Directors at the upcoming Annual Shareholder Meeting on May 24th As described in the proxy statement, we have filed for the annual meeting. Leslie is a diagnostics industry veteran with over 20 years of healthcare finance leadership experience. She is currently Senior Vice President and Chief Financial Officer of CIRVASC, a medical device company. Previously, she held roles as Senior Vice President, Finance and Treasurer of Roche Diagnostics Hematology, and Vice President and Controller of WholeLogic. We believe her experience and the skill set make her an excellent fit for the ChemBio board at this phase in our growth. To wrap up, we were off to a strong start in 2022, generating record quarterly product revenue, improved product gross margins, and increasing our capital efficiency. We continue to refocus and reposition our resources domestically and internationally to execute on our most valuable near-term opportunities while advancing our strategy to drive more profitable growth over the long term. With that, operator, please open up the call to questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. And thank you. Our first question is coming from Bruce Jackson. Please announce your affiliation, then pose your question.

Good afternoon. Questions about just maybe parse out the revenue a little bit. So Brazil had 12.5 million. If my math is correct, 10.5 of that was the remainder of the big purchase order. Is that right?

Yeah, that's right. So we completely the purchase order and all the remaining revenue in Q1.

And then the remaining revenue for Brazil, what was the product mix on that? Are you still shipping the tropical fever tests like dengue and chikungunya?

Yeah, Bruce, this is Rick. Our product mix in Latin America, as Larry said, was that the majority of that was finishing up the COVID-19 test to be in Manguinhos. The balance of that revenue was a mix of a number of products. We are excited about the growth of our subsidiary in Brazil. As you know, Bruce, we enhanced our commercial leadership of the Brazilian subsidiary. And over the course of the last couple months, we made some significant progress in getting our HIV SureCheck self-test on the shelves in the pharmacies in Brazil. As I said, it's exciting that it now be in two of the four largest pharmacy retail chains in Brazil. So we had good growth from our Brazilian subsidiary as well as the – Okay, okay.

And then moving over to the HIV syphilis combo test and the CLIA waiver, can you maybe remind us what are the remaining steps in the process and where are we right now?

Yeah, Bruce. Where we stand today is, as we talked about in the fourth quarter 2021 earnings call, the FDA did request some additional data to supplement our data submission for the CLIA waiver application. And so we've been in the process of gathering that additional data. And once we're completed, we will submit that to the FDA and then hopefully have a CLIA waiver approval.

Okay, and then would you care to hazard a guess as to when the data might be assembled?

Yeah, Bruce, it's ongoing. We haven't projected any timing on that or announced any timing on that. And so that's where we're at. And we're working very, very aggressively and as quickly as possible to get the additional data. And once it's complete, we will submit it to the FDA. And then we don't know what the turnaround time will be at the FDA given their workload. So the timing on this is a little bit uncertain, Bruce,

One last question for me and then I'll hop back in queue. It's about your manufacturing. It's a flexible arrangement. You've got both some automation and some manual lines. Is the automation set up for any particular product or can you swap the different product lines in and out?

Yeah, our goal, Bruce, is to have automation capability for every product format we have, which that includes our DPP platform, our DPP multiplex platform, as well as our SureCheck HIV self-test platform, and as well as our StatPak HIV platform. So that's our goal. So we have built into that strategy a lot of flexibility in terms of production of those product formats on automation options. The only thing I would say in addition to that, Bruce, is that Because of the regulatory approvals that we have around the world, including FDA, WHO, Anvisa in Brazil, CE Mark for Europe, we do have to go through, in some cases, a validation and registration of a change in production. The bottom line is we're maximizing, though, every bit of opportunity to automate our manufacturing.

Okay, got it. Great. Thank you very much for taking my questions.

Thank you, Bruce. Our next question comes from Per Ostlund.

Thanks. Good afternoon, everybody. Let's go back to the Brazil order, now that it's fulfilled with . Frank, you mentioned that Brazil would be coming into its respiratory season here in the not too distant future. Do you have a sense as the order has been fulfilled over the last couple of quarters, how the product has been used up in sort of an inventory burn sense, if you will. So just trying to get a handle, and I know there's other channels in that country that you're going to pursue besides B&O Manguinos, but curious if you have a feeling of how well stocked they may be going into the summer season and whether that presents a nearer term opportunity for you?

Yeah, Pierre, great question. We don't have a lot of visibility into where BioMeguinhos is shipping the product in terms of timing and volumes. What we do know is BioMeguinhos has been supplying all the federal healthcare providers in Brazil with their testing needs for COVID-19. So it gets distributed to multiple federal healthcare clinics and hospitals across the country, but they don't give us visibility into where they ship it, the quantity of what they're shipping, and the timing. for their inventory. I was in Brazil a few weeks ago to meet with BMA Guinhos, their CEO and CFO and their leadership team. And the goal of our meeting was to continue to number one, build a relationship, a strong relationship with our number one customer in the world. And number two was to begin to have discussions around getting better visibility into their future testing needs. whether that be our core products like HIV SureCheck and DPP-HIV, or future testing needs around the respiratory season that's coming up for them. And so we had discussions around what do they think their thoughts were on the respiratory season. We talked about the trending of COVID down in Brazil over the last several months. But the relationship is strong, and we're trying to move back to where we were before the pandemic, and that is having better visibility into our core products and their testing needs as they move forward.

Sure. Okay. That makes a lot of sense. You mentioned SureCheck, the HIV self-test. I would say... I think on this call it's probably the most I've heard self-test referenced perhaps in the history of covering ChemBio. I've always kind of wondered about the potential for the product given I think it's won awards and self-test has always felt like a very logical extension for HIV. Has there been something of an aha moment internally where You and the team have realized that there may be a technical advantage to your product that you can press. It sounds like you are making a more concerted effort globally on this product now than perhaps you ever have before.

Yeah, absolutely. It's a core product for us. We've had HIV SureCheck self-tests. for quite some time, but what we're seeing recently post-pandemic, and it actually started, you know, probably during the pandemic as self-testing began to be more well accepted for COVID antigen tests as one example. So we saw the WHO, we've seen the CDC take renewed interest in self-testing for HIV. just because of the need to reduce the overall incidence of HIV, especially in some countries where the incidence is higher. So as soon as we saw some of that NGO and government support, as well as in Brazil, and Visa approved this just recently for self-testing. So it's a relatively new development in getting our self-test approved in the UK, France, and Brazil. And we're going to continue to pursue, you know, other countries where they are beginning to support, the governments are beginning to support and endorse self-testing for HIV because there's many, many more treatments today for HIV. And so the question is, you know, get tested and if you're positive, get treated because the treatments are extremely effective. That's one. The second thing is as we've expanded our distributor relationships, I'll give you one example in Brazil. We have a very strong distributor and we're also selling direct through our subsidiary in Brazil, which is what enabled us to get into the two of the port largest pharmacy chains in Brazil. It's largely through our marketing effort. our commercial effort through our subsidy there. So what we're seeing is that momentum growing and I think that's why here we're talking more about that because we're excited about the growth potential. The average selling prices are higher in the retail market as well. So it fits into our global competitiveness program where we're really going after much higher selling prices to improve our gross margins.

Can't blame you there at all. I think that maybe dovetails into, I'll ask one more here. So the product gross margin improved starkly in the quarter from December quarter to now. I think, Larry, you said 27 percentage points. I think it might have been. How much, because I think in some of the recent quarters, we've had product write-downs and returns and some of that sort of one-off stuff. that I would hazard is probably mostly churned through at this point. When we talk about a 27 percentage point increase quarter to quarter, is there a way to parse through or strip away maybe something that might have artificially, for lack of a better word, impacted December's quarter and how much of the improvement is straight up organic efforts like higher price tests and better ASP geographies like the U.S.? ?

It's Larry, so I can take that one. To that point, as we disclosed in the last earnings release, there was $2.5 million of an inventory adjustment in the Q4 period. That is for So for that comparability, we don't have any one-offs in Q1. We really just had a strong overall operational performance and it was just tighter controls on the labor mainly. Previously we had a lot of labor premium that we had to pay to complete the order and then I think it's well lessons learned with the the automation as well so you know we we've got to the point where we know how to scale and now that the key driver is be able to continue to generate you know higher margins and then continue the trend for for the rest of the year so that's the one off item I point out from from the Q4.

Okay, excellent. Looks like some good progress. Thanks for taking the questions.

Yeah, thank you, Peter. Okay. Our next question comes from Jason McCarthy.

Hi, this is Joanne Lee on the call for Jason McCarthy. Thanks for taking the question. I wanted to ask regarding your SARS-CoV-2 antigen test. The 510 filing was submitted. near the end of last year could you provide some color and how the discussions with regulators went leading up to the submission and if they were similar or in line with the feedback received from ex-US regulators prior to receiving approval for the tasks such as in Europe and Brazil thank you thank you Joanne the 510k that we submitted is we have received fairly limited

feedback from the FDA because around the same time, we submitted the TPP SARS-CoV-2 antigen test for an EUA. The EUAs, as we see right now, are getting a priority review by the FDA over 510 submissions. That's the trend that we currently see. Our anticipation is the 510K process is going to take much longer because the FDA is still reviewing and approving and prioritizing EUA submissions.

All right. Thank you for that. And just as a follow-up regarding the COVID program, could you discuss some of the steps the company has undertaken or plans to carry out to address certain challenges that may have emerged given where we are in terms of COVID cases and the fluctuation that's occurred largely driven by the emergence of a new variant.

Yeah, what we're seeing is over the last 14 days, we've seen somewhat of a surge in cases and hospitalizations. I just read an article in the New York Times today about the rates increasing again due to the Omicron variant. So you were watching that very, very closely. As you know, a lot of our revenue in Q4 and Q1 was COVID related. So we're getting ourselves in a position commercially and from a manufacturing perspective to respond very quickly if testing demand surges, whether it's in the United States, whether it's in South America, whether it's in Europe. So, you know, we see it as something as an opportunity if COVID continues to spread. be out there and fluctuate in its positivity rate among the patient population. I think we're in a better position today than ever based on what we were able to do in the first quarter to scale our production and meet the B&M Ingenious Order, which happened to be the largest customer order in the company's history. So the team here at ChemBio did a fabulous job combining automation capacity, manual production where needed to meet that demand. So if the demand increases, wherever it might be, I think we're in a good position to help with whatever demand and testing is out there.

All right. I really appreciate your insights and all the updates. Thanks again.

Thank you, Joanne.

Sir, there appears to be no further questions in the queue. Do you have any closing comments that you would like to finish with?

I would just like to thank everyone for their time today. We were very encouraged by the first quarter results, and we will keep moving forward and stay focused on the Global Competitiveness Program, which is really designed to drive us as quickly as possible to profitability. So thank you for your time today, everyone. Have a good day.

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