Chembio Diagnostics, Inc.

of 2022 was $6.9 million for a loss of 23 cents per diluted share compared to a net loss of $9.1 million for a loss of 45 cents per diluted share in the prior year period. There were no impairment, restructuring, severance, or related costs for the second quarter of 2022 compared to $2 million or 10 cents per share in the prior year period. On the balance sheet, cash and cash equivalents as of June 30, 2022 totaled $22.8 million. We were able to reduce cash usage in the quarter to $1.6 million through tight cost controls on spend and working capital management. The company did not sell any shares of common stock as part of the ATM offering in the second quarter of 2022. Networking capital as of June 30th, 2022 was $27.1 million. Looking forward, given the substantial nature of the COVID revenues over the past two quarters, we expect revenue for the year will be first half weighted. and we will face challenging sales growth comparisons in the third and fourth quarters of 2022. Line of sight on orders is a major priority for the second half of the year, especially with regards to our large customers and markets. I will now provide an overview of the progress we are making on our global competitiveness program, which we launched in the first quarter of 2022. First, we are laser focused on higher margin business in growth markets. This includes our core products and being opportunistic with non-core products when these opportunities fit our profitability criteria. Notably, as Rick discussed, we see a significant global opportunity for our SureCheck HIV self-test and have aligned resources to support adoption of this product across markets. Second, we are taking action to lower manufacturing costs. Automation and labor management are essential to increasing product gross margin and for scaling unit volumes to support new opportunities. Our third automated manufacturing line is now up and running. Line four has been installed and we have initiated production on a new semi-automated line. Furthermore, Our contract manufacturing agreement with Freson should also provide a pathway to drive down manufacturing costs. We currently are facing a major margin headwind as high inflation is causing material supplies and logistics price increases. As a result, we have incorporated the assumption of longer lead times for materials into our manufacturing algorithm. We're evaluating appropriate price increases and delivery schedules for our products to offset these industry-wide impacts. Third, we're working to reduce infrastructure costs. This includes an in-depth analysis of all our support functions and external spend to reduce costs. Mainly through attrition, our organizational headcount is down to 290 employees. from 337 at the end of 2021. We plan on further headcount reductions in the second half of the year to adjust with automation efficiencies and lower volumes. Fourth, we have completed the majority of work related to the strategic review of non-core businesses and assets. Our focus has been on our subsidiaries in Brazil and Germany with the intent to develop independent tax profitability for each business. We have completed the restructuring of our German subsidiary, including employee reductions, at the local business. We believe that these pillars, when taken together, provide a clear roadmap for a trajectory toward profitability. Successful execution of these pillars is dependent upon a number of critical factors, such as delivering on the top line, key relationships with customers and distributors, expansion in large markets such as the US, and regulatory approvals. We are committed to adhering to these pillars and look forward to providing updates as we continue to execute. I'll now turn the call back to Rick for concluding remarks. Thank you, Larry. We were pleased with our results from the first half of 2022. and are excited to build upon this positive momentum. We've experienced strong year-over-year revenue growth, improved our gross margins, and are beginning to see the positive impacts of our global competitiveness program. We've increased our commercial efforts on the distribution of our higher-value core products, which we offer in high-growth markets such as the U.S., France, the U.K., and Brazil. Progress on the regulatory and product development front will increase our opportunities to drive more profitable growth in the years to come. With that operator, please open up the call to questions.

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 provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Per Ousland with Craig Hallam. Sir, please pose your question.

Thank you. Good afternoon, guys. To start with might be a bit of a dumb question to start with, but I think it might be a little bit foundational nevertheless. So as we've talked in recent quarters about COVID waning, you've talked increasingly about refocusing around the core portfolio. And I guess maybe my first question is, internally, how do you define and how do you think about your core portfolio? And the reason I ask the question is because there are always these other things that come up, whether it's been a Zika outbreak or obviously COVID and now monkeypox is the virus that can be opportunities for you as well. Whether or not they actually qualify as core is certainly an open question, but I look at DPP as a relatively product development friendly platform and it's easy to use. So when these things come up, whether they're core or potentially core or not, how do you evaluate what kind of opportunities you want to pursue as you're refocusing around the core? I know that's kind of a circuitous way to get to that, but let's start there if we can.

Sure. Thank you. This is Rick. You know, certainly we're defining our core products as the products that we've had on the market pre-pandemic, during the pandemic, and post-pandemic that have the greatest potential to drive revenue at higher average selling prices and higher margins. If you look at the U.S., we have three primary HIV products on the market under three different platforms. Our SureCheck is a self-test platform for HIV. Our StatPak is a traditional lateral flow platform for HIV. And then our DPP HIV syphilis combination test. So that is our core product. Certainly we have a DPP Zika IgM product on the U.S. market as well. So when we look at core products and evaluate new opportunities, our fundamental principle underlying analysis is the market opportunity. Where do we see growth coming from? So the products that we announced today, here as an example, DPP Syphilis Screening Confirm is a multiplex product that has high clinical value in the United States in confirming The other example we talked about today was our DPP Lyme multiplex product, where Lyme is a growing clinical concern in the United States. So you can see from our product development pipeline, we're very focused on innovative products that utilize DPP's multiplexing capability to deliver high value clinical need. So I think that's an example. Relative to other opportunistic disease states, certainly everyone is aware that today the US government declared a public health emergency for monkeypox. The WHO also declared a public health emergency on July 23rd. The states of California and New York and Illinois have followed suit in terms of declaring a public health emergency. We are monitoring that. Certainly, if you look at our history, back in 2017, we rapidly developed a Zika, rapid Zika product for the U.S. market when the Zika outbreak was impacting the United States. We went on to get an EUA for that product and then followed along and got a 510 approval for DPP Zika. There was certainly a clinical need for Zika. The following year, there was an Ebola outbreak. So we developed a DPP Ebola test to help with the outbreak with Ebola, which that product, as of today, still has emergency use authorization in the United States. And then in 2020, obviously when the pandemic hit with COVID, we rapidly developed COVID tests. We got funding from the US government of around $13 million to develop a portfolio of COVID tests. So we're monitoring the monkeypox situation very, very closely. We know that globally there's now 26,000 cases. in over 80 countries. In the United States there's now 6,600 reported cases. So this is a growing problem. We see that as an area where we can provide value because we've done it for other outbreaks. The interesting thing with monkeypox is that the symptoms are very similar to other sexually transmitted diseases like herpes and syphilis. as well as other healthcare issues like scabies and eczema. So it's beginning to show like it's a very difficult disease to diagnose because of the similar symptomology with other viruses. So we're gonna monitor this closely. We have a great network of individuals at the NIH, the CDC, as well as BARDA, who funded our COVID test development. So we are in conversations and in consultation with our colleagues at the NIH, the CDC, and BARDA to see what is the need. The current tests that are available today for monkeypox are PCR, which you have to take a sample from the open skin lesions which is very painful, very difficult to obtain very, very good samples for PCR. So we're monitoring this closely. All options are open for us. And if we see there's a growing consistent clinical need, and the ability to utilize our product technologies as we did with Ebola, Zika, and COVID, we'll make a decision and move forward or not. But I want to come back to the fundamental premise of our analyses for making a decision on a core product. It's really, do we have a high clinical need? Is there a growing need for that product? And is there commercial opportunity for the company along our global competitors guidelines, which is focusing on higher margin growth in higher markets. So here is talking a lot about our HIV SureCheck self-test. because that is a perfect example of we are realizing much higher margins on that product in the countries where we've got direct-to-consumer, OTC pharmacy initiatives in place, and we're really driving that for our future growth. I hope that's a long answer, but I hope it clears up how we're evaluating this monkeypox opportunity.

No, absolutely. It's very comprehensive. Feel free to have a long answer. That's very helpful. Since you kind of ended there talking about margin, so the gross product margin in the second quarter here was, I think, about 9%. First quarter was 18%, and I think in the fourth quarter was negative single digits and somewhere. So there was a stark improvement and a little bit of a comeback here in the second quarter. How much of that is just the logic of having that BM&Guinos order be fulfilled in Q1 and not having that big chunk of revenue to absorb some overhead and that sort of thing? Or were there mixed factors that it contributed to going from 18% to 9%? Just trying to think of the considerations there.

Yeah, Pierre, I'll take a quick shot at that and then turn it over to Larry to probably any additional details. Certainly, it's product mix and volume related. If you look at our revenue in the first quarter and the gross margins was largely due to high volume and product mix compared to the second quarter where more of our product mix was the HIV product for Ethiopia. So when you combine those two factors as well as some of the other inflationary measures that Larry was talking in his opening remarks, you know, drove that gross margin in the second quarter. Yeah, just to add to that, the large African revenue, $3.1 million, was certainly a lower margin. We did have solid revenues in the U.S. offsetting. So I think that's in play. Certainly inflationary raw materials was a factor. But we have made progress in automation, so now as you can see from our head count is going down with our attrition. And the automation now is getting up and running. So that will continue. So this is really another transformation quarter of moving from the labor manual production to automated. So that's been our trajectory. And now as we get to Q3, all the product platforms will be on an automated line. So the journey for ChemBio, for the automation, we're coming to the end to really drive with the higher volume to get even more dropped through from the margin.

I lost you there for a second.

Are you still answering the question?

We're here. Can you hear us there?

Yeah, I can hear you fine now. Sorry about that. Just disappeared for a second. Okay. Okay. That was helpful. And candidly, that's kind of what I thought. Since you mentioned inflation, just one last quick one for me. You have referenced the possibility of price increases in the past to tackle that. And, you know, I tend to think that, you know, the ticket price on a lot of your tests are low, right? which would make me think that a little bit of an increase wouldn't be so onerous. Now, you do have some end markets and customers that are going to be more sensitive to that. So I guess I'm wondering, do you see price increases or potential price increases residing kind of across the portfolio, or do you think it's more in some of these higher margin markets like the U.S., like France and the rest of Europe, or you're penetrating markets with SureCheck that that you have a unique product that you really feel like there's absolutely margin to be gained there with price.

Yeah, I would say our approach to pricing increases has been pretty much uniformly across our products and across the regions. Obviously, some regions where we compete in, like Africa and Asia, and even to some measures South America, we have a lot of competition from Asian countries. We're going after every price increase we can possibly get and yet be in a position to maintain our current customers. Certainly in the U.S., we've seen better options for price increases across our product lines because we don't have the same competition in the United States as we do from Asian suppliers and markets like Africa. So it was a part of our strategic plan, the Global Competitors Program, for the commercial organization across the globe to try and maximize any opportunity for a price increase get while balancing being competitive.

Sure, that makes a lot of sense. All right, I lied. I will ask, I guess it's a question that's as common as much as a question too. I think that the cash usage here in the corridor was very negligible and very impressive considering where it, you know, was not really that long ago, uh, just over a million dollars. Um, you did mention cost control. And I think that that would be one thing that you would clearly endeavor to continue to implement over time and have that be a contributing factor to lowering usage. The AR collection side of it, um, I suspect when you have AR and then you collect it, then it's no longer a factor to help you mitigate cash usage. So when you look, and not necessarily trying to ask you to guide this by any stretch of the imagination, but when you look at the next quarter, two quarters, is the million in change that you used in second quarter reflective of where you think you can be or want to be in the next couple of quarters? Do you think it's more, you know, was this a little bit of an outlier and maybe it's something between this and the, you know, call it four and a half, I think, million it was in the first quarter? Does it sort of reside in there? I guess I'm just... of trying to get a handle around it because it was obviously a you know to me it was a fairly eye-popping number considering where it's been a very encouraging number um just kind of want to get at sustainability of it yeah sorry so uh from from the quarter certainly

The tailwinds from the large orders and the collection on those receivables was a primary factor. The tight controls were in place, will continue to be in place. As we look to the second half of the year, don't expect to have it at that same level. We will have costs associated with trials and product innovation, so there will be a higher burn. That being said, we were looking at where we are with our labor force and the biomes associated from the second half. We are absolutely focused on while the cash burn would be expected to be higher than this quarter, we are monitoring that as closely as a priority as we can. So we would like to continue on that right discipline of cost, and again, we're going to be spending on product innovation for the long term here as well.

Okay, excellent. I appreciate all the answers, and I apologize for keeping on firing away at you. Thank you.

Thank you. Thank you, Peter.

There appear to be no further questions in queue, so I'll hand it back to management for any closing comments.

Thank you, operator. I want to thank everyone for taking time out of your day today for our second quarter earnings call, and have a wonderful evening.

Thank you.

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