Chembio Diagnostics, Inc. (CEMI) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Chembio Second Quarter 2021 Earnings Conference Call and Webcast. . It is now my pleasure to turn the floor over to your host, Philip Taylor, with Investor Relations. Sir, the floor is yours.
Philip Taylor: Thank you, operator. Before we begin, let me remind you that the company's remarks made during this conference call today, August 5, 2021, 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 report on Form 10-Q for the first quarter of 2021 in the current report on Form 8-K filed with the SEC on July 19, 2021. The 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 Eberly, President and Chief Executive Officer.
Richard Eberly: Thank you, Philip. Good afternoon and thank you all for joining us today. Well, on today's call, I'm excited to share business updates across our product development, regulatory, commercial, and operational objectives. Neil will address the second quarter financials in detail, then I will conclude and open up the call for a question-and-answer session. Before we dive into the second quarter, I want to begin by highlighting recent commercial and financial achievements that we believe physicians can file for success in the second half of 2021. Starting with our opportunity to support the urgent needs of Brazil's Ministry of Health and addressing the COVID-19 pandemic. We've already made initial shipments of our DPP SARS-CoV-2 antigen test to be in the making under the largest order in company history, $28.3 million to supply our COVID antigen test for delivery during 2021. We also received a $4 million HIV test purchase order, supported by the global fund for shipment to Ethiopia. Importantly, on the financial side to date, we have raised $36.9 million of gross proceeds through an at-the-market equity offering program we launched in late July. Our net proceeds from this ATM offering provided working capital, which we are deploying to support our future product development initiatives and to help establish commercial traction. Since the quarter end, we have meaningfully strengthened our balance sheet. Later in the call, we will dive deeper into these accomplishments and what they mean for the business going forward. Now going to the second quarter, where we generated total revenue of $6.4 million, including product revenue of $3.9 million, representing growth of 26% and 4%, respectively, compared to the prior period. Government grant income, license and royalty revenues, and R&D revenues combined in the second quarter of 2021 were $2.5 million. While results in the second quarter were below our expectations due to delays in receiving long anticipated orders and the timing of achieving milestones under the Board awards, we are pleased with having received the 2 aforementioned large purchase orders with our recent clinical trial progress. At Chembio, we remain committed to our previously outlined strategy to leverage the unique features and benefits of our DPP technology and other test platforms to provide innovative and differentiated diagnostics for application in areas that create attractive opportunities for Chembio. We focus our product development and commercial efforts where, #1, rapid diagnosis impacts patient treatment outcomes. #2, existing current diagnostic products underserved a clinical need due to performance or availability; and #3, new product opportunities arise regionally, demographically, or clinically. With profitability in mind, these criteria are aimed at products and markets that have potentially higher average selling prices. With that as a backdrop, we market our products globally to a wide variety of customers, such as acute care hospitals, reference laboratories, outpatient claims, including urgent care centers and physician offices, NGOs, and ministries of health. Of note, our branded products, which include SURE CHECK, STAT-PAK, and DPP have obtained meaningful market share. We've expanded our commercial infrastructure with plans to increase our focus on commercializing internally developed products in the United States. Currently, we are operating -- we're considering operating rapid diagnostic test solutions for a wide variety of infectious diseases, which include respiratory diseases, sexually transmitted diseases, gastroenterology, and insect vector diseases. Many factors are propelling the infectious diseases point-of-care rapid testing market. These drivers include the high prevalence of infectious diseases globally, a growing geriatric population, high demand for rapid test results, and advancements in multiplexing. We are leveraging our deep understanding of the market growth drivers, our customers, and patients' needs and analyzing our internally conducted research to actively evaluate new applications for our products. We anticipate that are calculated methodical approach to expanding our menu of differentiated high-value technology in the U.S., Europe and other markets with higher average selling prices for existing disease states will allow us to gain access to a broader customer base. The broad-based adoption of point-of-care testing or a decentralized space is throughout the COVID-19 pandemic, we've experienced the value that rapid point-of-care diagnostic testing provides to both health care providers and patients. Anyone who has submitted to a lab-based PCR test is now acutely aware of the downfall of slow turnaround testing. At the height of the pandemic, PCR results could take days, if not weeks, for results to be communicated leading to many patients not receiving urgent care they need for the spreading of the virus. Rapid test on the other hand, offer near immediate results, providing health care workers the opportunity to start on patient management. We are committed to offering a portfolio of rapid point-of-care COVID-19 tests. Internationally, we have antigen and antibody tests approved for sale under CE Mark and visa approval for marketing in Europe and Brazil, respectively. On the regulatory front, we are committed to earning EUAs from the FDA to market our DPP-based antigen test and respiratory panel in the United States. We are also actively engaged in clinical trials of the DPP SARS-CoV-2 antigen test in pursuit of a 510(k). Beyond COVID-19, we are experiencing exciting interest at our DPP HIV Syphilis test system for similar reasons. The test and treat approach is ideal for management and treatment of infectious diseases. We currently view these are the most attractive opportunities for our business. Our main avenue to achieving this goal is through Chembio's DPP technology platform. The proprietary DPP platform provides high-quality, rapid diagnostic results in 15 to 20 minutes using a small drop of blood from the fiber tip or alternative samples. Through advanced multiplexing, the DPP platform can detect out to 8 distinct test results from a single patient sample, delivering greater clinical value than other rapid tests. For certain applications, Chembio's easy to use highly portable, battery-operated DPP Micro Reader optical analyzer then reports objective results in approximately 15 seconds, making it well suited for decentralized testing, where real-time results enable patients to be clinically assessed, while they are still on site. Objective results produced by the DPP Micro Reader reduce the possibility of the types of human error that can occur with visual interpretations required by many rapid tests. Our strategy is designed around offering our customers a comprehensive portfolio of tests to be used on our DPP Micro Reader in decentralized markets. We are confident in our team's ability and our products potential to gain market share as we establish recurring test orders through building an installed base of customers with microreaders. Early in the pandemic, we began discussions with BARDA, the Biomedical Advanced Research and Development Authority, which is part of the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response regarding the capabilities of our technology and potential testing solutions. The results of these discussions produced 2 development awards. In July of 2020, we received an initial award from BARDA for $628,000 to assist in developing, submitting, and obtaining an EUA for a COVID-19 point-of-care antigen test system using DPP technology. Subsequently, in December of 2020, we received a $12.7 million grant from BARDA to develop and submit for EUA a rapid DPP respiratory antigen panel and support preparation, submission, and approval of an FDA 510(k) clearance for the DPP SARS-CoV-2 antigen system. We have completed the clinical trials for the DPP respiratory antigen panel, which were initiated in April 2021. Although we completed development of the DPP respiratory antigen panel on time relative to the plan and the second award of BARDA we encountered delays during their clinical trials, principally from the near absence of influenza in the United States, and also from rapidly declining positivity rates for COVID-19 throughout the United States at that time, including in areas surrounding our clinical trial sites due to the impact of vaccination programs. Delays in the clinical trials for the DPP respiratory antigen panel constrained our ability to achieve milestones and it invoices under the second award to recognize government grant income and to realize cash flows to fund ongoing development in clinical trial work. We were following review and approval by BARDA incorporating into our clinical data for the DPP respiratory antigen panel, foreign-sourced influenza-positive samples, which we expect will mitigate the impact of the extremely low incidence of influenza in the United States. We are working to finalize EUA submission materials for the DPP respiratory antigen panel internally and with BARDA. The FDA has the pathway for manufacturers such as Chembio that do not have a prior 510(k) approved influenza test. We are not, however, aware of the FDA having awarded to any such manufacturer an EUA for an influenza test, and the FDA may not consider the review of our EUA application for the DPP respiratory antigen panel as a priority and therefore, may decline to review the EUA application. That said, we are optimistic about the market opportunity for our DPP respiratory panel. In late July, the CDC issued guidance that incurred us clinicians to choose a multiplex test that can be used to detect and differentiate SARS-CoV-2 from influenza viruses. That is precisely what the DPP respiratory panel was designed to achieve. This past year's flu season was almost nonexistent. Now with much of the global economy reopened at immunity to flu viruses weakened due to a minor flu season last year, the CDC is preparing for flu virus circulation to return to pre-pandemic levels given that the circulation of some respiratory viruses is already returning to pre-pandemic levels, potentially making such multiplex test valuable tools when evaluating patients suspect of COVID-19 and/or the flu. This is consistent with our thinking that infection identification will be even more critical as closes on approaches because the infections present with similar symptoms, but the treatment and management protocols differ greatly. We hope to be able to position the DPP respiratory antigen panel as a critical component in managing the pandemic through the respiratory infection season and as the pandemic evolves, either with additional variants or into an endemic stage. As a reminder, COV virus DPP respiratory panel is designed, when used in connection with the DPP Micro Reader optical analyzer to provide simultaneous discrete and differential detection to SARS-CoV-2, influenza A, influenza B antigens from a simple nasal swab at about 20 minutes. The test system is intended to enable appropriate clinical management of patients with suspected respiratory infections and assist in the containment of COVID-19 cases during the flu season. Moving on to the DPP SARS-CoV-2 antigen test system. The FDA notified us in June 2021 that it was again declining to review the EUA submission for the test based on the FDA's effective prioritization guidance. Under which reviews and test is it was not a priority because of the anticipated resources needed by the FDA to continue a review of our EUA request. The volume of the EUA request the FDA had received and a variety of other factors. Similar to the respiratory panel, our clinical trials and the related timeline and achievement of related milestones are under the initial BARDA Award for the DPP SARS-CoV-2 antigen test system were delayed by the same factors that I outlined earlier on the call. The effects of a changing population of COVID-19 infection rates were reflected in our clinical results and created complexities and the data submitted to the FDA in connection with the EUA application for the DPP SARS-CoV-2 antigen test system. As a result, in June 2021, we worked with BARDA to extend the initial awards contract period of performance at no additional cost at part in order to provide us the opportunity to submit a new EUA to the FDA to address the FDA's additional priorities and incorporate additional data collected from international populations with higher positivity rates. We are in the process of collecting such samples in order to address the complexities in our data set that we believe resulted in the FDA's decision to deprioritize our second EUA application. We then intend to incorporate the collected samples in our clinical data for a new EUA application for the DPP SARS-CoV-2 antigen test system. There can be no assurance that the FDA will prioritize the review of our new EUA application. If made or that the FDA does determine to review the new EUA application that the submitted materials will satisfy the performance criteria and other FDA review standards in requirement that are being considered and applied by the FDA. Regarding the pursuit of 510(k) clearance from the FDA for the DPP SARS-CoV-2 antigen system. These clinical trials are also ongoing. The timeline for the trials and our achievement of related milestones were delayed by the evolving U.S. populations with low COVID-19 positivity rates triggered by vaccination rollouts, the impact of those evolving populations on the rate of enrolling subjects, the absence of guidance from the FDA regarding how to treat low positivity rates within a clinical study and the FDA's as yet unissued 510(k) guidance regarding COVID-19 antigen tests. On July 20, 2021, BARDA amended the $12.7 million contract in order to subdivide effective retrospectively certain previously specified milestones with respect to the clinical trials for the DPP SARS-CoV-2 Antigen system in order to reflect the effects of this delays we experienced in the clinical trials, which were outside of our control. As of June 30, 2021, we had achieved certain of the newly defined milestones. We've begun to incorporate into the 510(k) clinical trials, foreign source samples similar to the planned way resubmission for the DPP SARS-CoV-2 Antigen system with the objective of mitigating the impact of low COVID-19 positivity rates resulting on the vaccination rollout in the United States. We are confident we have the capability to produce the data required for permanent regulatory approval. This pursuit represents our commitment to the point of care testing market over the long term. The final component of our internally developed COVID testing portfolio is our antibody test. We believe that the global proliferation of COVID-19 vaccination programs may create opportunities for the DPP COVID-19 IgM/IgG system. We continue to pursue those opportunities at regions where the test has been approved. However, policies of individual countries are related to the monitoring of viral loads and other use cases or at an early stage, and we are seeing evidence of overcapacity among suppliers of competing tests. These regulatory and market conditions could adversely affect the demand for and pricing of our COVID-19 antibody test outside the United States. Transitioning to our commercial efforts. Throughout 2021, we've been actively pursuing sales opportunities for DPP SARS-CoV-2 Antigen system with government agencies, non-government organizations, and distributors in countries where the test systems is approved and registered. We are especially pleased with the recent $28.3 million purchase order from Bio-Manguinhos for the purchase of DPP SARS-CoV-2 Antigen test to be delivered in 2021. Bio-Manguinhos, which is a subsidiary of the Oswaldo Cruz Foundation known as Fiocruz, is responsible for the development and production of vaccines, diagnostics, and biopharmaceuticals, primarily to meet the demands of Brazil's national public health system. Chembio has a long-standing relationship with Bio-Manguinhos having previously supplied multiple products for point-of-care detection of COVID-19 antibodies, HIV, and other infectious diseases. Bio-Manguinhos received regulatory approval from ANVISA in March of 2021, following ANVISA approval for the test for Chembio's Brazilian subsidiary in November of 2020. In anticipation of orders from countries where DPP SARS-CoV-2 Antigen system is approved and registered. We had invested in finished goods and work-in-progress inventory to be prepared to meet the timing requirements of any potential awards. Our ability to deliver the full number of tests covered by the purchase order may be impacted by limitations of our supply chain, staffing and liquidity, and other matters outside of our control. Reflecting on business conditions earlier in the year, we both actively downsized our workforce in January and have continued to manage down our overall headcount. Therefore, the compressed timetable to produce and ship the test for these substantial orders is requiring us to rapidly expand our workforce in a range of manufacturing and other operational areas. Also, in addition to utilizing inventory on hand, we're closely working with our supply chain partners to shorten lead times and deliver material requirements. Amidst development of our PPP respiratory panel, we initiated distribution of a rapid point-of-care EUA-approved COVID-19 flu AB test branded stats. We continue to pursue our strategy to sell the products across the same decentralized markets we are targeting with our other point of care products. We believe there is a desire among different customers to have the option to choose between the visual REIT status product and potentially our reader enabled panel that operating both tests will expand our customer base in the United States. Customer leads have been generated, and we look forward to demand increasing as we enter the flu season. Fitting now to our commercial activity with our legacy products. Starting with the DPP HIV-Syphilis test system, which is a multiplex 15-minute test simultaneously detects antibodies to HIV types 1 and 2 and Treponema pallidum, the bacteria that causes Syphilis and is designed to be used in combination with the DPP microreader optical analyzer. The test uses a 10-microliter sample of fingerstick whole blood, venal blood, or plasma. The test system is highly sensitive and specific as a building procedural control and may be stored at room temperature. In May, we sponsored a webinar on sexually transmitted disease testing, hosted by key opinion leaders. Among other topics, the need for increased Syphilis testing was discussed. Several of the panel members use the DPP HIV Syphilis test in their clinics, and they highlighted the clinical utility and benefits offered by the test. One of the benefits identified by the clinical sites was the ability to test patients on-site when warranted and provide rapid treatment, thereby avoiding the risk of continued transmission of the diseases. We feel this is a strong indication of the market fit for the test and are excited about its potential. We submitted an application for a clear waiver from the FDA for the DPP HIV Syphilis test in January of 2021. Our commercial objective for obtaining the CLIA waiver is simple. With the PMA approval, we received from the FDA last October, the test is authorized for moderately complex labs and there are about 15,000 of them in the United States. If we receive clear waiver from the FDA, we estimate that opens up the target market to a range of 40,000 to 50,000 CLIA wave sites in the United States that have a history of running tests for prescribing treatment for HIV or Syphilis. Among these are planned parenthood and staying at local public health clinics, which can be the go-to providers for prenatal and STD health services. We active discussions with the FDA regarding their review of our CLIA waiver submission. But there can be no assurance that a CLIA waiver will be greeted with respect to the DPP HIV Syphilis system. Ken Lyle also offers numerous HIV test to our customers, one of which is the HIV-1/2 STAT-PAK assay, but WHO prequalified rapid Point and Care assay for the detection of HIV-1 and HIV-2 antibodies and fingerstick full blood, venal full blood, serum, or plasma. A version of the HIV 1/2 staff back for the U.S. market has received PMA and CLIA waiver from the FDA. Most recently, we announced a $4 million purchase order from the partnership for supply chain management, supported by the global fund for the purchase of our HIV-1/2 STAT-PAK assay for shipment to Ethiopia in the early 2022. We first were awarded the frontline testing algorithm position in Ethiopia in 2018, discreet for HIV. With this latest purchase order, Chembio's continuing that important role now under the contractual hospices of the Global Fund and expanding its long-standing relationship with partnership for supply chain management, which leverages the planning and logistics resources for clients, governments and non-government organizations in over 85 countries. As for the large order for Brazil, our delivery of the full number of tests covered by the purchase order may be affected by limitations of our supply chain, staffing, and liquidity, and other matters outside of our control. It's important to note that testing for HIV across Africa and Asia fell by 41% during the period from April to September 2020 compared to the same period in 2019, according to an April 2021 report by the Global Fund on the disruptive impact of the COVID-19 pandemic. To that end, the joint United Nations program on HIV -- As has identified 90-90-90 targets intended for 90% of HIV-positive people to know their status, 90% of HIV-positive people who know their status will be on HIV treatment, and 90% of the people on HIV treatment will have achieved viral suppression and have undetectable levels of HIV in their bodies. The 90-90-90 targets are a vital global public health initiative, and we remain focused on addressing this market need with Chembio's portfolio of HIV tests. I will now touch on our operational infrastructure before turning the call over to Neil. Here, over the past year, as mentioned, we have taken steps to automate our test manufacturing processes. With our final decision related to the Malaysia facility, which Neil will discuss in a bit, the entirety of our test manufacturing operations are in the United States. We will continue to take steps intended to increase manufacturing efficiency, add appropriate capacity, improved product margins, and reduce our able costs. As we scale our production to meet the significant orders that we just received, our production schedules and resources will be managed to ensure support of our customers and their needs. I will now turn the call over to Neil for details on the financials.
Neil Goldman: Thanks, Rick. For the 3 months ended June 30, 2021, total revenue was $6.5 million, representing growth of 26% compared to the prior year period. Product revenue for the first quarter of 2021 was $3.9 million, an increase of 4% compared to the prior year period. Government grant income, license and royalty revenues, and R&D revenues combined for the 3 months ended June 30, 2021, were $2.5 million, an increase of 92% compared to the prior year period. Of this $2.5 million, $2.3 million was earned by achieving milestones under our $12.7 million program with BARDA, bringing our cumulative government grant income under this program through the second quarter of 2021 to $7.2 million. Our revenues were in compliance with the 12-month rolling minimum total revenue covenant in our credit agreement. Both government grant income and R&D revenue are 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. Gross product margins during the 3 months ended June 30, 2021, increased by approximately $1.8 million compared to the prior year period. The gross product margin during the 3 months ended June 30, 2021, was unfavorably impacted by a $0.9 million charge related to the wipe-down of inventory. Product margins in the prior year period were impacted by a number of factors that we covered at that time and which are summarized in the press release. R&D costs increased by $0.9 million, primarily associated with clinical and regulatory work related to pursuit of an EUA and 510(k) from the FDA for the DPP SARS-Cov-2 Antigen test system and an EUA for the DPP respiratory panel, each as part of the awards from BARDA. Selling, general and administrative expenses increased by $1.6 million in the second quarter of 2021 compared to the prior year period. The increase in selling, general and administrative expenses, principally reflected increased costs associated with professional fees and our expanded U.S. commercial team. During the second quarter of 2021, we recognized a $1.3 million non-cash impairment loss from the write-off of intangible assets net leasehold improvements net and right-of-use assets for leases net, all associated with our Malaysian operations. During the 3 months ended June 30, 2021, we were informed that the World Health Organization had prioritized its review of prequalification of the manufacture of our HIV-1/2 STAT-PAK Assay on our U.S. automated manufacturing processes, which could -- which would reduce our reliance on manual labor that otherwise would have been performed at our Malaysian facilities had we restarted operations there. The products produced on our automated and manual production lines at any time depend on, among other things, the timing of customer orders and the mix of products being produced. We also recognized $0.7 million of restructuring costs related to professional fees to support the work in advance of as well as structuring and executing the ATM offering. Net loss in the 3 months ended June 30, 2021 was $9.1 million or $0.45 per diluted share compared to a net loss of $7.8 million or $0.42 diluted share in the prior year period. The net losses reflected asset impairment, restructuring and related costs of $2 million or $0.10 per share for the second quarter of 2021 compared to $0.3 million or $0.02 per diluted share for the prior year period. On the balance sheet, cash and cash equivalents as of June 30, 2021 totaled $5.6 million. Our cash balance as of that date was in compliance with the minimum cash covenant in our credit agreement. On July 19, 2021, we entered into an at-the-market equity offering agreement, or ATM, enabling the company to sell from time to time at the board's discretion up to an aggregate of $60 million of shares of common stock. Subsequent to the end of the second quarter, as of July 26, 2021, $36.9 million of gross proceeds have been raised through the company's ATM program. From the issuance of 8,323,242 shares of common stock at a weighted average price of $4.43. The 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 that 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 1 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-in-de 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.
Richard Eberly: 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 STAT-PAK tests. 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.
A - Neil Goldman: Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) Our first question today is coming from Per Ostlund at Craig-Hallum Capital Group.
Per Ostlund: 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'll use that word for it. Given the order out of Brazil specifically, the $28 million order there, that's obviously gigantic when juxtaposed against other orders you've received in the past, and frankly, just yearly revenue that you've generated company-wide across geographies. 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 is you called out some of the caveats from that press release, like supply chain and staffing and liquidity, I have to think that was such a large -- or a long-standing partner in Bio-Manguinhos 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?
Richard Eberly: 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 Bio-Manguinhos 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 at Brazil. So some of the considerations we took into place Per, where our investments over the last 1 to 2 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 made in the early part of the year relative to downsizing the manufacturing organization. But we were in anticipation of these large orders. We've been in discussions with Bio-Manguinhos 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. So we had to make some decisions as management to continue production and produce some finished goods as well as deeper supply chains going during the first half of the year. So we consider 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 we -- as soon as we got the purchase order and even prior to that, we have 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.
Neil Goldman: And Per, this is Neil, I'll just add on to that, and that's why you've 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.
Per Ostlund: Yes. No, I agree. I think that's entirely reasonable. I mean, obviously, this is in 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?
Richard Eberly: Yes, Per. The plan that we feel 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.
Per Ostlund: 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, have you -- is there anything you can articulate as far as a product margin target that you're hoping for in ASP that you're hoping for there? I guess it's probably in the contract, but anything you can tell us about that.
Richard Eberly: Yes. 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 margin, largely due to, #1, we didn't want our competitors to see that. #2, 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 regard as well. Okay. That's fair. That's kind of what I figured you'd say, but I figured I had to ask too. One last one. 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 that -- is there anything further, I guess, specifically from a year-end investment standpoint, be it in supply chain, be it in inventory, or what have you that you're really focused on or what's the nearest in issue just shoring up the balance sheet first and foremost?
Neil Goldman: Yes. Per, I'll take that, It's Neil. So certainly, shore as a balance sheet is a part of that, but you can go and review in the prospectus 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 ability to respond for them -- to them as we've done, we believe, validates those decisions. That never happens as quickly 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 our ability to move quickly in delivering product to Brazil is certainly being well received down there, as you can imagine.
Richard Eberly: I would add to that, Per, that one of the other things that were very focused on is executing our longer-range strategic plan. And dating back to last year when I joined Chembio, 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.
Operator: Our next question today is coming from Kyle Bauser at Colliers.
Kyle Bauser: Maybe I'll start with gross margin. I know we had some previous inventory write-downs in past quarters. And I was thinking we could actually, going forward, potentially see 100% gross margin on a GAAP basis on the product that you kept. How should we think about gross margins in general, and being able to get back above 0%? Or are there any other write-downs expected in subsequent quarters just any guidance on how we should be thinking of that?
Richard Eberly: Well, I'll start stating the absolute patent obvious, which is 0% is no bar. And I'll just leave that there. But if there were other things that we thought that we 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 product dating and expirations associated with that that still represent opportunities and commercial opportunities related to them, like any assessment of inventory that happens in it from time to time, it changed 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 from a product margin standpoint, our overall product revenues during the quarter were down relative to levels at which they have been historically. So certainly, there is a dimension in this related to simply the absorption of overhead and needing to cover that manufacturing that fits manufacturing overhead that plays a factor into those amounts. Hopefully, that helps clarify some things for you.
Kyle Bauser: Got it. That's helpful. And maybe switching to the respiratory product offerings. How have -- how has the traction been? How have sales been for the in-licensing of the Princeton BioMeditech 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 how things are going within licensed product.
Richard Eberly: Yes, 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 the 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 of weeks. We're seeing a lot of physician office labs, urgent care centers, beginning to think about -- 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.
Kyle Bauser: 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?
Richard Eberly: 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 the questions, we believe the process is moving forward. And as soon as we 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.
Operator: Our last question today is coming from Bruce Jackson at The Benchmark Company.
Bruce Jackson: 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?
Richard Eberly: 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 6 months to 7 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 your attention is drawn to and funding to fight against the COVID-19 situation.
Neil Goldman: Yes. Bruce, what I can tell you is during the COVID-19 pandemic, there has continued to be some level, which, for obvious reasons, I won't get into quantifying at that level of granularly, there is continued to be some ongoing level and continue to be an ongoing level of other infectious disease tests that they're ordering and that we're making and shipping to them routinely.
Bruce Jackson: Okay. Good. And then in terms of the $28 million order, you were able to ship some of that out of inventory. How much -- 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?
Neil Goldman: Yes. 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 disappear as we get started. Certainly, it's beneficial and is unquestionably valued by them as part of the business and that is now up to us, as both Rick and I have talked about in the prepared remarks and in 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.
Richard Eberly: Yes. I would add to that, Bruce, that due to the collaborative relationship we have with the making is 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 the Bio-Manguinhos if 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 we'll be making in both their operational scale up and our operational scale-up will be in harmony as we progress through the rest of the year.
Neil Goldman: 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.
Operator: Thank you. We have no further questions in the queue at this time.
Richard Eberly: 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.
Operator: 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.
