Chembio Diagnostics, Inc. (CEMI) on Q4 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Chembio Fourth Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Philip Taylor with 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, March 3rd, 2022, may include predictions, estimates, or other information that might be considered forward-looking. These forward-looking statements represent Chembio's current judgment for the future. They are, however, subject to numerous assumptions, risks, and uncertainties, many of which are beyond Chembio's control, including risks and uncertainties described from time-to-time in Chembio's SEC filings, including those under Risk Factors and elsewhere in Chembio's filings with the SEC. Including its quarterly reports on Form 10-Q for the second quarter and third quarters of 2021. And the current report on Form 8-K filed with the SEC on July 19th, 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 Eberly, President and Chief Executive Officer.
Richard Eberly: Thank you, Phil. Good afternoon, everyone, and thank you all for joining us today. On today's call, we will discuss our commercial performance, provide an update on our product development and regulatory pipeline, and comment on our priorities for this year. Larry will go over the fourth quarter financial results and lay out our operational initiatives for 2022. Then I will conclude and open the call for Q&A session. To start off, I would like to highlight our record fourth quarter and full-year performance. In the fourth quarter, we generated total revenue of $20.6 million, including product revenue of $17.4 million, representing growth of a 101% and a 154% respectively, compared to the prior year period. For the full-year 2021, we generated total revenue of $47.8 million, including product revenue of $34.7 million, representing growth of 47% and 40% respectively compared to 2020. Our performance was driven by several highlights across 2021, including the $28.3 million purchase order from Bio-Manguinhos for DPP SARS-CoV-2 Antigen Test in Brazil. A purchase order supported by The Global Fund for HIV Tests shipped to Ethiopia an award from BARDA for the development of COVID-19 tests and establishing distribution of third-party COVID-19 tests in the United States. In 2021, we also strengthened the balance sheet and our Board of Directors. And in 2022, we have significantly added to our leadership team with our newly appointed CFO, Larry Steenvoorden, whom I will introduce today. On the product development front, we also achieved regulatory approval from ANVISA and CE mark for our DPP COVID-19 tests, along with completing submissions to the FDA for these products. Diving deeper into the quarter, product revenue growth reached an all-time high for Chembio. Growth in the quarter was led by $12 million of product sales in the Latin American region, consisting mainly of DPP SARS-COV-2 Antigen tests, shipments to Bio-Manguinhos. We are on track to fulfill the remainder of this order in Q1 which will drive product revenues approaching Q4 levels in the quarter. Not only do we continue to deepen our relationship with Bio-Manguinhos, but we are also making progress marketing our tests to be sold through our Brazilian distributors that target the retail, state, and local healthcare systems, providing us with broad, complete coverage across the region. In the United States, we are pleased to further leverage our expanded commercial organization and distributor relationships. We're gaining traction with our distribution of a third-party COVID-19 to tackle Antigen test, which drove U.S. sales of $3.2 million in the fourth quarter. The DPP HIV-Syphilis System also supplemented U.S. sales and we remain very excited about the market opportunity for this test as we progress towards achieving CLIA waiver for the product. The increase in accounts and broad distributor relationships are laying a foundation for continued growth in the United States. We are excited about the opportunity to cross-sell additional tests in these established channels as our product portfolio expands. In the EMEA region, we recognized $2.3 million of revenue driven by sales of the HIV STAT-PAK as a shift to Ethiopia, as part of the orders supported by the Global Fund. In Europe and Africa, we are excited about the potential to expand our HIV self-testing business, which will be a priority in 2022. To further bolster our commercial opportunity and leverage the infrastructure we have established for delivery point-of-care test globally, we have a robust product development and regulatory pipeline. Our product portfolio expansion strategy includes two objectives. To develop tests on our DPP platform that are novel solutions for high-value growth markets, and to register existing products and additional geographies where we already have established commercial infrastructure. As we've talked about before, we believe the receipt of a CLIA waiver for our PMA -approved DPP HIV-Syphilis System would unlock a very large market opportunity by enabling use in 40 to 50 thousand clinics that regularly perform STD testing. There are no other rapid combo tests for these infections, despite the rise in infection and co-infection rates. In December, the FDA notified the company that it will require additional data for our CLIA waiver submission. We are diligently taking action to fulfill this request and are working to produce that data required to receive a waiver. Recently, we received CE mark and ANVISA approval for our DPP respiratory panel, which provides simultaneous, discrete, and differential detection. The SARS-COV-2, Flu A and Flu B from a single patient respiratory specimen. This tells -- this test helps clinicians decide the appropriate clinical care for common respiratory infections that present with similar symptoms. ANVISA approval allows us to commercialize the test through Chembio Diagnostics, Brazil, and a country that has recently experienced a flu outbreak concurrent with the ongoing COVID-19 pandemic. CE mark allows us to commercialize this product in Europe. Late in December, the FDA declined to review our EUA application for the respiratory panel. In order to address the near absence of influenza in the United States, the submission had included foreign-sourced, influenza-positive samples, preserved in viral transport media. The notice from the FDA informed us, that in order to proceed, we will need to prospectively collect Influenza A and Influenza B samples, and then submit a new EUA application. Given the continued near-absence of influenza in the United States, we were unsure the timeline and the ability to complete the necessary trial. Our EUA for the DPP SARS-CoV-2 Antigen test, which has received ANVISA and South African approvals, as well as CE mark remains under review with the FDA. The SureCheck HIV self-tests represents another growth driver in our product portfolio. The use of HIV self-tests around the world is increasing. This product has received WHO and ANVISA and Southeast Asia approval along with the CE mark. Registration in the United Kingdom, was recently completed. This year, we played a market more aggressively and pursue commercialization through all the channels available to us. On the product development front, we've invested in feasibility work to potentially develop additional sexually transmitted infection at insect vector tests. The evidence we're exploring product development in these categories is the identification of large, unfilled market needs. We are pleased with the progress of our pipeline and see strong potential for the R&D investments made over the past year to produce more profitable revenue over the long term. Although said, while we experienced tremendous revenue growth in 2021, we recognize we are not growing profitably. The magnitude of the recent orders has stretched our operations beyond our initial capacity. This has resulted in margins and earnings that are lower than expected. We are exploring every option to enhance our business model for greater efficiency down the P&L. To improve our profitability going forward, we have created the Global Competitiveness Program. I've talked about the first component that program before to focus on higher margin business in growth markets. We feel that the DPP platform offers advanced capabilities that will enable premium pricing as we expand our assets and targets, starting with achieving CLIA waiver for the DPP HIV syphilis test. This will be an immediate step into higher margin business. Improving our product and geographic sales mix is only part of the solution. Let me be clear. The entire cost structure at Chembio is under review. Looking at the gross margin line, we understand we need to increase manufacturing efficiency and this will require more than just automation. Exploring and establishing low-cost manufacturing alternatives is a top priority. I will let Larry discuss the Global Competitiveness Program in more detail as this has been a principal focus for since joining Chembio. Our goal has always been, and will remain to create value for shareholders, and we're going -- and we are forging a new path forward towards profitability. Now, I would like to introduce Larry Steenvoorden in our newly appointed Executive Vice President and Chief Financial Officer. He joined us with deep healthcare financial leadership experience, including many years at Siemens Healthcare Diagnostics. We are excited about the insights he has operated in his early days, which will be material for value creation in the future. I will let him provide his assessment of the business after he provides details on our financial results. Now to you, Larry.
Larry Steenvoorden: Thank you very much. I'm really excited about the opportunity in front of us here at Chembio. Before I describe the initiatives in our new operational plan, I'll cover the fourth-quarter results. For the three months ended December 31st, 2021, total revenue was $20.6 million, representing growth of a 101% compared to the prior year period. Product revenue for the fourth quarter of 2021 was $17.4 million, an increase of 154% compared to the prior-year period. Government grant income, license, and royalty revenues, and R&D revenues combined for the three months ended December 31rd, 2021 were $3.2 million, a decrease of 6% compared to the prior year period. Of that dollar amount, $2.9 million was earned by achieving milestones under our $12.7 million program with BARDA, bringing our cumulative government grant income under this program through the fourth quarter of 2021 to $12.5 million. Our revenues were in compliance with the 12-month rolling minimum total revenue covenant in our Credit Agreement. Gross product margins during the three months ended December 31st, 2021 decreased by approximately $1.1 million compared to the prior-year period. Gross product margin percent was negative 9.2% in the fourth quarter of 2021, compared to 7.2% in the fourth quarter of 2020. Gross product margin in the fourth quarter of 2021 was impacted by unfavorable mix of average selling prices, increased labor costs, and an inventory write-down of $2.5 million. R&D costs increased by $0.1 million compared to the prior year period to $3.4 million in the fourth quarter of 2021, primarily associated with clinical and regulatory affairs costs related to pursuing an EUA and 510(k)) from the FDA for the DPP SARS-COV-2 Antigen test, and an EUA for the DPP respiratory panel, each pursuant to awards from BARDA. Selling, general and administrative expenses decreased by $0.3 million compared to the prior year period, to $6.8 million in the fourth quarter of 2021. Net loss in the three months ended December 31, 2021 was $14 million or $0.47 per diluted share compared to a net loss of $7.1 million or $0.35 per diluted share in the prior year period. The net loss includes an impairment of goodwill and intangible assets from prior acquisitions of $4.6 million or $0.15 per share for the fourth quarter of 2021, compared to a de minimis amount in the prior year period. On the balance sheet, cash and cash equivalents as of December 31st, 2021 totaled $28.8 million. The company did not sell any shares of common stock as part of the ATM offering in the fourth quarter of 2021. Networking capital as of December 31, 2021 was $39.6 million. As Rick mentioned, reflective of the large current purchase orders we are working to fulfill, we expect product revenue in Q1 of 2022 to approach the level achieved in Q4 of 2021. We also expect revenue for the full-year 2022 to be first half weighted. Now I'd like to share my observations and analysis from our first month as a company and share our plans to improve profitability. The company has achieved significant revenue growth in recent years, but has not met expectations for improving profitability. There have been many headwinds throughout the pandemic on a regulatory front. And with scaling up manufacturing production that have taken resources and attention away from profitability. But it is time to change that. From the start in my first months, this has been my main focus. We see great potential for Chembio and are beginning to make the changes required to create meaningful value for shareholders. We're taking steps, including investments in automation to mitigate labor availability, headwinds, and implementing operational efficiency targets to proactively monitor production to address the volatile capacity planning, both with the overarching goal of profitable growth. To further accelerate and aggressively execute towards this goal of improved profitability in the first quarter of 2022, we have initiated a Global Competitiveness Program. Our Global Competitiveness Program has been developed with the support of the company's executive leadership team to ensure cross-functional alignment, commitment and accountability throughout the organization. The main pillars of the Global Competitiveness Program, include the following. One, a focus on higher margin business in growth markets. Our pursuit of growth in markets with higher selling prices remains unchanged. We have recently completed an in-depth analysis of our product portfolio and profitability on both a product and regional basis. With this increased transparency at a product level, we now have visibility to support customer pricing, marketing strategies, and evaluate opportunities to increase prices. Furthermore, focus will be on recurring revenue streams of our core business, but leveraging more recently established distributor and direct customer channels in the U.S. and other key markets. Products like our DPP systems, tests that require the use of micro readers play perfectly into this model. Two, lower manufacturing costs. Automation and labor management are essential to scale unit volumes while also seeking additional ways to drive our manufacturing costs down. With improved visibility on our labor and material costs at a product level, we will first target optimization of our lower-margin business. Three, reduce infrastructure costs. This includes an in-depth evaluation of all support functions and external spend to reduce costs. Research and development will further align with future innovation centered on core strategy, including DPP and expansion of product pipeline with a more disciplined approach to cost benefit analysis, target markets, and competitive landscape. All of our spend must contribute to more profitable revenue generation. Four, strategic review of non-core businesses and assets. Our prior acquisitions have not achieved the business plans as originally in the model. More specifically, emphasis will be on both our German and Brazilian subsidiaries with the reorientation for those businesses to achieve an independent path of profitability and alignment with the long-term strategic roadmap. While these pillars established a framework to improve our profitability, successful execution is dependent on many factors including future regulatory approvals, key relationships with long-term customers, and expansion in large markets, including the U.S. We plan to aggressively implement these actions that underpin fundamentals for long-term profitable growth and sustainable shareholder value. I'll now turn the call back to Rick for concluding remarks.
Richard Eberly: Thank you, Larry. Our message today is clear. We have navigated challenges throughout the pandemic while managing the business to generate record quarterly and annual revenue. We're very proud of the dedication and effort by the entire team. We have the products, the pipeline and commercial infrastructure to continue to drive continued growth. But now every decision we make hinges on profitable growth. This is absolutely a requirement of our business going forward. As we execute our operational efficiency initiatives, we plan to improve product gross margins and reduce operational expenses as a percent of revenue over the course of 2022. As we gain visibility from the results of implementing lower-cost manufacturing and cost structure changes, we will provide more information around a long-term impacts for the business. We remain confident in our ability to gain market share, and develop new point-of-care diagnostic market. We're excited about the future and the new direction for Chembio. With that, Operator, please open up the call for questions.
Operator: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, . Please hold a moment while we poll for questions. Your first question is coming from Kyle Bauser with Colliers. Your line is open.
Kyle Bauser: Great. Thanks. Thanks so much and thanks for the updates here. Maybe I'll start with profitability. I know profitable growth is the clear initiative based on your prepared remarks. If we look at products sale is $17 million, but the COGS associated were 19. I didn't quite catch it. Can you talk about what the dynamics are here? I know we've seen some of this in previous quarters, but how do we get back into the green here from a gross margin perspective? Thank you.
Richard Eberly: Kyle, this is Rick. Thank you for the question. Really, the strategic level as you heard in our prepared remarks. On a go-forward basis, we have much more visibility into our product gross margins. And so that is enabling better decision-making relative to our marketing strategies, our sales focus not only to the United States, but by regions around the world. So relative to -- I think your question was also about the fourth quarter. We did have an inventory adjustment in the fourth quarter that Larry touched on when he went through the financials. Larry, want to add anything to what we're doing moving forward relative to gross margins.
Larry Steenvoorden: Yes. And I think so the visibility that we have now is now guiding our strategic decision. So as we're coming up with opportunities, we have a more robust approach to where we are with our current pricing and certainly we are going to be using that for each and every decision going forward. So what we've done with automation and now making other improvements, the expectations that through 2022 that we'll continue to leverage that. And now with this, just higher focus on profitable growth that we're committed to as an entire leadership team, that we're going to execute on that in this upcoming year.
Kyle Bauser: Okay. Got it. Maybe following up on that. We've got the big order into your partner Bio-Manguinhos, which is great, $28 million. Looks like 17 of that was recognized and now you've said that Q1 revenue levels will be similar to Q4 so presumably there's going to be a decent amount of additional COVID Antigen tests going to Latin America, and it looks like we saw a lot of that in Q4 when the gross margins were hit. This gross margin expansion initiatives, is that going to take a couple of quarters? I guess what I'm trying to get at is, will the margin profile be pretty similar in Q1 as it was in Q4?
Larry Steenvoorden: Yeah, Kyle. A couple of factors. As you know, when we received the large Bio - Manguinhos order and the Global Fund order in July of last year, they were the largest or the BM order was the largest in the company's history. So as you can imagine, we were scaling up and in a dramatic fashion, to get to the type of manufacturing volume and output that was required. We talked about some of the headwinds relative to the very, very tight labor market that we were experiencing not only in Q4, but continue to experience today. Supply chain was logistics. Also, some of the pricing pressures on components and shipping, all played a factor in that. And as we scaled up, we also were very focused, as Larry remarked, on increasing our efficiency. And to scale up in the early days, we were really monitoring some of the areas where they weren't as efficient. And so we continue to increase the efficiency throughout the fourth quarter, and we continue to stay focused on that as we progress through Q1.
Kyle Bauser: Got it. Thanks. And then just lastly -- so we talked a little bit about gross margin. I think the cash burn rate last year was about $7.5 million a quarter and you talked a lot about how you plan on improving that. What -- I guess at scale or however you want to characterize it, how low do you think that burn rate could go or what's the target for you on a quarterly or annual basis? Thank you.
Richard Eberly: Yes, Kyle. We are not putting guidance out for 2022. We did get some qualitative comments relative to what we expect in Q1. What we are doing Kyle is trying to -- especially with our large government and NGO customers, is to get a longer visibility or line of sight into their demands for ongoing testing, whether it's HIV or COVID-19. That way we can plan our operations around better visibility into our long term customer commitments. That's essential to continue to improve our operating efficiencies, especially in manufacturing, and also impact our cash burn on a quarterly basis. But it is, as we said in the prepared remarks, Kyle, our number one priority in 2022 is to improve gross margins, do everything we can to reduce our operating expenses, and lower the cash rate on a path to profitability. That is our number one priority.
Kyle Bauser: Got it. That makes sense. I will jump back in queue. Thanks for all the updates here.
Larry Steenvoorden: Thank you, Kyle.
Operator: Your next question is coming from Per Ostlund with from Craig Hallum. Your line is live.
Per Ostlund: Thanks. Thank you. Got it. Good afternoon everybody and welcome, officially, Larry, to the team. I want to follow up on Kyle's cash burn question to start out with and I guess where I'm going with it is the acknowledgment that headwinds are continuing here yet in Q1 and that there is going to be a certain amount of time that it's going to take to roll out some of the new products, get through R&D, get registrations at the local levels taken care of and all that. How do you feel about your cash position in terms of giving you the ammunition to be able to go to do that? Or are there certain things on the product side that you feel like you're going to have to maybe rein in a little bit in order to preserve the cash situation?
Richard Eberly: Thank you for the question. Relevant to new products. We are very, very focused on the product pipeline and moving those forward as fast as possible. They do take time for product development, regulatory and clinical trials, FDA review time, etc., etc. So what we're doing is focusing not only on our COVID products which you saw on Q4 were largely impacted by the Bio-Manguinhos order. But we're very focused on our core products. In fact, our commercial organization has really prioritized our core products in terms of their selling strategies and, market strategies. And we realized we've got to maximize our revenue from our core products, not only in the United States, but in Europe and Africa and in Latin America. So, our HIV syphilis combination test remains a high priority in terms of selling the PMA approved product and then doing what we need to do to answer the FDA's request for additional data that has been CLIA waiver. So we're doing everything we can to maximize our focus on our core products, realizing that the uncertainty of the future around COVID, it's certainly related to what's happening with the Omicron variant. We're seeing a pretty significant decline and the incidents of COVID-19 and the Omicron variant in the United States. We're beginning to see some of that and some of the other markets we're in. So as a leadership team, we have committed to do everything we can to focus our commercial efforts on the core products as we moved throughout 2022.
Per Ostlund: Okay. Very good. On that point, I guess it's a two - parter. When we think about the supply chain and the staffing issues that necessitated the extension of the Bio-Manguinhos order, have you seen the worst of those issues? Are they still very, very acute? Maybe staffing might be the one you have the most control over. How do you feel in that respect?
Larry Steenvoorden: I will -- let me address the supply chain issues first. They continue to be headwinds for us. The pricing pressure on the supply chain, whether it's logistics or components, continues to be a problem as most companies are experiencing, especially with some of the recent global events. But at the same time, our procurement team and operations has built a very, very strong relationship with many long-term suppliers of our components. We all seen some of the biological suppliers threatening to raise prices so we're combating that with trying to negotiate longer-term contractual agreements with them. So that's the supply chain. If you look at its logistics and shipping, everyone is talking about the increase price that gas impact with shipping costs so that's also continues to be a headwind as we move into 2022. On the labor front, it's been an extremely competitive labor market, especially during Q4, and especially as we were ramping up and hiring additional employees for the manual side of the production. As we move into Q1 in 2022, we will be making the necessary adjustments, relative to what our employment needs are, directly affected by what demand we see beyond the early part of 2022.
Per Ostlund: Okay, very good. Last question from me for the moment. Maybe we can bring Larry into this discussion here. So the global competitiveness initiative, I think the tenants that you laid out all make a tremendous amount of sense. I think a number of those things, and Rick you alluded to this too. I think a lot of these things were things that we've talked about for a while. Focus on higher-margin products, higher-margin geographies, efficiencies and these sorts of things. How much of the global competitiveness initiative is just codifying it officially versus, hey, now we have a fresh set of virus -- and Larry and Rick, you're really just at the year mark as well? How much of it is -- the two of you sitting down and saying, there are specific things that we have not done and we have not laid out and now we feel like we can and we know we can and we -- and frankly, we have to.
Larry Steenvoorden: Fair. So thanks for that question and I'd say so to two a month in right now, certainly a fresh set of eyes coming into this a key lever that I'd have with my experience and when I first started to come in to the organization and look at where the 2020 budget was and where we need to go. I mean, Rick and I would we just we realize it's just not sustainable about where the current model is and how we're going to move forward to create shareholder value. So immediately I started to look at where we are from the revenue and then going down through what are the key levers that we can call to make changes going forward. And that's what -- the first one is a higher-margin business that continues to be the key pillar. But then in other ones we are looking at cost infrastructure, looking at our subsidiaries and where they are. And just going back and saying, you know what, we just need to ensure that our subsidiaries can also be a path to profitability. And then I'd also say that it's now really -- it's a commitment from the entire leadership team. So I had the benefit of coming in, putting my vision and strategy together. But then also getting the consensus from the entire leadership team that we are all going to execute, and we're going to be held accountable. And that has been clear to the focus of the entire team to make progress for profitable growth going forward. So that's the key key elements of it is that now we have the road map and now we're going to do is an entire team. And again, we are all will be held accountable to see that we execute accordingly. So hopefully, that helps address your question.
Richard Eberly: If you're -- this is Rick. If I could add just one more thing to that. Larry has been an incredibly well grown to the company, and I will just give you one example. Immediately when he joined the company, there was an assessment of all product revenue from 2021. It was analyze for the top 10 products down to direct labor, indirect labor and material costs. That was done based on actual product revenue from 2021. We've gone to a standard cost based on that review. The executive team was presented that data, and it was very obvious that the labor costs of our production in our gross margins is really, really high. So, my point there is that we now have -- wish you might ask why and you have that before. Well, we now have it and we're moving forward and we're making our strategic decisions both on product sales, marketing focus, regions based on that very detailed information. It's the visibility we didn't have before Larry joined. That's been I would say period of the biggest change. To your question about whether we're just codifying this or whether we're actually going to be able to execute. I can give you assurance that with Larry's leadership on the finance side, we are going to execute.
Per Ostlund: Excellent. Thanks for all the context. I appreciate it.
Operator: We have no further questions from the phone lines at this time. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Richard Eberly: Thank you, Catherine.
