Q4 2021 Chembio Diagnostics Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Chem Bio 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 opened for your questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host Philip Taylor Investor Relations, Sir the floor is yours.
Thank you operator before we begin let me remind you that the company's remarks made during this conference call. Today March three 2022 may include predictions estimates or other information that might be considered forward looking these.
Forward looking statements represent <unk> current judgment for the future.
However, subject to numerous assumptions risks and uncertainties many of which are beyond <unk> control, including risks and uncertainties described from time to time in <unk> SEC filings, including those under risk factors and elsewhere in <unk> filings with the SEC, including its quarterly reports on Form 10-Q for the second.
<unk> and third quarters of 2021 and the current report on form 8-K filed with the SEC on July 19 2021.
<unk> results may differ materially from those projected <unk> undertakes no obligation to publicly revise or update any forward looking statements made today.
Marriage, you to review all the company's filings with the SEC concerning these and other matters.
With that I'd like to turn the call over to Rick Eberly, President and Chief Executive Officer.
Thank you Phil.
Good afternoon, everyone and thank you all for joining us today.
On today's call, we will discuss our commercial performance.
Providing an update on our product development and regulatory pipeline.
Comment on our priorities for this year.
Larry will go over the fourth quarter financial results and lay out our operational initiatives for 2022.
Conclude and open the call for a Q&A session.
To start off I would like to highlight our record fourth quarter and full year performance.
In the fourth quarter, we generated total revenue of $26 million, including product revenue of $17 4 million.
Representing growth of 101% and 154% respectively compared to the prior year period.
For the full year of 2021, we generated total revenue of $47 $8 million, including product revenue of $34 $7 million.
Lending 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 for <unk>, making us for DPP Sars Covid two antigen tests in Brazil.
Purchase orders reported by the Global fund for HIV Test shifted Ethiopia and award from BARDA for the development of COVID-19 tests and.
In establishing distribution of third party COVID-19 test in the United States.
In 2021, we also strengthened our balance sheet and our board of directors.
And in 2022, we have significantly added to our leadership team with our newly appointed CFO , Larry Stephen Gordon, whom I will introduce today.
On the product development front, we also achieve regulatory approval from visa 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 Cambria.
Growth in the quarter was led by $12 million of product sales.
In the Latin American region, consisting mainly of DPP Sars Covid, two antigen test shipments to <unk>.
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 <unk>, but we are also making progress marketing our tests to be sold through our brasilia distributors that target the retail state and local health care systems, providing us with broad complete coverage across the region.
In the United States, we are pleased to further leverage our expanded commercial organization and distributor relationships.
We are gaining traction with our distribution of third party COVID-19 to tax advantage in 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 clear waiver for their product.
The increase in accounts and broad distributor relationships are laying the 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 assay shift to Ethiopia as part of the orders supported by a global thought.
In Europe and Africa, we are excited about the potential to expand our HIV self testing business, which will be a priority in 2022.
To further bolster our commercial opportunity and leverage the infrastructure. We've established for delivery point of care test globally, we have a robust product development and regulatory pipeline.
Our product portfolio expansion strategy includes two objectives to.
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.
<unk> commercial infrastructure.
As we've talked about before we believe the receipt of a CLIA waiver for our PMA approved DPP HIV.
HIV syphilis system would unlock a very large market opportunity by enabling us and 40% or 50000 clinics that regularly perform STD testing.
There are no other rapid combo test for these infections. Despite the rise in infection and co infection rates.
In December the FDA notified the company that it will require additional data for our CLIA waiver submission.
We are diligently taking action to fulfill this request and are working to produce the data required to receive a CLIA waiver.
Recently, we received CE, Mark and in visa approval for our DPP respiratory panel, which provides simultaneous discrete and differential detection. The Sars COVID-19 two flu a flu b from a single patient respiratory specimens.
This helped this past helps clinicians decide the appropriate clinical care for common respiratory infections that present with similar symptoms.
And these are approval allows us to commercialize the test through <unk> diagnostics, Brazil is a country that has recently experienced a flu outbreak concurrent with the ongoing COVID-19 pandemic.
Mark allows us to commercialize this product in Europe .
Okay.
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 and viral transport medium.
We noticed the notice from the FDA informed us that in order to proceed we will need to.
Prospectively collect influenza and influenza b samples and then submit a new EUA application.
Given the continued near absence of influenza in the United States, we are unsure of the timeline and the ability to complete the necessary trial.
Our EUA for the DPP Sars Covid, two antigen test, which has received and visa and South African approval as well as CE Mark remains under review with the FDA.
The sure check HIV self test represents another growth driver in our product portfolio.
And JV self test around the world is increasing.
This product has received <unk>, Joe and visa in Southeast Asia approval, along with the CE Mark.
Registration in the United Kingdom was recently completed.
This year, we plan our market discuss more aggressively pursue commercialization through all the channels available to us.
On the product development front.
We've invested a feasibility work to potentially develop additional sexually transmitted infection insect factor tests.
The impetus for exploring product development in these categories is the identification of large unfilled market needs were.
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.
Okay.
All that said, while we have experienced tremendous revenue growth in 2021, we recognize we are not growing profitably.
Magnitude of the recent orders has stressed our operations beyond our initial capacity.
This has resulted in margins and earnings that are lower than expected.
We are exploring every option to enhance our business model for greater efficiency down the P&L.
To improve our profitability going forward, we have created the global competitiveness program.
I've talked about the first component of the program before to focus on higher margin business in growth markets. We.
We feel that the DPP platform offers advanced capabilities that will enable premium pricing as we expand our assay targets, starting with achieving CLIA waiver for the DPP HIV syphilis test.
This will be an immediate step into higher margin business.
Improving our product and geographic sales mix is only part of the solution.
Let me be clear the entire cost structure at <unk> 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 discussed the global competitiveness program in more detail as this has been a principal focus for <unk> since joining in Cambodia.
Our goal has always been and will remain to create value for shareholders and we're drilling and we are forging a new path forward towards profitability.
Now I would like to introduce Larry seeing boarded our newly appointed executive Vice President and Chief Financial Officer.
He joins us with deep healthcare financial leadership experience.
<unk> many years at Siemens healthcare diagnostics.
We are excited about the insights he has offered in its early days.
Which will be material for value creation in the future.
I will let him to provide his assessment of the business. After he provides details on our financial results.
Now to you Larry.
Thank you Rick.
Really excited about the opportunity in front of US here at <unk> before I described the initiatives in our new operational plan I'll cover the fourth quarter results.
For the three months ended December 31 2021.
Total revenue was $26 million.
Representing growth of 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 31, 2021 for three.
$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.
The program with Florida, bringing our cumulative government grant income under this program through the fourth quarter of 2021 to $12 5 million.
Our revenues were in compliance with the quarterly 12 month Rolling minimum total revenue covenants in our credit agreement.
Gross product margins during the three months ended December 31, 2021 decreased by approximately $1 1 million compared to the prior year period.
Gross product margin percent was negative nine 2%.
In the fourth quarter of 2021 compared to seven 2% in the fourth quarter of 2020.
Gross product margin in the fourth quarter of 2021 was impacted by an unfavorable mix of average selling prices.
<unk> labor costs.
Inventory write down of $2 5 million.
R&D costs increased by $1 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 500 10-K from the FDA.
For the DPP Sars Covid two antigen test.
An EUA for the DPP respiratory panel each pursuant to awards from Florida.
Selling general and administrative expenses decreased by $3 million compared to the prior year period to $6 8 million in the fourth quarter of 2021.
Net loss in three months ended December 31, 2021 was $14 million or 47 per diluted share.
Impaired to a net loss of $7 $1 million or 35 per diluted share in the prior year period.
The net loss includes an impairment of goodwill and intangible assets for prior acquisitions of $4 $6 million or <unk> 15 per share for the fourth quarter of 2021.
Care to de Minimis amounts in the prior year period.
On the balance sheet cash and cash equivalents as of December 31, 2021 totaled $28 8 million.
The company did not sell any shares of common stock as part of the ATM offering in the fourth quarter of 2021.
Net working capital as of December 31, 2021 was $39 6 million.
As Rick mentioned reflective of the large current purchase orders, we're working to fulfill we expect product revenue in Q1 of 2022 to approach the level achieved in Q4 of 2021.
We also expect revenue for the full year 2022 to be first half weighted.
Now I would like to share my observations and analysis from my first months at the company and share our plans to improve profitability.
The company has achieved significant revenue growth in recent years, but has not met expectations for improving profitability.
There had been any headwinds throughout the pent up through the pandemic on the regulatory front.
And we're scaling up manufacturing production that I've 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.
We see great potential for <unk> and are beginning to make the changes required to create meaningful value for shareholders.
We are 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.
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.
And accountability throughout the organization.
Yes.
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 the 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 by leveraging more recently established distributor and direct customer channels in the U S.
Other key markets.
Products like our DPP systems test that require the use of micro readers place perfectly into this model.
To 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 targeted 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 aligned with future innovation centered on core strategy, including DPP and expansion of product pipeline with a more disciplined approach to cost benefit analysis Todd.
Target markets.
And competitive landscape.
All of our spec must contribute to more profitable revenue generation.
For strategic review of noncore businesses and assets.
Our prior acquisitions have not achieved their business plans.
Originally modeled.
More specifically emphasis will be on both our Germany and Brazilian subsidiaries with a re orientation for those businesses to achieve an independent path to profitability.
In alignment with our long term strategic roadmap.
While these pillars establish 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 the large markets, including the U S.
We plan to aggressively implement these actions that underpins fundamentals for long term profitable growth and sustainable shareholder value.
I'll now turn the call back to Rick for concluding remarks.
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 are 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.
<unk> operational expenses as a percent of revenue over the course of 2022.
As we gain visibility from the result of implementing lower cost manufacturing and cost structure changes, we will provide more information around the long term impact for the business.
We remain confident in our ability to gain market market share and develop new point of care diagnostic markets.
We are excited about the future and the new direction for Cambodia.
With that operator, please open up the call for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone now we ask that we're posing your question. Please pickup your handset at Essakane speaker phone to provide optimal sound quality. Please hold a moment, while we poll for questions.
Your first question is coming from Kyle Boser with Colliers.
Great. Thanks.
Thanks, so much and thanks for the update here.
So maybe I'll start with profitability I know profitable growth as the clear initiative based on your prepared remarks.
If we look at product sales.
$17 million, but the cost associated were 19, I guess I didn't quite catch it can you talk about what what the dynamics are here I know we've seen some of this in previous quarters.
But how do we how do we get back into the Green here.
From a gross margin perspective, thank you.
Yes, Kyle this is Rick Thank you for the question.
Really.
Strategic level.
As you heard in our prepared remarks.
But 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 marketing strategies, our sales focus not only.
In the United States, but by regions around the world.
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.
He went through the financials.
Larry you want to add anything to what we're doing moving forward relative to gross margins.
And I think so.
The visibility that we have now is now.
Guiding our strategic decision so as we're coming up with.
With opportunities we have a more robust approach to where we are with our current pricing and certainly we're going to be using that for each and every decision.
All forward, so what we've done with automation and now making other improvements.
The expectations that through through 2022 that we're continuing to leverage that.
And now with this higher focus on profitable growth that we are committed to as an entire leadership team.
That we are going to execute on that.
Upcoming year.
Okay got it so maybe just following up on that so we've got the big order into partner <unk> screened $28 million looks like 17 of that was recognized in now and now you.
You said that Q1 revenue levels will be similar to Q4, so presumably there's going to be a decent amount of additional COVID-19 antigen tests going to Latin America.
And it kind of looks like we saw a lot of that in Q4, when the gross margins were were hit.
I guess.
This gross margin expansion initiatives is that going to take a couple of quarters.
I guess, what I'm trying to get us.
Well the margin profile would be pretty similar in Q1 as it was in Q4.
Yeah Kyle.
A couple a couple of factors as you know when.
When we receive the large <unk> order in the global fund order in July .
Last year.
They were the largest we're the PM 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.
It was required.
We talked about some of the headwinds relative to the very very tight labor market that.
And that we were experiencing.
Not only in Q4, but continued to experience today.
Supply chain logistics.
Also some of the pricing pressures on.
On components and shipping.
Played a factor in that.
And as we scale up we also were very focused as Larry remarked on 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.
Got it thanks, and then just just lastly.
So we talked a little bit about gross margin.
The cash burn rate.
Last year was about $7 5 million a quarter and.
Talked a lot about how you plan on kind of improving that what I guess that scale or.
However, you want to kind of characterize it how low do you think that that burn rate could go or what's the target for you on a quarterly or annual basis. Thank you.
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.
Yes.
<unk> 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.
So that way, we can we can plan our operations around better visibility into our long term customer commitments.
Essential.
To continue to improve our operating efficiencies, especially in manufacturing and also.
Impact our cash burn on a quarterly basis, but 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.
It went up quite a path to profitability.
It is our number one priority.
Got it that makes that makes sense.
I'll jump back in queue. Thanks for all the updates here.
Thank you Kyle.
Your next question is coming from per Ostlund from Craig Hallum.
Your line of mice.
Thank you and good afternoon, everybody and welcome officially Larry the team.
I guess I wanted to follow up on Kyle's cash.
Aspirin question to start out with and.
I guess, where I'm going with it.
Okay.
The acknowledgement 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 two.
To rollout some of the new products get through get through R&D get registrations at the local levels taken care of and all of 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 youre going to have to.
May be reined in a little bit in order to preserve the cash situation.
Yes. Thank you for the question.
Relative to new products.
We're very very focused on.
The product pipeline and moving those forward as fast as possible, but they do take time for product development regulatory and clinical trials FDA review time et cetera et cetera.
So what we're doing is focusing.
Not only.
On our Covid products, which you saw in Q4 were largely impacted by the B and the genius order.
But we're very focused on our core products. So.
In fact, our commercial organization has really prioritize our core products in terms of their selling strategies and marketing market strategies and we realized we've got to.
Maximize our revenue from our core products not only United States.
But in Europe , and in Africa, and Latin America.
Our HIV syphilis combination test.
Remains a high priority in terms of selling the PMA approved product.
Then doing what we need to do to answer the Fda's request for additional data to get the CLIA waiver. So.
We're doing everything we can to.
Maximize our focus on our core products realizing that.
Certainty of the future around Covid is certainly related to what's happening with the omicron variant.
We are seeing.
A pretty significant decline.
And the incidence of COVID-19 in the on the ground.
In 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 as we move throughout 2022.
Okay very good.
On that point.
I guess, it's kind of a two parter.
When we think about the supply chain and the staffing issues.
Necessitated the extension of the <unk> in.
Greenhouse order.
Have you seen the worst of those issues are they still are very very acute maybe staffing might be the one you have the most control over how do you feel.
In that respect.
Let me address the supply chain issues first.
They continue to be headwinds.
For us.
Pricing pressure on the supply chain, whether it's logistics or components.
Continues to be a problem because 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 are seeing 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 I think if you look at logistics and shipping.
Everyone's talking about the increase.
The gas.
Impact of shipping cost. 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 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.
Correct, we affected by what kind of demand we see.
Beyond the early part of 2022.
Okay very good.
Last question for me for the moment.
Maybe we can bring Larry into this discussion here so the global competitiveness initiative.
The attendance that you laid out I'll make.
A tremendous amount of sense I think a number of those things.
You alluded to this do I think a lot of these things.
Sure.
Things that we've talked about for a while.
Our focus on higher margin products higher margin geographies efficiencies in these sorts of things how much of the global competitiveness initiative.
Is it sort of just.
Codified yet officially.
Versus.
Hey, now we have a fresh set of eyes.
And Larry and Rick Youre 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 that now we feel like we can and we know we can and we and frankly we have to.
Yes, yes, no fair so effect thanks for that question.
Thanks, though.
Monthly right now certainly a fresh set of eyes coming into this.
<unk> is a key.
Lever that I have.
With my experience.
With our first started to come into the organization I look at where the 2022 budget was and where we need to go.
Rick.
We realize it's just not sustainable.
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 from a revenue and then going down through what are the key levers that we can pull.
To make changes going forward.
And that's what the first one is the higher margin business that continues to be.
But the key pillar, but then theres other ones, we're 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 not really it's a commitment from the entire leadership team. So I had the benefit of coming in and putting sort of 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 cleared with the focus of the entire team.
To make progress for profitable growth going forward.
So that's the key key element of it that's now we have the roadmap and now we're going to do this as an entire team.
Again, we are all well.
We will be held accountable to to see that we execute accordingly.
So hopefully that helps address your question.
This is Rick if I could ask just one more thing to that Larry has been.
And incredibly welcomed to the company and I'll just give you. One example.
Immediately what he joined the company there was an assessment of all of our product revenue from 2021.
It was annualized.
Top 10 products down to direct labor indirect labor and material costs.
And that was done based on.
Based on actual product revenue from 2021 so.
We've gone to a standard cost based on that.
With that review.
And the executive team was.
<unk> presented.
That data and.
And it was very obvious that the labor cost of our production.
Our gross margins as is really really high.
And so I guess my point there is that we now have.
Would you might ask why did you have that before well we.
Now have it and we're moving forward.
Making our strategic decisions.
<unk> product sales marketing focus regions.
Based on that very very detailed information and as the visibility we didn't have.
Before Larry joined.
So.
That's been I would say per the biggest change.
To your question about whether we're just got to find us or whether we're actually going to be able to execute.
And I can give you assurance that.
With Larry's leadership on the finance side, we are going to execute.
Excellent. Thanks for all the context I appreciate it.
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.
Thank you Catherine.