Earnings Call Transcript - TRIB Q2 2020

Operator, Operator

Good day, and welcome to the Trinity Biotech Second Quarter Financial Results Conference Call. All participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, that this event is being recorded. I'd now like to turn the conference over to Kevin Tansley, CFO. Please go ahead, sir.

Kevin Tansley, CFO

Thank you very much. Before we begin with our prepared remarks today, we submit for the record the following statements. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify those forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts; the effect of regulation by the United States Food and Drug Administration and other agencies; the impact of competitive products, product development, commercialization and technological difficulties; and other risks detailed in the company's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect management's view only as of today. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. In addition, there is uncertainty about the spread of the COVID-19 virus and the impact it will have on the company's operations, the demand for its products, global supply chains and economic activity in general. So now, I will take you through the results for quarter two 2020. Beginning with our revenues, total revenues for the quarter were $16 million compared to just over $22.5 million in quarter two last year. Ronan will provide more details on the quarter two's revenues later in the call. So I will move on now and discuss the other aspects of the income statement. Our gross margin this quarter was 42.9%, which represents an improvement on the 42% reported in quarter two last year. This improvement was due to two factors. Firstly, the impact of lower instrument placements, which tend to have a lower average margin than other products, in addition to a lower depreciation charge during the period. You might also recall that our gross margin tends to fall in the event of lower revenues due to the largely fixed nature of our cost base. However, this quarter, we were able to offset most of the impact of COVID-19 on revenue by swiftly implementing a range of cost-saving measures. Moving next to our indirect costs. In total, they've fallen by over $1.9 million in the quarter to $6.4 million, a reduction of nearly 23%. Within this, R&D expenses during the quarter decreased from $1.4 million to $1.2 million while SG&A expenses from $6.6 million to $5 million. Both of these decreases are largely due to cost-saving measures we implemented in response to COVID-19 such as the furloughing of employees. So in the case of SG&A expenses, it would also include the virtual elimination of travel costs and discretionary sales and marketing expenditure, including the costs of trade shows, many of which have been canceled or deferred. Meanwhile, our share option expense increased slightly from $181,000 to $213,000, and that resulted in reporting an operating profit of $0.5 million for the quarter, down from $1.2 million last year. This reduction is entirely due to lower revenues and would have been significantly higher had we not undertaken the cost-saving measures I mentioned earlier. Moving on to our financing costs, which includes the impact of our exchangeable notes, our financial income for the quarter was $2,000 versus $133,000 in the comparative period. This is primarily reflective of lower levels of cash deposits. Meanwhile, financial expenses for the quarter were stable at $1.2 million, and of this, $1 million relates to the cash interest element of our exchangeable notes and the remaining $200,000 relates to the notional financing charge relating to lease payments as a result of IFRS16. There is also the non-cash financial expense of $700,000 which is disclosed further down the income statement that relates to the accretion interest on our exchangeable notes and a fair value adjustment in relation to the derivatives embedded in those notes caused by the increase in the company's share price during the quarter. The tax charge for the quarter was $32,000, and this represents an effective tax rate of 6.4% of operating profit. The comparative tax charge in quarter two 2019 was $5.6 million. This includes a charge of $5.5 million in relation to a tax settlement. In terms of overall results, the loss before tax and non-cash interest for the quarter was $718,000 compared to a profit of $101,000 in 2019. Meanwhile, after-tax loss for the quarter was $1.5 million compared to a loss of $5.6 million in quarter two 2019. The basic EPS for the quarter excluding non-cash items was a loss of $0.036 compared to a loss of $0.266 in quarter two 2019. However, fully diluted EPS was a profit of $0.01 compared to a loss of $0.179 in 2019. Finally, on the income statement, earnings before interest, tax, depreciation, amortization and share option expense was $1.5 million for the quarter. I'll now move on to talk about the significant balance sheet movements since the end of March 2020 and with an increase in property, plant and equipment of $87,000, addition for the quarter were $500,000 and this was offset by depreciation of $400,000. In the same period, intangible assets increased by $1.3 million and this was made up of an addition to $1.7 million offset by an amortization charge of $0.4 million. Moving on to inventories, you've seen that these have decreased $1.2 million and now stand at $31.5 million. Meanwhile, trade and other receivables have decreased by $2.9 million to $17 million, both reflecting the lower revenues in the quarter. Our trade and other payables including both current and noncurrent are broadly static at $39.9 million. This includes $4.5 million related to the new loan received under the US government's Paycheck Protection Program. Under provisions of the PPP, these loans will be partially or totally forgiven based on the extent to which a borrower's workforce returns to normal levels in the period immediately following the granting of the loans. On receipt of the loan, Trinity ended the furloughing of staff in each of its US locations, and consequently, we believe that a large percentage, if not all, of these loans will be forgiven later in the year once the necessary verification has taken place. Offsetting this increase was a $1 million decrease relating to interest accrued on exchangeable notes, as we made an annual interest payment of $2 million during the quarter and then accrued the next quarter of interest of $1 million. The remaining offsetting reduction related to lower trade creditors and lease liabilities due to payments which were made during the quarter. I'll now discuss our cash flows for the quarter. The cash generated from operations for the quarter was $2.8 million, capital expenditure in the quarter was $2.2 million, which represents a decrease of approximately $900,000 on the corresponding quarter last year. Then we incurred lease payments of $800,000 in relation to leased premises. These resulted in us having a negative free cash flow of approximately $200,000 for the quarter. Also in the quarter, we had our biannual exchangeable note interest payment of $2 million, and finally, there was the receipt of the aforementioned $4.5 million of PPP loans. The net result is that we had an increase in cash in the quarter of approximately $2.3 million bringing the quarter-end cash balance to $15.6 million. I'll now hand over to Ronan.

Ronan O'Caoimh, CEO

Thanks. I am going to review our revenues for quarter two before opening the call to question-and-answer session. Our revenues for quarter two were $16 million compared to $22.5 million in the corresponding quarter last year, which is a decrease of 29%. Point-of-care revenues of $1.3 million compared to $2.1 million in the corresponding quarter, which is a decrease of 41%. Clinical Laboratory revenues were at $14.8 million compared to $20.3 million in the corresponding quarter last year, which is a decrease of 27%. Moving back to point-of-care, our revenues decreased by 41% when compared to the corresponding quarter and the consequence of COVID was that we saw the suspension or reduction of HIV testing programs in certain countries in Africa, combined with supply chain difficulties caused by the major reductions in air traffic to Africa, as well as general uncertainty as to how quickly COVID would spread throughout Africa led to a slowdown in orders. However, during quarter three, we’ve seen a return to more normal levels of ordering and expect the outcome for quarter three to be marginally sort of normal. Moving on to our Clinical Laboratory, our revenues declined 27.5% to $14.8 million. We saw a significant reduction in our hemoglobin and in our autoimmune business due entirely to COVID. The consequence of COVID in many countries was that testing for non-acute conditions was severely reduced as patients were reluctant to visit their physicians or hospitals and run the risk of contracting COVID, leading them to forgo such testing. It, therefore, comes as no surprise that we saw a sudden drop in diabetes and autoimmune testing during the quarter. For autoimmunity, this first manifested itself in our reference laboratory in Buffalo with testing volumes declining for example by 90% in April. In the case of diabetes, we also saw instrument sales decline significantly with only 20 instruments placed during quarter two, as hospitals and clinics were likely not to purchase new capital equipment in the midst of the pandemic. Testing volumes for diabetes also significantly decreased during the quarter. On a positive note, however, we are now seeing revenues for both autoimmunity and diabetes return to near normal levels, with the exception being that hospitals are continuing to defer capital equipment purchases. However, the impact of COVID is not only negative from a revenue perspective. We are seeing higher sales of some of our point-of-care respiratory products such as Legionella urinary antigen and Strep pneumonia, given the increased testing for these conditions in light of COVID. With regard to our life science, considering Fitzgerald, we’re also seeing significantly increased revenues for our COVID monoclonal antibodies and our complementary reagents. In addition, the company is benefiting from sales of our FDA-approved transport medium, which is a sample collection device for COVID-19 PCR and molecular testing, used to store the nasopharyngeal swab, which contains the patient’s sample, allowing it to be transmitted in a stable environment. The Transport Medium stabilizes the sample and prevents bacterial growth and maintains its integrity until such time that the test is run at the laboratory. As recently announced, the company has launched its COVID-19 IgG ELISA antibody test and is now free to sell the products in the USA. We expect to have the product CE marked for sale in Europe within the next six weeks. The product has demonstrated specificity in excess of 98% and sensitivity in excess of 95% in samples drawn at least 14 days after symptom onset. These percentages comfortably exceed the minimum requirements of the FDA emergency use authorization partly. As the utility of this product is to detect individuals’ antibody response to COVID-19, indicating past exposure and potential immunity, the specificity is the key performance metric. A high percentage specificity means that there are virtually no false positives and therefore, for example, patients are not given the false impression that they may be immune. The test will potentially be used within the screening of people prior to vaccination to avoid vaccinating individuals who already have a circulating antibody response. Additionally, the test can be used to monitor patients' serological response in the weeks and months following vaccination as their immune system builds an antibody response to the virus. In addition, the test can be used to prove that an individual had previously had COVID-19 and is now assumed immune and can also be used by governments to monitor the prevalence of COVID's immunity in the population. As previously indicated, our reliable production capacity is significant and the instrumentation platforms that perform this type of testing are available in virtually every laboratory in the world. So in summary, our quarter three revenues for autoimmune and diabetes testing and anti-HIV would be below normal, but not significantly so, while our infectious disease revenues, which include COVID-19 products, will be significantly higher than normal, reflecting significantly higher sales of our point-of-care rapid test, the new antibody COVID-19 ELISA test, the PCR transport medium, and Fitzgerald-19 monoclonal antibodies. We estimate that quarter three revenues will exceed $28 million. Moving back to the development of COVID-19 tests, we have previously indicated that the company is also developing a rapid point-of-care COVID-19 test to detect IgG antibodies; the test can run in 12 minutes using one drop of whole blood procured by spring-loaded lancet or a finger prick. Like the ELISA test, this test will determine which individuals within the population have been exposed to COVID-19 and are therefore regarded as immune. We expect to complete the development of this test and transfer it into manufacturing before year-end and again believe that the product is exhibiting performance characteristics that will enable us to gain FDA Emergency Use Authorization. We already have in place existing and substantial automated manufacturing capability for such a test, given that we already manufacture many millions of HIV tests on the same automated equipment. Regarding the FDA warning letter, as you would have seen last week, we announced that our Primus subsidiary had received a warning letter from the FDA following an inspection of its Kansas City manufacturing facility that took place in January 2020. Firstly, I want to say that we're extremely disappointed to have received such a letter. In fact, it is the first time that this has occurred regarding any of our facilities during our 28-year history. The principal issue that was identified was in relation to our Ultra2 instrument, which is used for Hemoglobin Variants testing. This product has been on the market for over 20 years, making it the oldest Primus instrument operating in the field. In its letter, the FDA has pointed out that certain post-launch changes and enhancements made to the Ultra2 mean that it no longer bears sufficient similarity to enable its initial 510(k) approval to be relied upon. In order to address this, the company intends to negotiate with the FDA to allow for a new 510(k) submission to be made within an agreed timeframe. In addition to this, we're actively preparing more detailed remediation plans in relation to the 3483 findings identified during the January audits, and again, these findings principally relate to the Ultra2 instruments. I would like to point out that approximately $4.5 million of our revenues are derived from the Ultra2 in the USA as opposed to the Premier 9210, where the majority of our hemoglobin revenues are earned. In addition, our Premier Resolution instrument, which is already being sold in a number of countries, including CE Mark, is undergoing the process of obtaining its own FDA clearance at this time and is the designated successor for Ultra2. In fact, but for COVID-related delays in completing independent trials, it is likely that such clearance would have been obtained already. We now anticipate making the Premier Resolution submission by the end of November, ultimately allowing for the Ultra2 installed base to be replaced by the Premier Resolution new instrument. I would like to assure you that we're treating this letter with the utmost seriousness, and we're giving the resolution of the issues contained in FDA's letter the highest priority. We've assembled our highly qualified team who will spend the next two weeks completing our responses to the FDA, which will contain a detailed plan outlining how we intend to resolve all the issues that they've raised. At this stage, we could turn back for a question-and-answer session, please.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And our first question will come from Jim Sidoti with Sidoti & Company. Please go ahead.

Jim Sidoti, Analyst

Good afternoon, Ronan and Kevin. Can you hear me?

Ronan O'Caoimh, CEO

Hi, Jim, how are you?

Kevin Tansley, CFO

Hi, Jim.

Jim Sidoti, Analyst

Yes, thank you. I hope you're well. I just want to be clear. Did you say you expect third quarter revenue to be $28 million?

Kevin Tansley, CFO

Yes, $28 million.

Jim Sidoti, Analyst

So that represents about 14% top line growth from a year-ago which was also an up quarter. You haven't had a double-digit top line growth quarter in a couple of years and we're in the middle of the pandemic. What's driving that growth?

Kevin Tansley, CFO

Yes, well I mean, I think it's probably something like a 40% growth in the context of our current run rate, bearing in mind that I'd already indicated that autoimmune disease, HIV and diabetes have not returned to full levels, and that, for example, our instrumentation is supposed to be reasonably modest in quarter three. So, I mean it reflects the fact that basically, we're selling a new ELISA antibody test and PCR transport mediums. We're selling more infectious disease products like Legionella Urinary Antigen and Strep pneumonia, as well as selling a lot of monoclonal antibodies with COVID-related antibodies. So things accumulate those factors is giving rise to this. So again, that'd be five weeks to go to the end of the quarter, but I think we feel confident in that number.

Jim Sidoti, Analyst

Do you think those trends continue for the next few months? Or do you think that is, it could go up or down depending on what happens with COVID?

Ronan O'Caoimh, CEO

I think for quarter four, it's likely to accelerate. And quarter one, it's pretty difficult to foresee.

Jim Sidoti, Analyst

Okay, but can you remind me of 2020?

Ronan O'Caoimh, CEO

I think acceleration is more likely than deceleration.

Jim Sidoti, Analyst

It sounds like for the remainder of 2020, you're expecting double-digit top line growth year-over-year?

Kevin Tansley, CFO

More than that, yes.

Jim Sidoti, Analyst

Yes, okay. All right. And then on the expense side, I know you said you received the money for PPP money. Is there any effect on the income statement from that? Does that offset any expenses? Or is that something that will happen later on?

Kevin Tansley, CFO

That's something that will happen later on. So at this point, I suppose that the scheme is relatively new, the rule has been changing somewhat since it was introduced. There's a formal process to go through with the lending bank and then in turn with the government agency, and just given all that, at this point, we've taken a prudent approach and not recognized any forgiveness at this point. And we'll just wait until there's greater certainty as to exactly how that plans out. So at the moment, the loans are included in our balance sheet as a liability. Obviously, as I mentioned in my remarks, I believe that high percentage, if not all of them will be forgiven on the basis that we did bring back all of our furloughed employees in the US immediately after receipt of the loan financing. So from our point of view, we've held up our end of the bargain.

Jim Sidoti, Analyst

Okay, and can you give us an update on the timetable for the approval practice for both the screening test in Africa and then for the point-of-care immunity test, the COVID immunity test or I'm sorry, the COVID antibody test here in the U.S.?

Ronan O'Caoimh, CEO

Okay, Trin-Screen in Africa has just been held up because we can't run any trials at the moment. So just waiting to finish off in two of the three countries, we haven't been able to get going again, we're hoping to get going in the next month or so. But we don't have complete clarity on that. And then in respect of the rapid test, we're virtually completed at the moment, we're doing validations. But the other thing that has to be done is, obviously, it has to be transferred into manufacturing and mold issues, etc. So they're taking time, and then that new mold should be validated, etc. So because remember, it's going on to automated systems. So what's actually holding us up more than anything else at the moment is actually the manufacturing side of things. But I think we'll be clear. We're satisfied we will be clear before year-end. So I mean the EUA, I think will come probably comfortably enough, probably sometime in November, the real issue is how quickly we can scale up manufacturing.

Jim Sidoti, Analyst

And then last one for me for the IgG test that has already received the EUA approval, are you receiving inquiries regarding that? And when do you expect sales to commence?

Ronan O'Caoimh, CEO

We have huge interest and it's not just in the USA but around the world. And so we have huge interest. And yes, it's looking very promising. We also, of course, are going to be CE Mark, which will enable us to sell in Europe, and we hope to have that within the next six weeks.

Jim Sidoti, Analyst

So does your revenue guidance with $28 million of revenue for the September quarter? Does that include any sales for that test?

Ronan O'Caoimh, CEO

Yes, it does, yes. Good morning, Paul.

Paul Nouri, Analyst

Hey, good morning. Did you say that the annualized impact of the Kansas City plant issue is $4 million? Did I miss here though?

Kevin Tansley, CFO

$4.5 million.

Paul Nouri, Analyst

Okay. And the company issued a shelf statement a little while ago. What are the different financing options you're considering? Is ATM one of them where you can issue shares at the market?

Kevin Tansley, CFO

The first thing to say on that, Paul, is that we've had a policy for some time now of always having a live shelf registration. The reason we put the shelf in place is because the previous one has expired and so keeping with the policy to always have a shelf, we just placed one at the first available opportunity, and we put in a whole range of broad categories of financing, the broadest as such as is the norm in these situations. So I wouldn't necessarily read anything into the fact that we put a registration there. As I say again, it's the broadest possible range of raising just and keeping with the spirit of those types of documents.

Ronan O'Caoimh, CEO

So Paul, just to be clear. I mean, it's our policy to have a shelf registration in place as I think most companies would do. And so the fact that we actually did that filing in no way reflects an intention to actually raise money. In fact, it's not our intention specifically not our intention to do so at this kind of share price.

Paul Nouri, Analyst

Okay. All right. Well, thank you.

Ronan O'Caoimh, CEO

Thanks, Paul.