Trinity Biotech plc (NASDAQ:TRIB) Q2 2023 Earnings Call Transcript

Trinity Biotech plc (NASDAQ:TRIB) Q2 2023 Earnings Call Transcript October 3, 2023

Trinity Biotech plc misses on earnings expectations. Reported EPS is $-0.15 EPS, expectations were $-0.07.

Operator: Good day, and welcome to Trinity Biotech Announces Second Quarter Financial Results. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I’d like to turn the call over to Mr. Joe Diaz of Lytham Partners. Please go ahead.

Joe Diaz: Thank you, operator. And thanks to all of you for joining us today to review the financial results of Trinity Biotech for the second quarter of 2023. Joining us on today’s call are Aris Kekedjian, Chief Executive Officer, and John Gillard, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Before we begin, please note that statements made during this conference call may be deemed forward-looking statements within the meaning of federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include, but are not limited to those set forth in the risk factor statements in the company’s annual report on Form 20-F filed with the Securities and Exchange Commission.

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Trinity Biotech undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrence of unanticipated events. With that said, I will now turn the call over to CEO, Aris Kekedjian for opening remarks. He will be followed by CFO, John Gillard for a review of the financial results. After which we will open the call your questions. Aris, the floor is yours.

Aris Kekedjian: Thank you. Good morning. As usual, I will discuss the summary highlights for the quarter and John Gillard will discuss the detailed financial results. In addition, we took the opportunity this quarter to take you through the in-depth details of our operational initiatives surrounding our core diabetes franchise. We think these are critical for our shareholders to understand as it’s critical to unpivot and transformation. Total revenue for fiscal Q2 2023 was $13.9 million, Fitzgerald Industries, which was disposed of in April 2023. Excluding our COVID focused PCR Viral Transport Media or VTM products and Fitzgerald, revenue for the quarter was $13.7, which is comparable — properly comparable given the changes.

This was 3% lower than in Q1 2023. Our core franchise diabetes consumables revenues increased 10% over Q1 2023. This is a critical financial growth metric that is key to the transformation of the company. Recurring diabetes consumables revenue rebounded strongly in Asia in the quarter, increasing approximately 70% over Q1. This was led by demand recovery in China. Our expectation is that, this level of demand will continue for the rest of 2023 in one of our most important markets. In addition, diabetes revenue grew by over 10% collectively over the quarters in our direct distribution markets, namely the U.S. and Brazil. In other product lines, Clinical Chemistry, Chromsystems and Syphilis product lines continue to show positive revenue momentum despite key raw material backorders in some Clinical Chemistry product lines.

I’ll reflect on that as we continue the dialogue. These revenues were gains — sorry, these revenue gains were offset by lower infectious disease revenue compared to Q1 2023 and reflects the irregular order cycle in this business line. In addition, we phased out our non-core and difficult to scale transplant activity at our Buffalo, New York laboratory during the quarter. Revenue outlook for Q3 is expected to be approximately $14 million to $15 million. Based on our current perspective on what we’re seeing coming in and the fact that we more or less closed the quarter, we think that might be closer to the upper end of that range. In addition, order backlogs have increased substantially to approximately $1 million which is broadly double the run rate for the first half of 2023.

I want to give you further perspective on the outlook for the rest of the year, especially around our Haemoglobins franchise. Significant commercial reorganization, customer engagement initiatives and service quality improvements have positioned the core Haemoglobins franchise for a strong second half 2023 revenue performance. We have made strategic instrument placements and focused on maximizing instrument utilization, these are gaining traction toward building an expanding, recurring revenue profile for the business. Diabetes consumables are expected to increase over 20% in the second half of 2023 versus the first half. In addition, diabetes instrument placements for the second half of the year are accelerating and are expected to be up to double those placed in the first half of 2023.

Now I’d like to turn our attention to some strategic highlights with respect to our key product lines. First on Haemoglobins. In August, Trinity Biotech received U.S. FDA 510(k) clearance for the Premier Resolution System, the automated analyzer for accurate and precise quantification of haemoglobin variants. Our intention is to retake the market leadership position in haemoglobin variants with this modern successor to the highly regarded Ultra2 platform. The Premier Resolution System builds on our Ion Exchange technology reputation of excellence and a market leading combination of accuracy, speed and value. We expect this important clearance from the FDA to actually drive further penetration and increased utilization of the Premier Resolution System in key global markets, including Brazil, where there is substantial scale in the blood screening market, and allow us to begin the regulatory process to roll-out the product in China.

The redevelopment of our flagship diabetes HbA1c platform, the Premier 9210, is on track for a phased roll-out in 2024. The final redeveloped system is expected to feature an improved, backward compatible column and reagent formulation that should feature up to 3 times the current injection capacity, reduced calibration frequency, improved user interface and better lab system integration. The launch of the new column and reagent will be the first step in a multi-generational product development plan aimed at expanding the target market into higher throughput segments, driving lower service downtime and cost, while significantly expanding operating margins. Our improved design, combined with significant overhaul of supply chain strategy are expected to yield significant reductions in instrument cost.

Cost of goods sold related to test volume, and cost of service and repair are all on the priority list. These cost competitive actions are aimed at significantly expanding our total addressable market in the high growth diabetes space. We have initiated a program to manufacture a version of our core diabetes instrument in China, the 9310. In addition to optimizing supply chain benefits, we believe this will enable us to double our reach in a very significant proportion of the Chinese hospital market that is limited to domestic manufacturers. We plan to — we plan to obtain regulatory approval for domestic market entry by late 2024. Now I’d like to take a moment to discuss our strategy to leveraging and scale our Reference Lab in Ney York. Efforts are at an advanced stage to significantly reposition and scale the commercial focus of our 50-state certified lab in Buffalo, New York.

The company continues to see significant potential in its proprietary Sjogrens bio-marker lab developed tests, despite limited commercialization activities to date, with have had 20% average annual growth since 2020. Annual revenues are approaching $4 million, we think we can significantly scale this number. A serious Autoimmune complication of the broader dry-eye market, studies indicate that Sjogrens syndrome may affect over 3 million individuals in the US or about 1% of the population. In conjunction with this opportunity we are entering into a strategic revenue-sharing partnership with Trusted Health Advisors to lead our commercial and business development activities aimed at maximizing the Sjogren’s opportunity. The team, comprising of ex-senior executives from Quest and Mayo Clinics, brings decades of experience and extensive network in the industry.

We as partners intend to explore the opportunity to leverage the Reference Lab’s Autoimmune capabilities to jointly expand beyond Sjogrens and look at proprietary biomarkers library expansion opportunities. This may give us the opportunity to develop this platform into a center of excellence for therapeutic drug monitoring and companion diagnostics across multiple Autoimmune diseases. I’m very happy to have a team with caliber working with us on such an important initiative. Next, I would like to update you on the status of our TrinScreen HIV launch in Kenya. The company is focused on executing the launch and distribution of its TrinScreen HIV screening test, this follows the announcement by the Kenyan Ministry of Health last year of the adoption of this new HIV rapid testing algorithm.

This algorithm establishes Trinity Biotech’s TrinScreen HIV as the standard screening test in Kenya under World Health Organization guidelines. We have completed field evaluation of the algorithm in June, the Ministry of Health has communicated procurement and use specifications to the agencies that are directly aimed at placing the orders and we have shipped kits for training purposes. We, along with the Kenyan government are addressing legal challenges to the HIV testing algorithm and related process changes introduced. We are anticipating resolution of the court challenges in hearings being held in early October. Our expectation, and the government’s actions indicate that we will receive significant orders in the fourth quarter upon resolution of these legal matters.

The Kenyan HIV screening program is one of the largest in Africa, with up to an estimated 10 million screening tests annually. Now I’d like to take a moment to discuss in a little bit more detail our operating initiatives. John and I thought it will be worthwhile sharing with you the status of the extensive Operational Transformation and Cashflow Improvement activities that have been underway for much of this year, we believe many of those activities are actually reaching an inflection point and we’d like to share those with you now. We are very focused on driving significant operational transformation and optimization to improve cashflow and allow our key products to gain a cost competitive advantage in certain market segments. As the company operates in a highly regulated healthcare sector, significant operational changes are typically subject to complex technical validation processes that can create time lags between initiation of the change and final implementation.

In that context, many of the key operational transformation programs we initiated over the past 12-24 months are now starting to deliver significant benefits and we projected to deliver increased and recurring cashflow benefits while allowing us to target growth in certain lower price markets, all while maintaining target margin. To look some of the key operational transformation projects include the following. First, Headcount Optimization. This has been an ongoing effort, but in Q2 and Q3 2023 management accelerated headcount reductions as a result of process simplification initiatives that have been ongoing for the past number of quarters, the implementation of new software tools in quality/regulatory compliance as well as production planning, and to reflect the lower than expected revenues, particularly in light of the delays around the Kenyan HIV roll-out.

Excluding the impact of the disposal of Fitzgerald and limited hiring to support TrinScreen HIV manufacturing, these changes are expected to deliver an approximately net 20% reduction in headcount by the end of Q4 2023 compared to Q1 2023, with a resultant annualized cashflow saving of over $4 million. Overall, this would represent an over 35% reduction in headcount compared to Q4 2020 when we originally started this optimization journey. The majority of these 2023 reductions are in back-office functions such as Finance, Quality Assurance/Regulatory, Supply Chain, etcetera, reflecting the impact of modernization and simplification projects lead by senior functional leaders we have hired over the past couple of years. We expect the financial benefit of these reductions to make a meaningful impact from Q4 2023.

To support TrinScreen HIV manufacturing we have hired approximately 15 staff. I’d just like to reflect that in light of these numbers I indicated to you. We are highly focused on revenue per headcount as a key KPI for management and we intend to continue to transform and optimize our operations to improve this KPI overtime. And we will keep you posted on how we progress. Beyond headcount we are also focused on optimizing the entire Haemoglobins operation to enhance price competitiveness and profitability. We see significant opportunity to truly refine this platform, specific actions are as follows. Number one, with respect to our Diabetes A1C Consumables Manufacturing Optimization Efforts, we are now at the final stages of our revised manufacturing process for our key Diabetes A1C testing column.

It’s the key consumable for 9210 instrument platform. Bringing this process in house is an — in an optimized manner is projected to reduce the cost of goods sold of our Diabetes A1C testing column by over 30%. Based upon current run rate of production, this is estimated to deliver over $1.5 million recurring annualized cash flow savings once we have fully transitioned to the revised manufacturing process and should allow our Premier 9210 A1c testing system to be more competitive in lower price/high volume segments of the market. We expect the financial benefit of these reductions to make a meaningful impact from Q4 2023 with an increased savings level in 2024 as we transition completely away from the legacy manufacturing process. Initiative number two with respect to our core Haemoglobins platform.

Diabetes A1c Instrument Supply Chain Optimization. Over the past12 months we have initiated a supply chain optimization program for this instrument, with the intent of reducing cost and optimizing the quality of the instrument by moving to more competitive supply chain environment. This program has progressed significantly, we have already commenced securing materials savings of 20% per instrument. Given the success of this program to date, we are now targeting savings of 40% to 50% in materials costs for our Premier [9210] (ph) instrument which is based upon our expected production run rate and would deliver based on that run rate annualized cashflow savings of over $1.5 million when fully completed. These changes are already delivering a working capital benefit in terms of lower inventory costs and expected EBITDA impact to begin in late 2023 or early 2024 as inventory is converted into sold product.

In addition, this lower cost of production should allow us to competitively target growth in segments of the Diabetes A1c testing market that are lower price but much higher volume than our traditional focus segments, this would allow us to significantly scale our business in terms of revenue while maintaining target margin. There is also significant component commonality between our Premier 9210 and our Haemoglobin variant instrument the Premier Resolution that recently achieved FDA clearance. This means that many of the savings achieved for the 9210 instrument can also carry into a meaningful lower cost of production for the Premier Resolution. The third key initiative I’d like to highlight with respect to this platform is the fact that we are rebuilding and repositioning the Diabetes A1c reagent column system core to our 9210 instrument.

As previously discussed, we are developing an improved backward compatible reagent column system. This system is expected to feature up to 3 times the injection capacity of our current system. This program is at its final stages of development and technical validation. Subject to this validation, we expect to launch this new reagent column system in early 2024 and estimate that this system should deliver recurring annualized incremental cost of goods cashflow savings of over $1 million, while again facilitating us more importantly to competitively targeting growth in segments of the A1c testing market that are lower price but much higher volume than our traditional focus segments. The ability for us to maintain volumes is because our reagent business is much higher margin than our insurance business.

This is a razorblade model and high volume is a critical way to scale. We are applying the same thinking now with all of this discussion about our Haemoglobins business to our HIV product manufacturing as well. We have initiated a program to optimize the location and cost of certain downstream manufacturing and supply chain activities related to our HIV products, namely Uni-gold and TrinScreen. Our initial assessment indicates that such a program could well deliver several million of annual cash flow savings while providing the company with additional manufacturing capacity to meet the increased and expected demand for TrinScreen as we roll the product out in additional countries. We expect this key product — this key project to start to deliver recurring savings in 2024, and we will provide further updates on this program as it progresses over the next couple of quarters.

These initiatives have combined to increase — these initiatives have contributed to some increased SG&A expenditure over the last 12 months. And we will continue to require some further investment over the coming quarters. Management believes that the future profitability and growth of the company is significantly dependent on optimizing our cost structure and cost competitiveness which makes these investments key to delivering significant returns over the medium term. We are prioritizing investing and the delivery of recurring savings or recurring revenue as they should deliver increased sustainable EBITDA and thus increase capital value within each of our core business areas. Before I turn it over to John, I’d like to address ongoing balance sheet optimization and the development of new growth opportunities.

As can be seen from the results over the past few quarters, our SG&A has increased. A major driver of this increase is expenditure on third party market research, technical assessment consultancy services, and other related costs as we seek to identify next generation biotech opportunities for the very significant growth market segments within our total addressable market. We are trying to position Trinity and its capabilities where the TAM is significantly larger, especially as it relates to adjacencies around our diabetes franchise. As a result of this work, we have now identified and are pursuing a select number of investment areas and associated targets. In conjunction with pursuing these targets, we’re also closely working with our existing lenders, Perceptive Advisors, to both improve the terms of our existing financing, considering our lower debt levels, and to gain their support and investments in these high growth opportunity areas.

These discussions are going well. We continue our strategic review of some of our noncore business lines for potential capital reallocation, to lower debt or reallocate capital to higher growth opportunities. Our approach to improving cash flow through operational transformation and organic growth in our core business areas should also play a key role in providing cash flow for investment and availability to incrementally improve financing. With that, I would like now to turn it over to John Gillard, who will provide you a more detailed review of the financial results for the quarter. Following that, we will take your questions. Thank you.

John Gillard: Thank you, Aris. Good morning, everyone. Now I’ll take you through the results for the second quarter of 2023. As you may be aware, we sold our Fitzgerald Industries business in April this year. So on our income statement for Q2 2023, the results of Fitzgerald have been reported separately within discontinued operations. As was the case in our Q1 earnings, the revenue, gross profit and operating loss numbers are stated without Fitzgerald for both Q2 2023 and the comparative period. Starting with revenues, total revenues for the quarter were $13.9 million compared with $15.4 million in Q2 2022. Gross margin for the quarter was 36.2%, which is the same as for Q2 2022. Here we are seeing the sales price and cost saving initiatives that we have implemented in the last year have been offset by lower revenue over a significantly fixed and semi-fixed cost base and by an unfavorable sales and exchanges.

In particular, the loss of the transplant testing services at our Buffalo lab has had a negative gross margin impact. As I will speak to later and as Aris has already disclosed we are taking significant action to address our cost base. R&D expenditure increased from $1 million in Q2 2022 to $1.2 million in Q2 2023 mainly due to lower capitalization of payroll costs into the product development of intangible assets as key products came to the end of their development cycle. Meanwhile, SG&A expense in the quarter increased by $2 million compared to Q2 2022, mainly due to the effect of three different cost increases. Firstly, $0.9 million of the increase was due to higher share based payments expense. This is a non-cash accounting charge related to performance share based compensation awards, which are intended to closely align the goals of our team with those of our shareholders in the creation of shareholder value.

Secondly, there was an increase of $0.6 million due to external technical advisory, legal and professional fees. The board of the company is committed to our corporate development and corporate finance activities as we continue to assess strategic opportunities for inorganic growth and balance sheet optimization. In particular, we are seeking to identify next generation biotech opportunities for very significant growth in market segments with total addressable markets of real scale that can fuel Trinity Biotech’s growth into a much larger scale company. As such, we have invested in market research, technical advisory and other professional services to assist us in successfully mapping our way to these key areas. Thirdly, within SG&A there was an FX loss of $26,000 for Q2 2023 compared to an FX gain of $0.6 million in Q2 2022, resulting in an unfavorable variance of approximately $0.6 million.

This mainly relates to lease liabilities for our rented premises. We have recorded an impairment charge of $10.8 million this quarter compared to an impairment charge of $0.5 million in Q2 2022. The impairment test performed as of June 30, 2023, identified an impairment loss in two cash generation units, namely Immco Diagnostic and Trinity Biotech Do Brazil with the majority of the impairment charge relating to Immco. Immco’s laboratory has for a number of years provided transplants testing services to a local healthcare provider. However, in early 2023 that health care provider informed the company that it was moving to a different service provider and this resulted in lost revenues for the laboratory since the beginning of quarter two 2023.

Secondly, the expected level of additional laboratory services revenue arising from our partnership with imaware, Inc. has not materialized. As a result, Immco’s value in use has fallen below the carrying amount of its relevant assets. Similarly, Trinity Biotech’s Brazil value in use as end of June is below the value of its relevant assets. Included within the Immco impairment is a full impairment of the financial assets associated with the company’s $1.5 million investment in imaware. To date, the company has paid $700,000 of this $1.5 million investment to imaware, but as the investment agreement provides us our total potential investment of $1.5 million, this amount was recognized in our balance sheet in Q1 2023. Given the uncertainty over the future of imaware’s performance and thus the value of this investment, management have decided to impair the entire $1.5 million of committed investments.

We have not to date paid the additional $800,000 to imaware, which remains in our balance sheet as an accrued payable. However, we have contested whether we have a valid obligation to pay the additional $800,000 and expect discussions on that matter to continue with imaware. The aforementioned items have resulted in an operating loss for Q2 2023 of $14.9 million compared to an operating loss of $1.9 million reported in Q2 2022. Moving on to net financial expenses of $3.8 million in Q2 2023 compared to $8.3 million for Q2 2022. The decrease of $4.5 million is mainly due to the comparative period, including a penalty for early settlement of the senior secured term loan with Perceptive in Q2 20.22 of 3.5 million, whereas in Q2 2023, there was an early repayment penalty of $0.9 million.

Additionally, early partial settlements of the term loan results in an acceleration of the accretion interest expense under the applicable IFRS accounting provisions. This accelerated interest expense was $2.1 million in Q2, 2022 and $0.5 million in Q2 2023. These variances account for $4.2 million of the decrease, while the remaining decreases accounted for decreases in the fair value of derivatives of $0.4 million and an increase of $0.1 million convertible note interest as the note was issued midway through the comparative period. Although our borrowings are now significantly smaller following our repayments of debt, the interest cash expense is broadly similar to the comparative period last year as our main borrowing accrued interest have a significantly higher interest rate than during Q2 2022 due to base interest increases in the interim.

The profit on discontinued operations was $12.4 million in Q2 2023, comprising a gain on disposal of Fitzgerald Industries of $12.7 million, offset by trading loss of $0.3 million for discontinued operations. The gain on disposal was made up of proceeds of approximately $30 million, offset by associated transaction costs of $1.3 million and the net assets limited on disposal of $16 million. The trading loss of approximately $300,000 mainly comprises the results of Fitzgerald on 1 April to the date of sale on 27 April 2023. In Q2 2023, the loss per ADS is $0.16 compared to $0.29 loss per ADS in Q2 2022. I will now move on to address some of the main balance sheet movements we have seen since quarter one 2023. PPE decreased by $3.6 million in Q2, of this $3.5 million relates to the impairment charge for Immco.

Intangible assets decreased by $5.6 million with $5.8 million relating to impairment of Immco’s intangible assets, the remainder is made up of amortization of $0.2 million offset by asset additions of $0.4 million. The majority of the additions to intangibles relate to product development in our Haemoglobins business and some of this expenditure contributed to gaining FDA 510(k) clearance of our primary resolution instrument in August. As I mentioned above, financial assets have decreased by $1.5 million as a result of our impairment of the investments in imaware. The senior secured term loan liability has decreased by $9.4 million during the quarter as we repaid $10.1 million of the senior secured debt held by Perceptive Advisors from the proceeds of the Fitzgerald [indiscernible].

The remaining movement is made up of accretion interest. Finally, to briefly mention our cash flow for the quarter, our cash balance increased by $10 million in Q2 2023 from $4.2 million at the end of Q1 to $14.2 million at the end of quarter two. And including the cash balance of Fitzgerald in the Q1 number of $4.2 million, although you will note that this balance was reported on March balance sheet with an assets 10% rather than in the cash balance. Now turning to the operational transformation issues as we outlined in today’s press release and as discussed by Aris. As I said out in previous earnings calls, driving recurring operational cost savings has been a key priority for Trinity over the last few years and indeed since I’ve joined and has been a major driver in us hiring some of the senior function leaders that have joined the business over the past three years.

As Aris said and as you will note from today’s press release, in Q2 and Q3 management initiated a significant headcount reduction program. As a result of this program, net of limited hiring for TrinScreen production, we expect a headcount reduction of approximately 20% by the end of 2023 compared to our headcount in quarter one, 2023 with an expected annualized saving of $4 million. We expect that the financial benefits of these reductions will really start in Q4 2023 and will reach full run rate savings in early 2024. We’ve also focused on reducing the cost of our core products through manufacturing and supply chain optimizations, including the $4 million of cost of goods saving expected in our diabetes business, from the key three initiatives being moving a key manufacturing aspect of our main diabetes test consumable, our column in house, changing the sourcing of key components of our Premier 92 and Premier Resolution instruments, and the launch of a new diabetes column and reagent system.

All of these, as I said, are expected to deliver combined $4 million annualized run rate savings. And these initiatives should lead to a significant improvement to the operating margin and cash flow generation profile of our Haemoglobins business. The savings are now starting to come through but we expect it will be mid to late 2024 until we see the full $4 million impact of those savings. We’re also focused on improving the cost of our HIV tests, Uni-gold and TrinScreen as Aris set out, we’ve identified opportunities to change some downstream manufacturing activities which we believe could save several millions of dollars per year, allow us to effectively scale production to meet the increase demands as we roll out TrinScreen HIV to new markets.

This is a very exciting opportunity and we expect it will deliver savings from May 2024 and is now a key priority for the operations team. We are focused on delivering recurring annual savings. That in turn increases sustainable EBITDA of our businesses. This in turn should increase the capital value of these businesses and ultimately our shareholders’ equity. As a simple rule of thumb, if we assume a 10 times EBITDA valuation multiple, which is broadly what we saw with Fitzgerald, each $1 million of annualized sustainable savings is worth $10 million in capital value. In addition, if these savings can also allow our products to become more cost competitive and deliver growth through accessing new market segment, that then delivers an additional benefit to shareholders.

Finally, we are in advanced discussions where our current lender is Perceptive, regarding an update to our existing credit facility and we expect to access improved interest rates recognizing our progress in lowering debt compared to when we initially took over the dash, plus access to additional capital to fund the key strategic investments in next generation biotechnology areas. I expect we’ll have further updates on that for shareholders in the short term. With that, I will hand it back to Aris. Thank you.

Aris Kekedjian: Thank you, John. I appreciate the thorough update. I think you can all appreciate that we endeavor in this call to be a bit more in-depth and specific about our initiatives and efforts. As John mentioned, some of these things take time. We are in a regulated industry, but we felt both the combination of positive momentum from a commercial standpoint and improvements that have been — had been implemented over the last 24 months from a COGS standpoint, we believe we’re actually approaching an inflection point. Now, we don’t want to get ahead of ourselves but we do feel very confident about the progress we’re making and we wanted to share that with you. With that said, we’d like to hand it over to questions.

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session [Operator Instructions] First question is from Jim Sidoti of Sidoti & Company. Please go ahead.

Jim Sidoti: Hi. Good morning. I’ll have to go over this morning. But let’s start with the business that you lost in Buffalo, the transplant services testing business. On an annual basis, how material is that for you?

John Gillard: Hi, Jim. It’s John here. It’s probably about $2 million of revenue. We had seen some declines in this, so it’s not hugely material. It was a difficult business to scale. So the vast majority of our business at that lab is focused on autoimmune disease, in particular, our proprietary Sjogrens test. The transplant business required kind of 24/7 365 staffing. And so there was some additional costs associated with that. I’m not saying we were happy to lose that business, but it was not core to us and did add complexity as we set out in the press release, it was not easy to scale, because inherently the transplant business you have to be within a certain geographical distance, typically to where the transplant activity is happening. So you’re limited in a geographic sense.

Aris Kekedjian: I think you have to be within 30 miles typically. So you’re basically covering two hospitals. You can’t scale. And as John mentioned, the standby requirements, and frankly, we had a chance to try to win that business or maintain that business, we actually bid it pretty low, but we felt at some level it didn’t make any sense anymore, because long term, we couldn’t scale it. And so at the level it went at, I think we felt confident we had better opportunities. To be honest with you, we have a chance — if you look at the margins in Sjogrens compared to the margins of transplants, they’re not even close. And we have a chance here to partner with the team that people know what they’re doing to really scale the Sjogrens business. So that’s the right focus right now.

Jim Sidoti: Okay. All right. And you did give guidance for the third quarter, which is higher than the second quarter, despite the fact you bought this business. Should we take that as saying, maybe the second quarter is — I know you don’t want to give long term guidance, but do you think this second quarter was a low water mark to you and that you’ll see revenues from your other businesses continue to grow to offset business and some of the other — some of the COVID type businesses. So that revenue should sequentially be climbing for the next several quarters?

Aris Kekedjian: Again, I think, your premise here is actually pretty much why John and I wanted to spend the time on this call to baseline people, okay? We feel like we bottomed on all of the changes we had to make on the revenue run rate. We feel confident about our sequential revenue profile going forward, both — and not only that, but we also feel confident about our COGS profile going forward. So I think we’re at an inflection point. That’s our view.

Jim Sidoti: Okay. And now if we switch over to the Premier business, it was down overall in the quarter, but that was — it sounds like that was all on instruments that consumables business continues to grow. Is that correct?

Aris Kekedjian: Yes, look, the thing you got to look at in this core business in the Premier business. And eventually, as we get into rolling out the resolution product in a more extensive way is really about consumables. That’s where all the money is, right? We generate greater than 50% margins in the consumables, its recurring revenue, the instruments are there to largely drive that consumable profile, revenue profile. So we’ve been focused very much on being strategic about where we’re placing instruments, making sure that — and I can tell you, John — a stickler for this, making sure that we’ve got recurring revenue profiles associated with those instrument placements around the world so that the payback makes sense. And that is a big change in terms of how we’ve been running the place historically versus where we are today. Okay? So this is where the franchise scales. And this is our number one focus.

John Gillard: And Jim, just to augment that, as we reduce down the cost of us manufacturing the instruments, right? That will allow us to be more competitive in terms of placing instruments, which should ultimately allow us to have a greater footprint, which again will drive revenue in the consumables, right? So really reducing down the cost of the instrument is reducing down a barrier to market entry in certain segments. And coupled with that is, we can reduce down the cost of goods of our consumables, in particular, our column, will allow us to be cost competitive while also maintaining margin. So there’s a comprehensive strategy here to grow. We’ve had some market research done on the A1c testing business and that [indiscernible] cost is critical and that kind of validates the path we’ve been on for the last 12, 18, 24 months and trying to get these cost reductions through.

To Aris’s point, we are going regulate the market. This is not stuff you can just flick the switch on. But the flip side of that is, once you’ve made those changes, those regulatory barriers that slowed you down can become somewhat of a competitive moat around your business.

Jim Sidoti: Okay. And that’s actually what I was going to ask next, the regulatory hurdles. Now you’ve overcome a big one, I think, when you got resolution approved, but it’s a separate 510(k) for the new column and then for the 9210?

Aris Kekedjian: No. Well, let’s put it this way. The changes we’re anticipating at the end of the year into 2024 don’t require any significant regulatory approval. They’ve been going — they’ve been undergoing validations and testing, which are required, but we don’t need any regulatory approval. Are there regulatory approvals planned in the updates later in 2024 and 2025? Yes. But for the initial launch of these improvements, the things John’s talking about, the 3 times improvement in column performance, etcetera. That’s all within the purview of what we’ve got going on right now. And look, one of the other things I think I want to expand on with respect to John’s point. The cost competitiveness is a huge factor here in scaling the volume and volume is the game.