MBXBF - Microbix Biosystems Inc. (MBXBF) Q4 2022 Earnings Call Transcript
Microbix Biosystems Inc. (MBXBF)
Q4 2022 Earnings Conference Call
January 4, 2023 11:00 AM ET
Company Participants
Deborah Honig - IR, Adelaide Capital
Cameron Groome - President and CEO
Jim Currie - CFO
Ken Hughes - COO
Presentation
Deborah Honig
Thanks again for joining us today. We have an update with Microbix talking about their year-end and Q4 numbers that were released just before the holidays. With me, I have Cameron Groome, CEO; Ken Hughes, COO; and Jim Currie, CFO.
We will do a little bit of an overview of the year and the quarter and then open things up for questions. So as always, if you have any questions, feel free to input them in the Q&A box at the bottom. We will try and get all of those answered. And as always, this will contain forward-looking statements. If you'd like to know more about those, you can find them on the company's presentation on their website.
And with that out of the way, I'd like to open it up for Cameron Groome to give us a little bit of an overview of Q4 and year-end results. Hi, Cameron.
Cameron Groome
Hi, Deborah. Well, Happy New Year, everybody. Thank you very much to all the participants for joining us on an update call. We are going to run through a little bit the year just ended, give some operational updates, and a little bit of an outlook for what we see emerging in fiscal 2023. I would urge everybody to read from the Microbix website our full Q4 disclosures package, which consists of the news release, describing our year end and Q4 results, the CEO Letter to Shareholders, the management discussion and analysis and the full financial statements of the company, which for the year ended and fourth quarter, which constitute the full corporate disclosure alongside the Annual Information Form of the company, which is also filed.
With regards to Q4, I'll just briefly touch on a few high points and then hand it over to Jim for a little bit more context to detail. We had a reasonable Q4 top-line, bolstered by some better antigen and QAPs sales, but those were offset by the lack of any viral DxTM brand, viral transport medium in the quarter. And those of you that are monitoring the wires, may have seen that a new CEO was appointed to Supply Ontario just on December 23rd, so there is a lot influx with regards to procurement in the province and we continue to work with the authorities on directing that for our DxTM product line.
In terms of our -- so sales mix, strong on antigens and QAPs in the quarter and no DxTM sales in the quarter. So a little bit lighter than the prior year that had each of those three constituents.
In terms of gross margin, that is affected by a heavy weighting of lower margin antigen sales, specifically sales of lower margin antigens in the quarter that pushed down margins a little bit along with some cost pressures not yet passed through to customers.
SG&A was up. There is an increase in the quarter, and that's largely due to increase in selling expenses as we resumed participation in trade shows and events for customer acquisition purposes, and the lack of grant offsets. Net-net, a reasonable quarter, not our best, but ends up another firmly profitable year for the fiscal year ended 2022. It's not quite what we were targeting, and that's as outlined in my CEO letter, largely due to the major contract we signed in August and that top 10 diagnostics company continuing unexpectedly to iterate on the final design of its point of care testing instrument and assays related to that, that was, frankly unexpected by us. And that continues to impact the timing of revenue realization for that customer, although we are seeing quite a reasonable amount of service revenues, as we work with them on this process of perfecting assays for that important instrument. And those same factors are likely to influence our Q1 and our Q2 of this year as well. We foresee fiscal 2023 as being very firmly profitable as well. But that profit will be certainly generated in the back half as opposed to the front half year.
So overall, I would say that 2022 has been a year of transition from full on pandemic in 2021 to a post-pandemic or at least endemic world in 2023. And whereby, we generated another year of record revenues and another year of convincing positive net earnings for the full year.
So Jim, maybe I can ask you to provide a little more color in relation to Q4 and the full year. Jim, you're on mute, the immortal words.
Jim Currie
Sorry about that. Yes, I think my focus and comments here is on the fiscal year performance. Strong revenues. That was a record, another record year of revenues, profitable revenues. As Cameron said, it was a meaningful profit year as well. We continued with our strong margins. We saw some improvement in margins in our antigen business. And we certainly have stronger margins in our QAPs, and VTM business which led us to 58% margin. And our expectations for margins are probably in the 60% range. So we're not that far off where we had expected to be in terms of our margins for the year.
That was a year where we've made a number of investments. Our cash position improved, where we were at $13.5 million at the end of the year. However, we did make some sizable investments during the year. We paid off approximately $3 million in debenture and long-term debt. That decreased our interest, lowered on an annualized basis by over a $0.25 million. We invested $1 million in equipment, both new and replacement of aging equipment. We also invested in new labs and facilities over $1 million. And we've also invested in some of the key areas that Cameron was talking about, sales and marketing, invest -- continue to invest in that area, as well as research and development. It's a key for us to be on top of what our customers need and invest in new products that come along. And IT infrastructure, so we've had a sizable investment in staffing, as well as ERP solutions. We're in the process of implementing a new ERP solution and an eQMS system as well. So we're investing for the future and we've made those investments, a large chunk of them in fiscal '22. And we will continue to make them in fiscal 2023 as well.
We've got a strong balance sheet. We've got current ratio for the year improved from 3.68 to 8.45. Our debt equity ratio improved from 0.55 to 0.33. So I think we're well positioned for the growth that we've been indicating, are on the cusp of -- for fiscal '23 and beyond.
Cameron Groome
I think it's worth noting that on top of the considerable investments that Jim has highlighted that we've been making for -- in capabilities and capacity, along with the debt reduction and share buybacks even, we're still ending the year with a very strong cash position and we’re at approximately $13.5 million; and as Jim has indicated, very, very strong and meaningfully improved financial strength ratios, liquidity and leverage.
Deborah Honig
Sorry to interrupt, Jim, I had a clarifying question, what is an eQMS system?
Jim Currie
It's a quality management system, electronic quality management. This is something Ken can better describe what it is.
Cameron Groome
Well with that -- we will let Ken do so. But this is converting the company from paper based quality management records into a fully digitized system. For complex biologicals as we make there's tremendous detailed records for each individual batch of product. And those are literally telephone book sized documents that are now being moved into digital form. And Ken maybe I can ask you to start your comments with a bit of a description of what that is and why we're doing it.
Ken Hughes
Yes, I mean, the cumbersome nature of a paper based system, which is fully integrated and repeatedly audited and we get great feedback from our auditors in that regard. I guess everybody's aware that we're ISO 13485 accredited, ISO 9001 accredited, and we operate a total quality management system anyway to be a regulated provider of biological solutions. But it gets to a point where there's a critical mass of paper that would just -- would become an impediment to the growth that we're pursuing. And so to kind of get ahead of that, we've been digitizing our systems and we have a program for the electronic nature of the quality management system where paper documents are transferred into digital form, and therefore easy to handle and manage going forward. And also with that the enterprise resource planning software that fully integrates into that to manage the financial aspects of the business. This creates an efficiency which allows growth. We’re investing in this as we said we would. It's part of building capacity and capabilities for the growth trajectory we are on.
Cameron Groome
Very good. And what other comments would you want to make from an operational point-of-view, Ken?
Ken Hughes
Yes, I mean, from operations, I mean, stated objective for before 2022 and including 2022 was to build flexible capabilities and capacity. And we've done that. We've commissioned a number of labs and manufacturing suites. We've built teams and capabilities. And this has been illustrated in how we've pivoted in the face of the pandemic, for instance, the clear examples would be all our QAPs, which are on the various variants of COVID-19 or indeed pivoting to make our VTM product portfolio which we’ll continue into the future. But as a consequence of the activity and creating that infrastructure, we have additional capacity on antigens, QAPs, on viral transport medium and other special projects that may come up as we move forward with a very integrated R&D quality control, quality management and manufacturing group to allow us to pursue these capabilities going forward. So as we go to that, as our business continues to grow, we now have the capacity in place to realize that it's not going to be a problem in terms of the facilities, and we continue to add capabilities as we move forward as we continue to build and diversify the business.
So operationally things are going very well, and we have basically done what we said we would do, that’s what we do.
Cameron Groome
Yes. And I think that's a great point to make, Ken, that if anyone looks back over the history of our disclosures and in the forward-looking statements made in them, we are very much executing consistently on what we say we are setting out to do. Our QAPs business over the past three years has tripled. Our antigen business has increased margins, as we said we were targeting, and we created out of nothing the opportunity of our DxTM business, our viral transport medium where we have realized over $10 million in grant and product sales income associated with identifying that acute need through the pandemic and now exiting it.
So timing is -- and certain aspects of our customers' behavior is beyond our control. But the things within our control, I think, we're certainly executing on.
Ken Hughes
And I mean, we have...
Cameron Groome
Sorry, go ahead, Ken.
Ken Hughes
I mean, we have an excellent scientific and technical and production and testing team, which we have been building to address all these diverse opportunities and be able to pivot so well and build that capacity going forward. And we’ve specifically put that capability in place. I mean, examples would be, we are currently launching a multiplex QAP by -- which really illustrates the type of technical acumen we have. But also all the production processes we put in place are deliberately flexible and have a capacity so we can pivot in the new product opportunities as we need to, and because obviously we're on a very rapid growth trajectory that's in QAPs also in the DxTM portfolio and with the antigens as well. So we are continuing on that route.
Cameron Groome
Very, very much the case. And I'll make some concluding remarks. But Jim, was there anything further you wanted to touch on before that, just in regards to…?
Jim Currie
No, I think I covered off everything I wanted to cover off, Cameron.
Cameron Groome
Okay. Very Good. Well, to recap, I would say again, we expect full year 2023 to be firmly profitable. We do foresee due to customer issues, softer first half followed by strength. The realization of sales growth is to a large extent driven by what we see in the point-of-care testing area and opportunities to supply in QAPs for such major customers. And by nature, we are subject to their assay and instrument launch times associated with that. I think we are satisfied with the operational and strategic directions of the company. We have the balance sheet to execute on these plans and we are not -- we are not certainly subject to market volatility, capital markets volatility as we have no need to raise capital at this time. So we are not subject to the negative sentiment other than as it affects our share price in the shorter term. We are, as was mentioned, deploying capital as we generate it both on enhancing capabilities and capacity on debt reduction and as well our normal course issuer bid otherwise known as a share buyback is certainly active. And in the first three months of that program, we have bought back over 0.75 million shares or cancellation. So that's certainly something that is being actively used not just as window dressing.
Deborah Honig
And how much of that program remains?
Cameron Groome
We have the ability to buy -- in theory to buy back 5% of the shares outstanding, which is up to 7 million shares. There are, however, strict constraints on how those buybacks function imposed by the TSX. We can only buy back a portion, a quarter of the average daily volume in the six months preceding the start of that normal course issuer bid, we’re not able to buy in an uptick and so forth. So it does have some practical limitations on how you can use it. But we certainly put it in place with the intention to buy back shares up to that limited to the extent permitted.
So those are, I think, the conclusion of our comments, but happy to move to addressing specific shareholder questions, Deborah, or any that you've perhaps received offline, prior to the call as well.
Deborah Honig
Sure. Sounds good. I've got -- let's start with one for Mr. Hughes. So when will the physical renovation of the third plant be complete? And when do you expect it to be operational?
Ken Hughes
It is and it is, is the short answer. So yes, we have a production suite in the third facility already operational and being used. We actually have some plans to build out some further space into the warehouse to build some additional functionality and capacity in the next little while. But the production suites that we're going into the third facility are there.
Cameron Groome
Our third facility is fully qualified under our ISO 13485 and 9001 quality systems, and is fully functional for its intended uses. As Ken has indicated, that facility has a front end which it has office workstations for staff in different departments. The middle section of that building has been built out for DxTM production and there's a considerable amount of warehousing space. So we're evaluating potential for other production or QC labs or other purposes in towards the back of that building.
Ken Hughes
And actually to adopt new accreditation -- for ISO 13485 accreditation, manufacturing has to be occurring in all buildings that are under the auspices of that. And in 2022, we added our Building 3 at 275 Watline under our ISO 13485 certification.
Cameron Groome
In fact, we were looking at the potential to add a fourth building to our facility -- our facilities. But we felt with some of the customer timeline delays, that was a little bit premature. We don't want to get as the saying goes too far ahead of our skis. So we elected to pull back on that for the time being. Well, Deborah, you’re on...
Deborah Honig
I got it. Well, let's go thematically then. I see a few questions on VTM, so let's start there. So from one investor, why no sales of VTM especially to others beyond the Government of Ontario?
Cameron Groome
A lot of a lot of testing practices have changed over the past short while. As for example, Ontario has moved from testing all comers, where respiratory viruses to those in hospital, entering hospital or in long-term care facilities. So patterns of consumption are renormalizing across not just Ontario but multiple provinces and in Ontario, specifically, the whole supply chain has been reoriented in Ontario, the whole procurement practices are reorienting. In fact, if -- the new CEO of Supply Ontario was appointed on December 23rd. So we are on top of these matters. We are evaluating opportunities in Ontario and other provinces, but these things are very much in flux. And our big advantage of course is domestic production. And the closer you can get it to home, the better it is. So Ontario, we expect will remain a principal client for DxTM for the foreseeable future. But it is not without lumps, unfortunately,
Deborah Honig
In terms of VTM, like if you're going to try and access different markets, do you need to change the formulation of it? Or is it like a standardized product?
Cameron Groome
Formulation is driven by application. Our DxTM is currently qualified as a viral transport medium, its formulation makes it compatible as a universal transport medium but some of the work to make those claims has not been -- in that may or may not be important to end users but we have to respect the appropriate regulatory pathways. We have certainly ambitions to sell the product more broadly in Canada and have done so in small quantities. We do not presently have ambitions to extend that product to international or U.S. sales and that's something we'll certainly evaluate with our partners and stakeholders before we move forward on that.
Deborah Honig
And are you still producing 50,000 vials a week?
Cameron Groome
No, we're not. We have sufficient inventory for our purposes currently. And we are not in production at the present time.
Deborah Honig
Okay. I'm just seeing if there's any more VTM. Is $2 million a good estimate for top line fiscal 2023 For VTM or is it too optimistic?
Cameron Groome
We're still evaluating that. We have a conservative budget number for DxTM in mind, but certainly we'd like to exceed our budgets to the extent as possible. And given that certainly discussions are ongoing with different purchasers, I think it would be strategically inappropriate to put a number on the table as to what our current expectations are. We do see overall 2023 being another year of record sales for the company. But how that will be comprised between the three major operational lines of the company is something we'll see how it emerges. But we see -- we'd like to see certainly growth in all three if we can or as many out of three as possible through the year.
Deborah Honig
Okay. Then moving on to QAPs. Have there been any changes in the point of care diagnostic market that would impact demand for QAPs? Are you seeing potential customers coming to you following the sunsetting of EUAs?
Cameron Groome
The EUA question and this is the Emergency Use Authorizations of the United States where tests were permitted to be put on the market without the perhaps same level of scrutiny that they would need to undergo under the customary 510(k), which is the predicate device approval pathway or the PMA premarket authorization approval where there is no predicate device. So there are a number of tests that are out there, under Emergency Use Authorizations. And it's really a stage, I believe, certainly and Ken please step in if you have heard much different. But what I've been hearing is that, companies right now are being encouraged strongly by FDA to get their files in order because the FDA doesn't want there to be gap and test be unavailable. But as a certain number of people have gotten their files in order, the door will be shut on those that have not. And they are not setting a bright line or a firm date by which this has to happen. But we are seeing more companies entering into dialogue with us about whether we can help them get their houses into order. So short answer would be yes, but not as a -- but more of a process of persuasion rather than brute force on the part of the FDA.
Deborah Honig
Ken you are nodding. Did you have something to add?
Ken Hughes
Yes. I mean, that's exactly right. That the traffic to Microbix has increased as a consequence of this reality. People are anticipating what's coming down the pike at them and if they are sensible enough to do that. And use of our products to help them to get it right is something that they are well aware of.
Cameron Groome
Yes. And some of the key points that we have highlighted in the corporate presentation, which as you know Deborah we will be revamping to update in a short while. But there is some key points in there with particularly FLOQSwab-based QAPs are particularly well suited for point-of-care. The format of course emulates for many forms of testing how the sample is collected, so provides a streamlined and indicative simplicity to that use of controls. The long-term temperature -- room temperature stability that we have demonstrated with our QAPs is also very key because the controls under non-Emergency Use Authorization utilization need to be able to be kept at the same room temperature storage conditions as the cartridges. You can't have one needing to be refrigerated or frozen, where the other can be at room temperature. And they have to be very simple so that non-laboratory people that are not trained laboratory technicians can run the controls as well as the tests. So those are key.
Another element is the FLOQSwab itself, whereby the very quick and consistent uptake and release of analyte is very important in the context of control as the regulators really want the control to really test the lower level of detection of the test to see that it's working, not just barely, but optimally. And there is some real issues with other forms of controls where there is tremendous variability in the control, so you can't actually consistently test that lower threshold of protection, and that's a real advantage that we are finding is necessary for our customers.
Ken Hughes
The customers are well aware of Microbix' unique abilities in terms of infectious disease and
organism growth purification and activation stabilization be it native, wild type viruses and other pathogens, or indeed, viruses or pathogens produced by a synthetic biology techniques that we have in-house. So they're well aware of that. And then the overarching on that is the quality management system we have to make sure the product behaves the same way every time. And the customers are well aware of that expertise, which is specific to Microbix, if not unique to Microbix.
Deborah Honig
And then staying on the theme of QAPs. Looking at this year's shareholder letter, you don't mention the $100 million market opportunity in QAPs anymore. Why has this opportunity changed?
Cameron Groome
I think we can't repeat the same things every time or it'd be pretty boring letter. I don't think our view on the scale of the opportunity has changed, perhaps our view and the timing of that opportunity has evidently, but we can continue to be very optimistic about our ability to realize very material revenues in that segment. So I wouldn't change that viewpoint, I think it's a question of industrial sales, acquiring customers, seeing them roll out more assays on that instrument. It's a little bit like a, I'm going to date myself, I'm not a gamer, but I guess it's an Xbox or PlayStation or the gaming consoles, you can have the best gaming console in the world. But if you don't have games to play on it, nobody's really going to buy it.
And so what we're doing is helping enable them to have more games to run on those consoles, more tests to run on those instruments. For each one of the tests that they plan to roll out, they need the accompanying controls, if those point of care instruments are going to be permitted to be used outside of a clinical lab. And point of care is meant to be used in settings where you don't have access to a full lab quality management system and controls that come with that.
So those are doctors’ clinics, those are pharmacies, those are long term care facilities, schools, workplaces. These applications require in controls with the instruments in those quasi institutional settings, where there's going to be a relatively high volume of test usage on those instruments. And you don't want errors persisting or problems persisting and giving you false positives or false negatives.
Deborah Honig
Does the HPV opportunity remain intact and how is that…?
Cameron Groome
Very much so. Yes, yes, absolutely so. Microbix continues to be intensely active with human papilloma virus molecular testing. This is the virus that is the direct cause of cervical cancer in women. It's becoming a very common cause of head and neck cancers in men. It is a cause of other cancers in other geographies of the body. And historically, the means of diagnosing cervical cancer, in particular was to examine cells from the cervix through a Pap test. And then look to see if those have transformed into cancer cells or sometimes high grade precancerous cells. Molecular technology, PCR technology enables you rather than to look at the conformation of the cell and say this has transformed into cancer, lets you look years beforehand to say there is the presence of a form of the HPV virus that will or could cause cancer years down the road. So imagine the improvement to healthcare to say, you are at higher risk of cancer, let's watch closely to make sure that doesn't happen versus saying congratulations you have cancer. Those are two very different outcomes. And I'm very pleased that Microbix is now very much at the front of that transformation from looking for cancer to looking for the viruses. And we're helping multiple companies in multiple jurisdictions on enabling that transformation. And that will be a very material revenue generator for us in the not too distant future we believe, forward looking.
Deborah Honig
And how are delays at the large OEM affecting your revenue projections on this contract, previously, $5 million in the first year?
Cameron Groome
We had certainly baked in some buffer on our own statements to -- as to expectation, I think we've now used up that buffer. So we would still see around that number for fiscal 2023 from that agreement in our budget, but it will be certainly back-ended. And that is unexpected and we did not foresee months of further iterating on that particular program. And that iterating is generating some service revenues for us. But it is not generating the high volume recurring product revenues that we were targeting yet.
Deborah Honig
Are there near-term opportunities for QAPs supply agreements with other OEMs?
Cameron Groome
Yes, there are. And discussions are ongoing on multiple files in there.
Deborah Honig
Okay. And then I think there was one last QAPs question and bear with me it's a little bit long if you want to look, Cameron, it's the third question in the box right now.
Cameron Groome
Let me open it up if it's got a whole bunch of parentheticals, it may take me a moment to read just a moment.
Deborah Honig
It's all good. I'll read it out. But considering repeatedly discussed delays in QAPs orders and the share price development over the last few months, it seems the capital markets has lost confidence in management projections. What do you actively do to make those QAPs contracts happen? And what is your base case for guidance for revenue in 2023?
Cameron Groome
We don't provide formal revenue guidance, let's get that off the table. It's not something we're in the business of doing. We do see revenues being a record and certainly in the 20s, certainly well north of $20 million in revenues, perhaps not $30 million. But what we are looking for another record, we are looking for another profitable full year. It's not to say we won't see a quarter or quarters of negative net earnings, but those are not sea changes, those are blips.
Further to our confidence, what we see day-to-day is our team working, supporting the teams of major multinationals to enable their very important new product launches happening and supporting existing and new products, tests and instruments. And that's really where we derive the confidence in our outlook. When teams are working side-by-side on a daily basis, we have in some cases, double-digit numbers of companies, instruments in-house supporting their product development and these are not commitments that are made lightly on either side. So, well, it tests everybody's patience and sometimes faith, when there are delays in realizing revenues. These are not -- these are very concrete relationships and commitments that we are working with and working on.
Deborah Honig
Alright. I don't see any other VTM or QAPs questions. I mean, a favorite is always, can you give us an update on Kinlytic?
Cameron Groome
Yes. We -- the file continues to be very active and we are moving forward, I would say, in a direction of discussions that seems to be very satisfactory. And when we have something definitive to announce, we will be very pleased to do so. And I think our target certainly remains to move Kinlytic back on to start the funding to drive the work forward to generate new drug substance and new drug product and move that through regulatory filings and bring it back on to the market. There certainly is a ever-growing use of long and dwelling catheters to deliver therapeutics, and other interventions for the catheter clearance indication that is really the tip of the spear for bringing that product back into the market. And there is also indications of increasing incidence of blood clots and need for thrombolytics generally. So we are seeing there is a stated shortage of tissue plasminogen activator in the European Union.
We have received news of shortages of high molecular weight. This is the urokinase derived from pooled urine, which is not something that would ever be approved in the West, but there are shortages even if that product across Asia. So we definitely see a real material need for the return of Kinlytic in the marketplace, not just to provide price relief, but to provide added supply and added security of supply. And we see it as a very material opportunity, as do respective partners.
Deborah Honig
I had a follow-up question. So after all these years waiting for a deal, what's your view of the main reason holding back securing a partner for this opportunity?
Cameron Groome
I think we were proceeding along a very good track in 2019 as the pandemic roleplayed in the year. And that certainly upended more [out of carts] than just our own in respect to that product, companies that were in the specialty pharmaceutical field and specifically companies focused on hospital directed product sales. So again, patients were going to hospitals for anything but COVID, by and large, and that affected healthcare quite badly, but it affected the revenues of those companies and they were not in a position to take on new development projects at that stage. So it's really only is we are coming into some sort of new normal that companies can look and say, yes, I'm ready to take on a development project, and it will be a US$20 million to US$30 million spend to bring the product back and relaunch it.
So this is why we're not doing it ourselves is even with the strong balance sheet that we have, it would be an all or nothing bet for Microbix, whereas a larger company in the context of a portfolio can more responsibly make that venture. And for us, we want to participate and absolutely believed in the upside economics of the product. And that's why while it has been written down to zero on our balance sheet, it still has attention with regards to partnering that asset and finding third-party funding -- finding partner funding to drive it forward, not consuming Microbix’s own capital, that is of course being intelligent use for growing our immediate revenue businesses.
Deborah Honig
Okay. And going back to COVID, I think there's some misperception in the market that Microbix remains a COVID story. What percentage of business is now COVID dependent?
Cameron Groome
Certainly, the viral transport medium in the near term has had an element of that. COVID testing is broadening out as everybody knows, and I think most people have been sick with a flu or RSV this season. Respiratory testing is not just about COVID. So our DxTM was initially used for COVID testing. But it can certainly be used more broadly for testing for respiratory and other viruses and other infections even.
So in the near-term, that could be tarred with that brush to some extent the DxTM revenues. Beyond that, it starts to get very difficult to tag things as COVID related, as many of our QAPs are multiplex already. Respiratory QAPs are not a single unless somebody's qualifying to detect a single variant of COVID and needs to remain qualified. So the -- what we call the proficiency and accreditation sales, well, they may be COVID directed or very secure. And more broadly, those are multiplex tests. So is a QAPs product that is a 4-plex between COVID flu A, flu B and RSV, is that a COVID sale? No, that's a respiratory disease sale. And whether COVID is up, down or sideways? Really doesn't overly affect those sales.
Ken Hughes
When we talk to public health officials about what's next after COVID, and what other things should you be involved in? Two things really come up -- a lots of things come up, but two things come up. One is HPV, which you've already had a question about. And the other one is anti-microbial resistance in various pathogens. Microbix has been deeply involved in both of these areas since before the pandemic and continues to be there.
The launching of molecular testing for HPV was delayed because every PCR machine in the world was doing COVID. So we have a whole portfolio of new products coming out there. And we expect the ratios to change, I think COVID I think we all know is now endemic and various variants are going to be with us for a while, but we have the capacity to deal with many other market opportunities and I would just cite HPV and antimicrobial resistance as exemplifiers of that.
Cameron Groome
Yes. And at the risk of tooting our own horn a little bit, it's worth perhaps listening in on some of the webinars that we've started to do with leaders in the industry, whether that's with Becton, Dickinson and Memorial University with regards to COVID, whether that's about antimicrobial resistance as Ken was indicating with SpeeDx, whether that's talking about sample collection technologies with Copan, these are the relationships we continue to build. And working with leaders in the field continues to build our credibility and the comfort level that prospective customers become real customers. And we lock in increasing amounts of business in that regard. But it's difficult to do it, in a perfectly smooth exponential trajectory, sadly, does not happen in the real life. So that's where we have a bit of the “bumpiness.”
Deborah Honig
Okay.
Cameron Groome
I urge Jim to get us a perfect exponential revenue curve but he just won't oblige me.
Deborah Honig
You beat me too and I was going to say, let's get Jim on the hot seat for a bit. So I've got some financial related questions for you, Jim. So first, you mentioned $3 million in debt reduction, while long-term debt is up $0.5 million year-over-year. What was that increase used for? And true long-term debt reduction looks closer to $2 million year-over-year. Is that correct?
Jim Currie
Yes, so, I'm just trying to recollect the long-term debt. There was a treatment. It was a financial statement treatment of the debt that impacted us, just at the year-end was year-end reclassification that impacted the long-term debt. But certainly we've had the reduction in the debentures the $2.5 million reduction and conversion of a $0.5 million was made in the April timeframe as well during the year. We also paid off BDC loan in the area of about $250,000 during the year. Certainly we don't expect to see any climb in our long-term debt in the near-term....
Cameron Groome
I think it would be helpful for the person asking the question. Great question. A, the -- a large part of the debt that was repaid was in the current liabilities section of the balance sheet in 2021, would not appear in the long-term debt portion. So you will see $2.2 million going to zero in the current liabilities section that was related to debt was paid off as it came due rather than refinanced.
Jim Currie
Yes, valid point, Cameron. Yes, we had a couple of debentures that were -- that could be called. And therefore, they were treated as current. And those were two that one was paid off and the other was converted.
Cameron Groome
So there has been a substantial pay down of debt as well as a BDC, another debt instrument that was repaid as well. And we will evaluate depending on the direction of interest rates, whether we should pay off further amounts of debt as well.
Jim Currie
The other area that we’re just thinking about is we do have some climb in debt, and that's the Fed debt agreement where we get 0% loan for project that we are working on with the Federal -- FedDev and that adds to our long-term debt. None of that is payable until 2025. And we are still getting loans on a quarterly basis to support our growth as well from the...
Cameron Groome
I hope no one will mind us adding to 0% interest debt, if that's okay.
Deborah Honig
Alright. And I got one more for you, Jim. And I'm not sure if you can really answer this, but are you forecasting other quarters of unprofitability?
Jim Currie
Well, it's back to the guidance thing. Although, I think Cameron has provided some guidance but…
Cameron Groome
I think that we are looking at a breakeven number of approaching $5 million in revenues depending on product mix. It can be lower than that or higher than that, depending on the margin mix in that particular quarter. So I think it would be surprising where we never to see a quarter where we dip into a loss, but we don't see those as being a systemic set of losses more circumstantial and short-term. So I wouldn't rule out losses, but I wouldn't expect a protracted period of losses.
Deborah Honig
Okay.
Cameron Groome
Jim, does that -- I didn't mean to jump in, but I know you are being circumspect.
Jim Currie
Yes. No, no, no. That's fine. I think as you had indicated before, I think you'd indicated to the audience here that we were looking at record revenues for the year and profitable revenues for the year, so. But it does that. Product mix has a significant impact on our margins and our quarterly profit, and timing in terms of some of the larger orders that we get in, whether it's for VTM, QAPs or our core antigen business.
Cameron Groome
Yes. Depending on which side an order falls on the quarter end line, has a dramatic impact on the top-line and the top-line of quarter has an impact on the bottom-line. So we certainly can say, Q1 is not going to be a barn burner and we will see what the balance of the year brings, but we see revenues coming in more strong -- much more strongly in the second half of 2023 than in the first half.
Deborah Honig
Okay. And then another one for you, Cameron. What do you think are -- sorry, I'm going to rephrase this question. Why do you think Microbix is underappreciated or misunderstood by the market in respect to your company/stock?
Cameron Groome
I'm not convinced we are, Deborah, misunderstood or under -- whatever underappreciated. I think we’ve just gone through. We're in the midst of -- perhaps we are more than halfway through, perhaps we are not. But we are in the midst of the most aggressive interest rate making cycle that has been seen in 40 years and small cap utilization companies across the board have seen tremendous pressure on their share price. You were mentioning some statistics in the healthcare sector more broadly where all stocks effectively have been affected negatively by the increased cost of capital. I think the difference -- the biggest difference for us is that, we have ''real business'' and that we manufacture products that customers want to buy, and we generate significantly positive gross margin selling those products. So, this is a real business. We have a real balance sheet with tremendous financial strength $13.5 million in cash and we expect to continue generating net cash in 2023.
So our business ultimately water finds its level. And this is where we will just continue building the real fundamental value and telling the unvarnished truth on calls like this and investors will do their analyses and call things as they see them. And sometimes we are surprised as we have been on the timing of revenues from new customers. But we communicate these, the information as we receive it and as we see it.
Deborah Honig
Okay, thank you. Now, the remaining questions are a bit of a hodgepodge Cameron and the first one's long, but it's the first question in your question box if you want to follow along. So, I have noticed in recent shareholder calls that you’ve mentioned M&A opportunities more often against all the bullishness around QAPs, VTM and Kinlytic. We've heard from you in the past year -- I'm sorry, I said that wrong. Against all the bullishness around QAPs, VTM, Kinlytic, we've heard from you in the past years we're facing delays now, why not double down efforts in the already existing opportunities instead of diluting attention? So I guess just asking, like, where are you with M&A? Are there opportunities you're looking at?
Cameron Groome
There are opportunities we're looking at. I mean we're in a very strong position with -- as is pointed out in the question with strong existing businesses, and it's a great question, why are you risking getting distracted if you're looking at other potential opportunities. Well, there are two reasons why we would, why we are in fact. One is, do opportunities provide complementary capabilities or product lines that enhance the business that much more? Second, are those available at prices that are less expensive or cheaper than where we are trading? Certainly, we're not going to pay a higher multiple than where we're trading for an opportunity. So it has to be a good value relative to where Microbix is, if we're going to pay that with shares, or if we're to pay that with cash, it's got to be compelling. So there are two categories of opportunities. One is, are you just adding size? Now there's some value with respect to that. People like scale in companies. More people watch the heavyweight fight than the bantamweight fight because of that issue, and larger companies can trade at higher multiples than smaller companies. But we would really question, is that enough? We would much rather look at an opportunity where there's some really compelling strategic value to that opportunity where it adds some capabilities that we don't currently possess or adds a product line that allows us to cross-sell more products and add a new base of customers to who we can sell more products.
So those are the things we would -- we will and are looking at. But to be damn sure we will measure twice and cut once before we transact on anything. But it's great to be asked, you don't have to [dance].
Deborah Honig
Okay. Another long one Cameron which is now number one in your box if you want to follow along with me. Cameron has talked about on-site due diligence efforts undertaken by potential clients, the company's facilities in the past before, how many prospects have decided to continue work with Microbix? How many are waiting to do business with you later because they can't be serviced by you now? And how many have walked away from a potential collaboration and why if this has happened?
Cameron Groome
That's pretty granular. Let me think about how deep we'll go down those particular rabbit holes. But certainly we do have companies come periodically to visit us and do due diligence for audits. If we're a supplier to a company, they will sometimes have the right or obligation to come in and make sure that our quality systems are as they're represented to be just as we are audited regularly by the ISO accreditation agencies. So that happens periodically. Some of those audits during the pandemic were moved to virtual audits where it's a documents review, rather than a physical site visit, but some of those are coming back to be more in-person, which is certainly easier to do, and we're happy to do.
I'm not aware of anybody has come and audited or visited our site and declined business with us as a result of such a visit. Quite to the contrary, I think it adds to -- greatly adds to the comfort and confidence in the company when those visits take place.
With regards to how many companies are waiting to do business with us, I think it is more of a two-way interaction. There are multiple companies that were providing evaluation samples to determining whether they can use off-the-shelf products or need custom products from us to satisfy their needs. And I'm only aware of one instance in which we were not able to come to agreement on price for a particular project piece of work. And for a portion of that, that company has gone a different direction and we wish them well but it's an open question as to whether that other pathway they've pursued will succeed.
So, of certainly many companies that are in discussions or are currently working with us, I'm aware of one instance in which we didn't get a piece of business for and the reason being what we feel was an unrealistic price expectation. We don't take on businesses at a loss. If somebody else will God bless, but it isn't our business.
Deborah Honig
Okay. I have got one…
Cameron Groome
Jim, Ken, anything you want to cover on any of that?
Ken Hughes
Yes, we have multiple site visits and virtual visits every year, be it from clients or regulators to audit formally or informally our quality management system, our technical capabilities, and so on and so forth. And to Cameron's point they always walk away with a good impression. And we have never lost business. Because of that we operate a very tight ship from a quality perspective. And our scientific and technical and production capabilities are well understood and manifested in these audits. So we always do very well. And we're used to getting good feedback from.
Jim Currie
Yes. I think while our customers -- and they may not necessarily be under the control all the time, meet their expectations or deadlines. We as an organization, certainly do meet our deadlines, whether it's on a research and development project or launching a new product or shipping a new product, we always meet our commitments. And I think that's seen as a very, very positive with our customer base.
Cameron Groome
And this is not to say that we haven't faced supply chain challenges of our own, be it delivery timing, be it quality issues that we've seen as a result of all the disruptions going on. But I think we have done a very good job of managing through those.
Deborah Honig
Okay. And then I had a follow-up question from when we were discussing Kinlytic. Has the company analyzed selling Kinlytic outright and using the proceeds to buy back stock?
Cameron Groome
Kinlytic requires the technical knowledge that Microbix has. For a purchaser to be successful, there really has to be a process of either support or knowledge transfer. And in our evaluations, we just don't see. We would much rather get tens of millions every year in a few years following the relaunch of Kinlytic, rather than sell it for a few million today and walk away and not get the benefit of that. So again, we are about building value in the medium and long-term for the business, not about crystallizing it that way. And there's a bit of, I think, misunderstanding in how normal course issuer bid share buybacks work. You can't just walk in one day and say, oh, I like the price today. I'd like to buy back 0.5 million shares. That's not the way it works. You are allowed to buy specific volume of shares every day when the stock is -- and then you cannot uptick the stock. So you cannot drive the share price higher.
So the stock buyback has to function over time and it has -- you have to look at it management and say, what is the weighted average price at which we are acquiring those shares. Now the last public offering we did was at a $0.60 share price for 1 unit of a share and a half warrant. If you look at the imputed value of the warrant, you are at somewhere $0.50 to $0.52 effective value of that share. So we look at things and say, certainly we have built a hell of a lot of value in the business since then. So we feel very good about buying shares back at or below the price of that 2021 offering. So -- and we will continue to do so actively almost every day.
Deborah Honig
I had a throwback question that was previously answered. Can you just update us on the status and stage of the repurchase plan? Sorry for the repetition.
Cameron Groome
Certainly. The repurchase plan became -- the normal course issuer bid became effective October 1. And we bought back shares in October, in November and December, closer to 400,000 shares in October and closer to 200,000 shares in each of November and December. So over 0.75 million shares have been repurchased and the October and November ones have been canceled and have been deleted from the base of shares outstanding, and I'm sure the December ones will be in the next week or two. And likewise, we'll be continuing to decrease the number of shares outstanding, somewhat as a result of the normal course issuer bid.
Somebody was just saying, you can use a block exemption, you can. There's some discussion between TSX ongoing as to whether the block has to be an internal cross, dealer running the offering. But this is all inside baseball and technicals. But if anybody has a block they want to sell, please reach out to the company. And we'll see if we can arrange to buy it through the normal course issuer bid.
Just in terms of shares, certainly, you see a substantial purchase and increasing ownership by management over time and I think that is another expression of our commitment, our belief in what we're doing.
Deborah Honig
Okay. I have one last question, it's for Ken. So is the BSL-3 lab built yet? And what advantages will that bring?
Ken Hughes
Right. So the BSL-3 lab has been planned out, but has not been operationalized to be a BSL-3 suite, has not been operationalized as yet. And the reason for that is simply the volume of work that’s underway. We have so much going on right now but it's been putting -- something about holding patent, we expect lots of progress in this year. But the planning is complete. We expect to operationalize it in this year. But right now we're focusing on the opportunities in front of us at the [CL2] level, which are already there.
What would it add to us? It will add additional capacity and portfolio. We're always building capacity to service the upward trajectory of the company and that will just basically blend straight into that provide us with further product development and realization opportunities.
Jim Currie
Well, one comment that we haven't chatted about. While we've got the cash to make investments, that has not stopped us in approaching the governments for funding support. So we continue to look for funding support to support projects, like we just talked about, and we hope to obtain some further funding, as we have in the past.
Cameron Groome
Yes. We'll continue to use our capital judiciously. But there's also a value when companies are looking to rely upon us as a critical sole source supplier to them, you need to be able to show some balance sheet strength. So it's not like we can just throw -- that we want to just throw all our cash all at once into all sorts of things. One, we want to grow profitably. But we also need to demonstrate the financial strength to companies and we can certainly as governments -- as Jim was saying, and as governments look to help drive economic growth, we can make legitimate asks and saying, we might not prudently be able to undertake this as soon as we might be able to if we have some support by the government, this will add jobs, and this will add economic activity for the province and the country as well as accelerate the creation of value for shareholders.
So, it's a balancing act, and I think we're doing a reasonable job of it. And speaking of jobs, I'd also just want to take a moment to compliment and thank all the Microbix staff. I think, our job as senior management is really to enable everyone to do their best work and everybody really is stepping up and doing just that. And it's a privilege to work with such a wonderful team of people that are not only talented but just damn nice folks as well. With two or three exceptions.
Deborah Honig
I guess the last question that I have, Cameron is looking into, this year, what sort of catalysts can investors expect? Maybe give some exciting things that investors can look forward to?
Cameron Groome
I would like to see, and I would expect to see some very material growth in our QAPs business, as the things do click into place. And there'll be C level executives at companies, many, many, many, many, many times larger than like Microbix that will likely have their heads on the block if some of this stuff doesn't happen. So we do have a reasoned belief in realizing some of what we're talking about with regards to QAPs.
Second, I think we will see some strong resumption of acceleration of activity in our antigens business as well. Some of our product lines, we see going flat out for the balance of -- certainly the balance of 2023. And making product as fast as we can manufacture it and release it, but that is multi-month production cycle. So it takes some time for that to be realized in the revenues. The order timing certainly is an issue when revenues are recognized.
Third thing, I'd very much like to see Kinlytic alliance in 2023, and have reasoned optimism that, that will happen. And then other opportunities, we'll see how those emerge. Certainly, I'd like to see the resumption of some order flow, and hopefully with some continuity associated with it, with Ontario, and others with regards to DxTM. And we'll do careful evaluation of opportunities to add strategically important business lines to the company as well from an M&A perspective. So I think on all three of our business lines and more, there are opportunities. So there are, at least five that I would identify from what I've just said.
Deborah, you're on mute.
Deborah Honig
Oh, sorry. Some repair guys showed up. So I was just telling them I was on a call. My apologies. Well, I think that's a good summary. Ken, Jim, did you want to add anything to what would you look forward to in '23?
Ken Hughes
No, I think those five aspects that Cameron just touched on, are dead right. There's the three elements of the core, which is QAPs, antigens and viral transport medium portfolio, and we have M&A and Kinlytic opportunities going forward. But other stuff may come up. We have flexibility in our capacities, in our manufacturing and development capacity. So we can be responsive to that, and pivot like we did when the pandemic started. There'll be other pivots to do and we'll be set up to do that in the infectious disease diagnostic space.
Jim Currie
Yes, my only add is that I think we've -- I want to talk with what Cameron outlined, and we've got the financial and human resources to make these things happen.
Cameron Groome
Yes. And I don't see that there are specific issues holding us back. I think it is very much a company that is advancing and continues to advance and we have gotten from -- gotten to a position of relative strength. And we are going to keep building forward from that position of strength.
Deborah Honig
Great. Well, I think that's a great place to wrap the call unless there is anything that we missed?
Cameron Groome
No. I think let's call it a wrap. We're quarter past the hour and just thank everybody, thank the shareholders for your time, attention and continuing support and we are going to keep building value for you and we will see it recognized in due time.
Deborah Honig
Yes. Thanks everyone for participating. If you have any follow-up questions, feel free to reach out and I'll get those answered for you. And thanks Cameron, Ken and Jim for your time. And Happy New Year.
Cameron Groome
Always a pleasure. Happy New Year.
Ken Hughes
Yes. Happy New Year. Thanks all.
Cameron Groome
Take care. Bye.
Question-and-Answer Session
End of Q&A
For further details see:
Microbix Biosystems Inc. (MBXBF) Q4 2022 Earnings Call Transcript