CODX Co-Diagnostics

Andrew Benson Head of Investor Relations
Dwight Egan Chief Executive Officer
Brian Brown Chief Financial Officer
Yi Chen H.C. Wainwright
Theodore O'Neill Litchfield Hills Research
Call transcript

Good day, and welcome to the Co-Diagnostics Q2 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Benson, Head of Investor Relations. Please go ahead.

Andrew Benson

Thank you. I'm Andrew Benson, and joining me this afternoon are members of the Co-Diagnostics management team, including Dwight Egan, Chief Executive Officer; and Brian Brown, Chief Financial Officer.

We will begin to call with management's prepared remarks and then open up the call to questions from our analysts.

Before we begin, we would like to inform the listeners that certain statements made by Co-Diagnostics during the course of this call may constitute forward-looking statements. Any statement about company expectations, beliefs, plans, objectives, assumptions of future events or performance are forward-looking statements.

For example, statements concerning 2021 financial operational guidance, the development, regulatory clearance, commercialization and features of new products, plans and objectives of management and market trends are all forward-looking statements. The company believes these statements are based on reasonable assumptions.

However, these statements are not guarantees of performance and involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results expressed or implied by such statements. Important factors, which could cause actual results to differ materially from those in these forward-looking statements, are detailed in Co-Diagnostics filings with the SEC. Co-Diagnostics assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events.

In addition, the company may discuss certain non-GAAP financial measures during today's call. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. We refer you to the company's earnings release out shortly before this call, which contains reconciliation to the non-GAAP financial measures presented to their most comparable GAAP results. At this time, I would like to turn the call over to Co-Diagnostics, Chief Executive Officer, Dwight Egan. Dwight?

Dwight Egan

Thank you, Andrew and thank you all for joining us. On this call, we will provide an overview of our results for the quarter, updates on key financial performance metrics and a discussion of progress against our strategy. Then, we will take your questions.

This quarter saw Co-Diagnostics achieve record sales and gross margins with foreign sales exceeding domestic as predicted in our previous earnings announcements. And we are proud that we've been able to deliver on those predictions and exceed expectations, while providing a valuable product in the ongoing battle with SARS-CoV-2. We believe our international growth, along with our clean balance sheet and strong cash accumulation are positioning us to become a leading global molecular diagnostics company and that the sales momentum, we have been experiencing over the last year-and-a-half, continues to demonstrate demand for our products throughout 2021. Co-Diagnostics was able to achieve record sales in Q2 in large part due to the strength of our international partnerships, especially in those regions, where vaccination rates are much lower than the US and expect it to remain so for some time. This demand, as well as continued sales in the US, as fueled by the rise of the Delta and other variants have allowed us to recently achieve the milestone of selling well over $20 million of our Logix Smart COVID-19 related products including ABC test for flu A, flu B and COVID and our COVID-19 2-gene multiplex test.

Importantly, those overseas relationships are now driving sales not just for our suite of COVID related offerings, but for our other diagnostic products as well, opening up opportunities for our existing and planned products to an even larger market.

We are already seeing this take place as our Zika, Dengue, Chikungunya or ZDC test for example is registered in several countries and experiencing more demand than ever before. This uptake of Co-Diagnostics products is a driving factor in our emphasis on expanding our product offerings to better serve our important and profitable centralized laboratory segment. CoSara, our joint venture in India, posted another profitable quarter in Q2, also driven by demand for its COVID-19 tests built on the CoPrimer platform, but also seeing increased demand for its other diagnostics that received IVD clearance prior to the onset of the pandemic. Recently, the Indian government has also lifted its ban on exporting COVID diagnostics from the country. This opens the door for CoSara to begin exporting its COVID diagnostic to customers in other countries in the surrounding areas, which we anticipate will serve to augment its domestic test sales operations.

Going forward in the infectious disease vertical, the company will pursue two business segments, the first business segment comprises our centralized lab customers, of which there have been many hundreds in domestic and foreign markets. This is what currently drives strong sales in the company and a large focus of our R&D efforts as we grow that product pipeline and we continue to expand our worldwide network. This includes countries like Brazil, where just this week we received notification that our Logix Smart COVID-19 test kit has been registered for sale in that country by Anvisa the Brazilian health industry.

In addition to centralized labs, the company's infectious disease vertical is also composed of the at-home and point-of-care market, which will be addressed by our forthcoming Eikon platform. The Eikon development continues at a rapid pace with various studies and optimizations in progress to prepare for FDA EUA submission. We believe that the addressable market for at-home and point-of-care diagnostic applications is considerable and we are optimistic about the potential contribution our new platform will have throughout the world not just for COVID but for many other diseases as well.

We will be unveiling the particulars of the Eikon platform over the coming weeks and months as we prepare for various regulatory authorizations and our international product launch. The YourTest [ph] PCR system on the Eikon platform is a real-time PCR test for COVID-19 that we anticipate ultimately being available for at-home use. This system is designed to be easy to use, inexpensive and fast, while maintaining the superior performance of PCR. The result is a low-cost, small footprint platform that can be deployed widely in nearly every setting comprised of a reusable instrument, a single-use test kit and a mobile app. Operation is simple and accessible after introducing an oral rinse sample into the test cup it is capped and inserted into the instrument results are delivered by mobile app sample preparation, RNA DNA amplification, results interpretation and reporting are automatically performed by the system. The system is capable of addressing other testing needs in the future, including the expansion to a variety of multiplex assays. No other hardware or consumables are required. Since our founding in 2013, our mission at Co-Diagnostics has always been to bring effective high-quality and affordable diagnostics to those people in places who need them most. Since the pandemic, our territory has expanded to include product sales throughout the United States and over 50 countries worldwide as qualified laboratory personnel and the sophisticated labs utilizing our test have validated its performance again and again and found that it meets with their high standards of quality. The vast majority of our sales are from repeat customers who believe in our technology's ability to reliably produce accurate results for their end users with lives potentially hanging in the balance. These results are possible due to the strength of our patented CoPrimer technology platform, originally conceived and developed over eight years ago, and which underpins the performance of our diagnostic and research devices including the chemistry being used in the Eikon product development. More than just a company with high-grade infectious disease diagnostic products Co-Diagnostics is truly a platform technology company, which platform has applications extending far beyond COVID. These include liquid biopsy for cancer detection. The development of which is ramping up as we position the company to take part in this historic development in human healthcare. CoPrimer's have been shown to have excellent capabilities in the detection of cancer mutations present in human blood and we are developing tests to detect a number of relevant mutations relating to the most pervasive and deadly cancers A paper was recently authored by scientists of Co-Diagnostics showing the effectiveness of CoPrimers in cancer detection, which is currently pending peer review prior to publication. Progress in our agricultural vertical also continues, especially in our work with Bayer Crop Services and LGC. The company is under contract with Bayer pursuant to an ongoing proof-of-concept project using our patent-pending NGS library prep technology. Overall, we believe that our strong profits are positioning Co-Diagnostics well for these and other future growth initiatives as significant investments in talent and R&D continue to yield positive results. The continuingly rising rates of infection, not just in countries without reliable access to a vaccine, but in our own communities in the U.S. illustrate the continuing struggle with this disease on a global basis. The company has long-held, that mass scale vaccination would not obviate the need for testing.

We have positioned ourselves around this reality since last year, before a vaccine was available or even authorized. And our viewpoint in this regard has proven to be correct. This week on CBS' Meet the Press, Dr. Anthony Fauci said, "Previously, we have to admit that early on it was said to just give testing to people who have had contact with people, who were infected, who are symptomatic.

Now it's very clear, you've got to go beyond that, because we know now from experience here and in other countries that you will have people who are asymptomatic, who get into contact with an asymptomatic person who's infected. And you'll know that there will be more infection, that otherwise would have gone undetected.

So you're quite right, we need to do more testing." The company has also asserted that in order to normalize society that is to go back to school, to go back to work, to travel et cetera that regular testing with reliable protocols will need to be done. Earlier this week on NBC's Face the Nation Dr. Scott Gottlieb said, "The other thing schools should be doing is operationalizing testing on a regular basis." We believe that operationalizing testing on a regular basis will be required, wherever we intend to normalize and create safe schools, safe workplaces, restaurants, hotels, ships et cetera. The Eikon platform has been designed from the beginning, with the ability to operationalize testing on a regular basis in an, at-home and point-of-care settings. It is the optimal solution, not only for COVID, but for other infectious diseases that will be added to our testing menu overtime. It is inexpensive, fast and very importantly accurate, with gold standard PCR results. We believe that our history of remaining ahead of the curve since the onset of the pandemic will continue to drive this trajectory of growth. I would like to conclude my prepared remarks by thanking our employees and distributors for their dedication and action in helping to deliver outstanding results this quarter.

Let me now turn things over to Brian Brown, for a review of the key metrics and numbers. Brian?

Brian Brown

Thanks Dwight.

Our second quarter revenue of $27.4 million increased $3.3 million or 13.8% from $24 million in the second quarter of 2020, primarily due to continued sales of the Logix Smart COVID-19 test. Gross profit for the quarter, increased by $6.8 million or 37.6% to $24.9 million, up from $18.1 million in the second quarter of 2020 a reflection of the ongoing COVID-19 pandemic as well as continued improvement in our product mix as compared to the prior year period.

During Q2, 2021, our recognized revenue includes a smaller amount of equipment sales as compared to the prior year period, resulting in a higher gross margin.

Additionally, we were able to recognize a healthy gross margin for the quarter, as a result of the structure of certain international sales which provided a higher sales price, with higher third-party commissions. Year-to-date, revenue, grew $47.4 million to an increase of $21.8 million or 85.2%. And a gross profit of $41.6 million was up $22.5 million an increase of more than 100%. Total operating expenses for the quarter were $13.1 million, up from $3.4 million for the second quarter of 2020. And up from $6.4 million for the first quarter of 2021. The higher operating expenses were driven by expected increases in both sales and marketing and research and development expenses. Sales and marketing expenses for the second quarter increased by $5.5 million compared to the second quarter of 2020 due to higher third-party commissions on increased international sales.

Our research and development expenses were up by $3.9 million compared to the second quarter of 2020 primarily related to planned expenditures of $3.5 million for the development of our point-of-care device. Total operating expenses for the six months ended June 30, 2021 were $19.5 million up from $5.5 million for the first six months of 2020 reflecting the same sales and marketing and research and development expenses -- expense increases identified for the second quarter.

Second quarter income from operations was $11.8 million down from $14.7 million for the second quarter of 2020 primarily resulting from the increased operating expenses for the quarter that were just described. Year-to-date income from operations was $22.1 million an increase of $8.5 million from the same period in 2020. Income before income taxes in the second quarter of 2021 was $11.9 million compared to $15 million in the prior year comparative quarter.

For the six months ended June 30, 2021 income before income taxes was $21.8 million, an increase of $7.9 million from the $13.9 million recognized for the comparable six-month period of 2020.

Now turning to income taxes. Income tax expense for the second quarter was $2.1 million representing an effective tax rate of 18.0% and for the six-month period ended June 30, 2021 income tax expense was $4.1 million representing an effective tax rate of 18.9%.

Our effective tax rate will generally differ from the US federal statutory rate of 21.0% due to state taxes permanent items and discrete items.

For both the three and six months ended June 30, 2020 we were in a full valuation allowance position. And as a result, we recorded no expense or benefit from income taxes resulting in an effective tax rate of 0.0%.

Second quarter net income was $9.8 million or $0.33 per fully diluted share compared to a net income of $15 million or $0.51 per fully diluted share in the prior year quarter. The decrease in net income of $5.2 million was primarily the result of increased operating expenses described previously and income tax expense of $2.1 million partially offset by an increase of product revenues and resulting margins from higher sales levels.

Our balance sheet further strengthened in the second quarter of 2021 with cash, cash equivalents and marketable securities that totaled $72.4 million at June 30, 2021 an increase of $25 million from December 31, 2020 and up $12.3 million from March 31 2021. With a highly liquid no debt balance sheet, we remain solidly positioned to continue executing on our strategic growth plan by investing in our people, processes and research and development to drive future growth.

As we discussed during our first quarter call we planned for increased sales and marketing and research and development expenses in the second quarter of 2021.

However, we were still able to significantly grow our cash balance reflecting our strong debt-free position. Net cash provided by operating activities during the six months ended June 30, 2021 was $24.7 million compared to cash used in operating activities of $0.3 million for the prior year period, an increase in cash flows from operations of $25 million. This significant increase in cash flows from operations was primarily due to continued process improvement and strong revenue growth reflecting the hard work of our people.

Our team's effort generated strong results for the first half of 2021 and we remain confident that those -- that these continued efforts will result in solid financial results for the back half of 2021.

We are anticipating third quarter revenue between $23 million and $25 million reflecting continued strong domestic and international demand for our products.

We also anticipate diluted earnings per share in a range of $0.19 to $0.22, which includes the effect of increased research and development spending on our new diagnostics platform.

We are very pleased with our strong financial position, which enables us to invest in significant growth opportunities such as the Eikon platform.

We will continue to build upon our solid business foundation and are in a strong position to experience continued progress on our strategic growth plan. I'll now turn the presentation back over to Dwight.

Dwight Egan

Thanks, Brian. Operator, we are now ready to begin the question-and-answer portion of the call.


We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Yi Chen with H.C. Wainwright. Please go ahead.

Yi Chen

Hi. Thank you for taking my question. Congratulations on a solid quarter. Could you comment on the long-term view of COVID-19 diagnostic market demand as new variants of concern emerge and the mortality rate of the new variance could increasingly become lower?

Dwight Egan

As I said earlier in my remarks Yi, we believe that the COVID problem is not something that would be -- that would obviate testing for COVID-19 notwithstanding wide-scale vaccination.

We have always assumed as part of our strategic plan that there would be widespread vaccination. The problem, of course, is that vaccinations are not foolproof. They are only effective to a certain point. Variance of course cause additional problems, as it relates to the effectiveness of the vaccines. That's a story that we can't predict. We'll have to see how that plays out. But what the evidence is showing so far, as articulated by Dr. Fauci in my remarks is that notwithstanding vaccination, we're going to have to continue to test at a wide level, especially if we want to put people back into school and colleges, back into sporting arenas, back on to cruise ships and airplanes and back at work.

So our goal has been to create a product with our Eikon platform that will allow us to test people in any of those settings at-home and point-of-care with a product that's fast, accurate and inexpensive. And by accurate we mean PCR accuracy, gold standard accuracy, according to the CDC.

And so we see a continued and prolonged need for testing. There are also a lot of other issues going on Yi, where last year we didn't have much of a flu season. But as time goes on flu will reemerge.

We have an excellent test for flu A, flu B and COVID all-in-one test with one sample and these types of solutions will be increasingly called for as we need to differentiate between different pathogens. And I really want to stress that our COVID strategy is really a gateway strategy to many, many other diseases. The Eikon, YouTest platform is something that will go way beyond COVID.

We have a strong vast menu of tests being prepared for this platform that includes all kinds of different upper respiratory pathogens, sexually transmitted infection pathogens and others. And keep in mind Yi, there are a million sexually transmitted infections every day in the world.

And so that makes COVID look rather small in comparison. There are a billion cases of the common cold, just in the United States. And in 2019, notwithstanding widespread vaccination throughout the United States, we still have up to 50 million plus cases of the flu.

So there's lots of things that need to be diagnosed.

Our Eikon platform is meant to really reset how and where and for what cost those types of things are going to be done. We think the day of driving into a Dodger Stadium or into a grocery store parking lot or a hospital parking lot and waiting for hours to get up to the tents and then for days to wait for results. We think those days are gone. And we think our new Eikon platform will supplant in very important ways, the how why and where testing and good PCR testing is done.

Yi Chen

Got it. And what's the current estimated timeframe for Eikon to enter the market?

Dwight Egan

So we're in the middle, as I mentioned, of optimization and tests that we are getting ready for our eventual FDA EUA submission. We anticipate continuing those tests in our clinical trials early in Q4 and having a submission, hopefully, into the FDA before the end of Q4. This is, I think, a product that demands rapid response from government and other regulatory agencies.

We will also be submitting, as fast as possible, to the European Union for CE marking, because as you know, we have vast distribution throughout the world.

So it's not just a domestic market that we're targeting for the substantial market of the Eikon platform. But that's our current timetable.

Yi Chen

Got it. And should we expect any catalyst for the company within the next 12 months that is not COVID related?

Dwight Egan

Well, our first test that is going to be coming out on the Eikon platform will definitely be COVID-19 and then, it will be followed by other upper respiratory diseases.

So I think we basically view it like this, Yi.

Our strong international and domestic sales of our COVID products are really the bridge to the introduction on an international basis of our Eikon product. We think that the Eikon product is the surest and most exciting thing that we could be doing, as a company, to go way beyond COVID in terms of taking our patent CoPrimer technology to the world of diagnostics. This is a -- I really don't think you could overstate how revolutionary and groundbreaking our chemistry and our device is for being able to test in at-home and point-of-care settings with this platform.

So we're not looking for any particular whiz-bang catalyst, as much as we're looking for solid performance through our regular centralized laboratory products, which we're definitely showing, as we prepare to put Eikon on the market.

So COVID was our bridge to an international business. And it is also -- the centralized laboratory evolvement world is our bridge to Eikon. That's our trajectory.

Yi Chen

Got it. Thank you.


[Operator Instructions] Our next question comes from Theodore O'Neill with Litchfield Hills Research. Please, go ahead.

Theodore O'Neill

Thank you and congratulations on a great quarter. I have -- I realize it's a board-level decision what you do with the cash, but you've got more cash than you could possibly need for your business.

So how should we think about what's going to happen with all that?

Brian Brown

We do have a very good, strong cash balance. And not only do we have a great cash balance, Theo, but we have no debt.

And so, we're preparing a very ambitious product launch for our Eikon product. This is going to be an international product launch. This is going to be -- just in the United States, we're talking about 7.7 million businesses, we're talking about 230 physician offices and 186,000 dental offices and senior care centers and just an enormous amount of schools and colleges.

And so we have a lot of work to do and we're going to need cash reserves to make it so we can do all that we're doing in this product launch with the plan and not have to be worrying about where we're going to get money.

So we're -- we like having the cash balance. We don't want to be distracted by other things. We could hunt around for acquisitions or things like that, but we think our primary goal right now is to get Eikon launched and out the door and into the marketplace. My only regret with respect to Eikon is that we don't have it ready to go already. I don't think we could have done it any faster than we've done it. But it would be nice, if we could put it on the market instantaneously.

So the faster we get it to the market both here and the United States and around the world, the better off we're going to be. And that's -- having a war chest makes it so we can do that in the right way.

Theodore O'Neill

Fair enough. In your queue under the recent developments, you talk about developing a low-cost PCR quality test for COVID-19 that can provide results in an hour. That is the Eikon product you're talking about is it not?

Dwight Egan

Well, the Eikon product delivers results basically in less than 30 minutes from sample to result.

So the -- a normal PCR test takes an extraction process, the Eikon does not require that, it's a direct saliva sample. In the protocol for taking an Eikon test, we will provide like two milliliters of water just purified water that the person will use to swish around in their mouth for 10 seconds or so before they spit it into the cup. It makes it easier for people to generate saliva. And -- but the -- when we say fast, we mean basically less than 30 minutes from sample to result. And keep in mind that the result is transmitted from the device to the person's smartphone, it then can go from the smartphone into the cloud.

So if you're checking into a ship for example a cruise ship, there could be an Eikon in every state room. And the people who are running that ship could know within a couple of hours when people board the ship exactly what the status is of that entire ship for each state room in terms of their COVID status. They can do it again halfway through the cruise. They can do it again before they leave and board a plane. They'll have record on their phone that they've had a PCR test within a certain amount of time. This is self-administered. And it's just an unbelievably elegant product. But keep in mind the bioinformatics and the cloud operations of this through secure servers in terms of notifying government entities, health departments and so on. It's just so elegant. It's hard to describe. But the fact that it can be done in almost any at-home and point-of-care setting is what makes it ultimately so revolutionary.

Theodore O'Neill

Yeah, I understand that. I was just asking because the queue has this section called recent developments and it talks about developing a low-cost, PCR quality test for COVID-19 that provides results in less than an hour, but it doesn't say that's the Eikon product.

So I just want to make sure there aren't two different products out there that are going to be quick?

Dwight Egan

Yeah, yeah.

Brian Brown

You've got it right. This is Brian since I'm responsible for the queue. I can tell you that's exactly what we were talking about in the queue.

Theodore O'Neill


Okay. My last question is looking at the falloff in sales in the United States more than offset by what's going on in your sales for the rest of the world. But can you talk about what are the dynamics that would have such a fall-off from June quarter last year to June quarter this year in sales just in the US?

Dwight Egan

Well, I think the thing that you have to point to is the widespread vaccination in the United States which was far ahead of much of the rest of the world.

And so as the United States became sort of preoccupied with their vaccinated and sort of hopeful secure status testing naturally fell off in that environment. And what you're seeing now are two things, you're seeing the emergence of variants like the Delta variant which are getting in the way potentially of vaccinations, it's much more transmissible. We'll have to see just how it comes out in terms of its mortality rate. But that -- the variant problem combined with the fact that we're trying to normalize is what's making testing kick in again with a vengeance.

So we had an environment where America was sort of celebrating, but the only places that were really normalized over the last few months are bars and sporting events.

So we started seeing people at our basketball games and things amping up without masks and that sort of behavior. But going forward, especially with the variant problem, the need to have ongoing testing, as I mentioned operationalizing this whole thing, what we used to call normalizing and what I used to refer to as the workflow of life, the things that you have to do in order to live.

You have to go to the grocery story, you have to go to the office, you have to go to the bank and so on. Those things are going to require that we have a certain level of testing going on and it's widespread and pervasive.

So even though there's a lot of vaccination going on, that is a story that is yet to be played out. And in the meantime, people that are vaccinated are still getting infected and people that are vaccinated are still passing on infection to other people, both vaccinated and unvaccinated.

So at the end of the day, you need to know what your COVID status is in order to have a COVID-safe workforce, a COVID-safe school, a COVID-safe ballgame, or wherever it is you're going in order to operationalize this. That's where we're heading. And that's resulting in a constant and strong demand for tests in the domestic market.

So it fell off, I think for a bit. I would say, we have a better and more durable business model than most COVID companies. We're not tied to a few parking lot tent operations with this serpentine line of cars.

We have had in the neighborhood of 189 different laboratories centralized labs in the United States about 130 of those CLIA equivalent labs in the -- around the world almost 200 labs in India about 75 or 80 of which we provide equipment for.

So we have a much broader and durable business model than what many of the other COVID companies have had. And it has been disconcerting for us to be painted with the same brush as many other COVID companies who are more tied to those types of activities and have less durable and diverse business models as we have, because we certainly have not experienced a diminution in overall test sales as a result of vaccination.

Theodore O'Neill

Okay. Thanks very much.


This concludes the question-and-answer session. I would like to turn the conference back over to Dwight Egan for any closing remarks.

Dwight Egan

Thank you for your interest in our company and for joining us today for our second quarter call. We're very enthusiastic about the direction Co-Diagnostics is headed.

We continue to invest in expanding our sales and marketing efforts throughout the world, which is an investment in our future.

Our centralized laboratory business segment along with our growing international presence have provided the company with better durability and help to bridge to our Eikon platform introduction in the near future. With our expanding menu of tests and a device that we believe has the potential to redefine, how and where PCR is performed, and our dedicated team of scientists, sales staff, regulatory, quality, financial and back office support, we believe Co-Diagnostics is positioned for success better than ever. Thank you and have a good day everyone.


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