Co-Diagnostics, Inc. Q2 FY2020 Earnings Call

Good afternoon, everyone, and welcome to the Co-Diagnostics Q2 2020 Earnings Conference Call. All participants are currently in a listen-only mode. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Andrew Benson. Sir, please go ahead.

Thank you, Jaime. And thank you everybody for joining us today. 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. In these statements of our company expectations, beliefs, plans, objectives, and assumptions of future events or performance are forward-looking statements. For example, statements concerning 2020 financial operational guidance, the development and 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 may 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. Additionally, the company will 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 sent to you before this call which contains reconciliation to the non-GAAP financial measures presented to their most comparable GAAP results. I'll now turn the time over to Dwight H Egan, CEO of Co-Diagnostics. Dwight?

Hello, everyone and thank you for joining us on the call. At the beginning of the second quarter Co-Diagnostics received emergency use authorization from the FDA for our Logix Smart COVID-19 test. Since that time, the company has successfully launched an internationally recognized business and brand, with clients in over 50 countries across over 25 U.S. states and validations of test accuracy from numerous regulatory and reference institutions worldwide. The company has established a durable production and distribution platform designed to sustain sales and profitability as our test gains widespread acceptance in the market. While the whirlwind pace of activity during the second quarter has led the company to record revenues, resulting in Co-Diagnostics crossing well into profitability, the sales momentum we are experiencing midway through the third quarter not only provides important context for understanding the progress that the company has achieved, but more importantly, a glimpse into where we are headed over the coming months and years. In that regard, I am pleased to report that the company has received and is currently fulfilling orders, approaching $50 million in year-to-date business. This includes the sales and activities from our India joint venture, which we are also pleased to announce has achieved profitability in the second quarter. In addition to the U.S. FDA, India, and the European community, our COVID-19 test has also been granted clearance in several other significant markets, including Mexico, Australia, Colombia, Argentina, South Africa, and others. Authorizations from Brazil and Health Canada are also in process. The Logix Smart COVID-19 test is designed to target the RDRP gene of SARS-CoV-2, which continues to show 100% coverage for all strains of the virus in global genetic databases. To proactively respond to global concerns about potential genetic drift and viral strains, we have also completed principal design and feasibility for the next iteration of this test to include additional genetic targets. To maintain testing specificity and sensitivity, we expect this test to be completed before the end of the current quarter. After achieving significant earnings during the second quarter, and establishing a robust distribution network and client base globally, Co-Diagnostics' current mission is focused on the durability of our product offerings, not only as they relate to COVID-19 but also to other ongoing infectious disease targets that will be relevant for decades to come. While the company is engaged in several molecular diagnostics initiatives, including TB, Zika, Dengue, Chikungunya, liquid biopsy for cancer detection, and programs for mosquito-borne diseases, today I will focus on our activities addressing COVID-19 and the current pandemic. The most significant initiative the company has been focused on is the development of a multiplex test designed to differentiate between COVID-19, Flu A, and Flu B. This test is better referred to as a panel, since it interrogates more than two dozen strains in a single test. Why is this important? Experts expect the U.S. alone to have about 100 million cases of the flu and flu-like symptoms in the coming fall and winter months. When a person has flu symptoms, which are very similar to COVID-19 symptoms, they need to know whether their infection is a routine flu or a potentially deadly case of COVID-19. Our test will make this differentiation. Moreover, our tests will be usable in high throughput settings where labs may perform as many as 1,000 to 50,000 tests daily. Many analyses of the testing landscape have failed to recognize the inherent throughput limitations of certain closed system platforms that require single cartridges or cassettes to obtain results. Even if a result can be obtained quickly, the throughput limitations severely constrain these platforms' utility for wide-scale testing. While a closed system test may play an essential role in testing the disease status of a hospital patient pre-surgery in urgent scenarios, it does not provide a viable solution for wide-scale testing or surveillance applications. The company has attracted significant clients, such as Clinical Reference Lab, which recently obtained FDA emergency use authorization for a saliva-based COVID-19 test that can be self-administered at home, work, or other settings without professional care assistance, and then analyzed in their laboratory using Co-Diagnostics technology. This is a high throughput organization capable of meeting the most demanding requirements of companies and other organizations needing high-volume testing. Our strategy has been to attract a large number of CLIA labs throughout the U.S. to secure a continuous demand for our tests. Generally speaking, CLIA labs play a vital role in the landscape of infectious communicable and genetic disease testing, with existing clients relying on their laboratory services for diverse testing needs. These same legacy customers often turn to existing CLIA lab relationships for COVID-19 testing. By building relationships with numerous CLIA labs, we are able to leverage our reach to businesses, schools, senior care centers, and other organizations, both big and small. The value proposition of Co-Diagnostics tests is evident. We provide highly accurate, economical, and open-architecture tests meeting the current high throughput needs for COVID-19, and we also establish client relationships to sell other tests to these labs, including custom tests using our CoPrimer platform. It is vital to emphasize the significance of the company's development of the upper respiratory Flu A, Flu B, and COVID-19 panel concerning the CLIA lab model. Our competitors that market single-use cartridges for upper respiratory diagnostics will now have to contend with Co-Diagnostics' new test, which offers significant advantages in pricing and high throughput capabilities. It is well-known that upper respiratory panels provided by other companies constitute a substantial percentage of their sales lines, and now for the first time, Co-Diagnostics will enter the competitive landscape with a superb product offering with previously stated advantages. Now that we have established worldwide distribution channels with a respected COVID-19 test, we are understandably excited to participate in one of the most high-volume diagnostic markets in the U.S. and around the world. This new test, which we refer to as the ABC test for Flu A, Flu B, and COVID-19, is one of the critical aspects of our durability and consistency strategy in the near and medium term. Our expectations for the next few quarters anticipate ongoing demand for our existing COVID-19 tests as businesses, colleges, schools, senior care centers, and other organizations strive to normalize their environments, which should include a testing component alongside social distancing, masks, contact tracing, and other preventative measures. We also anticipate the adoption of our new ABC test by customers globally, who will be able to conduct this test on the same platform where they are running our current COVID-19 tests. We have made key additions to our scientific team over the last couple of quarters. This was done to ensure that the company can continue to move ahead aggressively with other initiatives mentioned earlier as we expand the footprint of our unique patented technology platform across multiple applications. I will now turn the time over to Reed Benson, our Chief Financial Officer, who will take us through the numbers. We will then take questions from our analysts. Reed?

Thank you, Dwight. The revenue comparisons Dwight presented reflect increases from quarter to quarter rather than a comparison with last year since we had only minimal revenues in 2019, as we were primarily a development company just beginning to enter sales. Because of the current pandemic and our ability to respond to the diagnostic needs of the world during this time, the company has transformed to a sales and manufacturing company. In the second quarter of 2020, total revenue was $24 million, an increase of approximately 15 times compared to the 2020 first quarter revenue. The exponential and sudden growth in revenue brought many challenges and was almost exclusively due to the sales of our Logix Smart COVID-19 test. Second quarter gross profit was $15.7 million, for net income per common share of $0.43 a share, representing a gross margin of approximately 64% of revenue. Our profit margin on sales of our tests is approximately 70%, but sales of equipment, which we provide as a convenience through our established relationships with manufacturers, have a lower margin, thus lowering overall margins. Our profits are also a result of operating leverage we enjoyed by employing relatively few employees to generate significant revenue. This quarter, we generated $650,000 of revenue per employee. Total operating expenses were $3.4 million, representing an increase of approximately $1.9 million over the second quarter of 2019. Of the increase, approximately 24% was a reserve for doubtful accounts, which was established for the first time, while another 24% represented increases in salaries and related benefits as we added three PhDs and six technicians to aid in completing our development projects and the manufacturing test to help ensure continued profitable operations after the current pandemic, and 10% were expenses incurred while we examined the possibility of lyophilization of our test products to facilitate easier shipping to all foreign countries we service, and we're finalizing those contracts. We also added office, laboratory, and warehouse space to accommodate the new employees and facilitate manufacturing and shipping. Moving to the balance sheet, we ended the quarter with $34.5 million of current assets, compared to $1.6 million of current assets at January 1, 2020. This includes approximately $18 million of net proceeds from the sale of common stock in a series of registered direct offerings during the first quarter. Excluding these financing activities, we generated sufficient cash from sales to fund raw materials and finished goods inventory at the end of the quarter, amounting to approximately $10 million and $5.3 million of accounts receivable. We still had $18.6 million of cash at the end of the quarter. Our stockholders' equity increased to $33.4 million, compared to $1.7 million at the beginning of the year. The improvement of our balance sheet was driven by strong revenue growth and helped to grow gross margins even after the increased operating expenses in the second quarter, which were mainly driven by the explosive growth we experienced as we prepared for the fall flu season and beyond. With that, we'll accept questions now from our analysts.

[Operator Instructions]. Our first question today comes from Yi Chen from HC Wainwright. Please go ahead with your question.

Good afternoon, and thank you for taking my question. My first question is could you give us a breakdown of the second quarter revenue in terms of U.S. and ex-U.S. revenue?

It's approximately equal; the U.S. revenue is probably a little bit more, probably 55% to 60% of total revenues.

Got it. Okay. And could you also give us some color on the recent trend of the test shifts, I mean, in July and August so far?

The tests that have been actually shifted so far are probably around $7 million to $8 million.

Okay, do you see any slowdown in terms of customer ordering?

Quite the contrary, I think orders are now speeding up a little bit in response to the acquisition of some new clients and customers.

Got it. And regarding the new ABC test panel. Do you need to have FDA emergency use authorization before marketing the test panel? If so, when do you expect to obtain it?

Yi, this is Dwight; how are you doing? I want to let you know that when we develop a test, the process occurs in four stages. First, the test design is completed, followed by CoPrimer selection, then testing verification, and finally, testing validation. Once we complete those four processes, we submit the test to regulatory bodies for approval, which includes a CE marking submission for the European Union and permission from the FDA for emergency use authorization for that test. We anticipate that the first marketing of the test will occur on an international basis, followed by an introduction into the U.S. market.

Okay, thank you. My last question is, the FDA has recently issued authorization for the first screening test for screening an asymptomatic population for COVID-19. So far, there's only one test that has received this screening EUA. Is that something of interest to Co-Diagnostics?

We are very focused on knowing what business we're in, and our business is providing polymerase chain reaction tests, which are the current gold standard. There are other tests being introduced to interrogate for antigens, for example, and for antibodies; they all have a role, to some extent, but our particular focus is on providing highly accurate tests that are economical. I want to emphasize especially the high throughput nature of our tests and our client base. We have onboarded important clients that have the capacity for high throughput testing. As organizations strive to return to normal routines, the ability to conduct high volume testing is critical. Our focus remains on our Flu A, B, and COVID tests and on servicing clients that require a high degree of throughput. This will continue to be our focus in the medium term.

Our next question comes from Jason McCarthy from Maxim Group. Please go ahead with your question.

Hey, guys. Thanks for taking my questions. This is Michael Okunewitch on the line for Jason. I'd like to see if you could comment on the testing backlog at all, just been kind of an issue facing the U.S. in general, where it can take up to two weeks to get a result back, making it essentially useless. So, I'd like you to comment on where the bottlenecks are coming from. Is this range in lab capacity, and does CoPrimer require fewer reagents? With a lot of smart tests being the panel for high throughput, do you think that Logix Smart could offer a potential solution to alleviate bottlenecks?

Michael, you're right on, and indeed, our high throughput model with CLIA Labs is being applied in that very area. We are not aware of any clients we provide tests for experiencing those kinds of delays in providing results to their end-user customers. Generally speaking, if the test reaches one of the testing laboratories that we supply, they can typically complete the turnaround within 24 to 48 hours. A test can be taken, shipped to the lab, and often by the following evening or the next day the results are available. This is how we test our own employees at Co-Diagnostics; lab employees are tested weekly while other staff members are tested biweekly. If they take their test on Monday morning, they often receive their results by Tuesday evening or the next morning. Co-Diagnostics' structure and the nature of our tests facilitate quick results, and we are excited about the types of laboratories in the U.S. that are adopting our tests for high throughput volumes. Clinical Reference Lab is among them and has given us permission to reference them. They went through numerous different tests before ultimately choosing the Co-Diagnostics solution for their needs. The saliva-based test they have, which is self-administered, is easy to use and provides rapid responses, and this company has the capacity to conduct a high volume of tests.

Thank you very much. I have one more question. Could you break down that $50 million year-to-date number? How much of that corresponds to CoSara sales versus actual Co-Diagnostics sales? In a previous question, you mentioned around $7 million to $8 million so far in July and August. Could you assist in breaking down that number?

Yes, of the approximately 50 million year-to-date in tests ordered, about 44.5 million are from outside of India, which includes the U.S. and other parts of the world. About 4.5 million come from the Indian market. Our CoSara joint venture has kicked in nicely. As you know, India is the third largest hotspot for COVID-19 globally. Our timing there was fortunate in terms of getting a lab operational and securing governmental approval to begin marketing those tests there. That effort is now in full swing. When you analyze the present 50 million, a good way to look at this is to take the revenue generated in the first quarter and the revenue reported in the second quarter and calculate based on the 50 million tests ordered to evaluate the backlog we are currently filling. We have a robust capability to produce tests quickly to fulfill customer orders, often within a matter of days.

If you don't mind, I'd like to just do a quick follow-up on that. Where do you expect your production capacity to sit now, and how do you foresee it ramping up?

Our production capacity remains robust. We have previously cited our ability to manufacture approximately 3 million tests a week, if necessary. Our manufacturing process can be somewhat variable, as we produce a number of tests and store them so that when a customer calls, we can fulfill their order quickly. We can send out quantities ranging from 200 to half a million tests at a time. Responding quickly to customer orders is crucial, and we strive to ship tests on the same day we receive them. We maintain a good inventory of tests and, as previously announced, we ordered components early on for tens of millions of tests, placing us in a solid position for inventory and fulfilling test orders.

Our next question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead with your question.

Thank you. In your Q, on Page 18, there's a nice table that discusses the market opportunity for molecular diagnostic testing for tuberculosis, hepatitis, etc. But there's nothing here for COVID-19. Do you have an estimate of what the annual market for diagnostic tests is globally for COVID-19?

That's an excellent question, Theo, and it's nice to hear from you. Unfortunately, I don't have an off-the-cuff answer for the exact size of the worldwide COVID-19 market. What I can share is that our focus at the moment lies in utilizing our COVID-19 tests alongside our ABC test, which combines upper respiratory Flu A, Flu B, and COVID-19 diagnostics to address present needs worldwide, particularly in the U.S. For example, the U.S. is expected to encounter 1 billion colds this coming year, with every child experiencing 6 to 10 colds annually. In a school setting, a child with a runny nose will prompt inquiries about whether it is due to COVID or merely a cold, which is why we have spent considerable time and effort on developing this ABC test. I want to make everyone aware that this is an upper respiratory panel designed to generate significant revenue for some companies we will now be competing against. The upper respiratory panel comprises a considerable percentage of total revenue for those companies. For the first time, we will enter that landscape with a high-quality, economical test with high volume and throughput capabilities that can be used on the same equipment currently running our COVID-19 tests. We will concentrate on generating business from the 1 billion individuals expected to catch a cold in the upcoming year, as stated by the Rockefeller Foundation, which predicts 100 million flu cases affecting the U.S. shortly.

What about the working capital requirements to meet that demand?

I'm going to let Reed answer that question.

I believe we are well positioned to handle any working capital needs as they arise. We have been following a policy of securing upfront payments to fund all operations through cash flow from our sales. This strategy has allowed us to cover all expansions performed thus far and accumulate cash reserves. From a working capital standpoint, we are well-equipped to meet any sales demands.

Ladies and gentlemen, at this time we've reached the end of today's question-and-answer session. I'd like to turn the conference call back over to Dwight H Egan for any closing remarks.

Thank you, Jamie. And thank you again, everyone for joining the call. This has been an incredibly busy and interesting four and a half months for the company since we received FDA UA approval. We have an excellent test, and we're excited about our upcoming ABC test. We are thrilled about all aspects of our tests in terms of accuracy, sensitivity, specificity, economical benefits, and capacity for high throughput, which we believe will be crucial. The second half of the year is shaping up to be busy, and we have a solid start in the third quarter. Now that we're halfway through the third quarter, we're focused on fulfilling the orders approaching $50 million that encompass our year-to-date activities. We expect to generate many additional orders, highlighting the company's strength and our capacity to meet these demands. Thank you again for joining us on the call and for your support as shareholders. That concludes my remarks.

Ladies and gentlemen, that concludes today's conference call. We thank you for attending. You may now disconnect your lines.