Co-Diagnostics, Inc. Q2 FY2021 Earnings Call

Good day, and welcome to the Co-Diagnostics Q2 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

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 the 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?

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. 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 U.S. and expect it to remain so for some time. This demand, as well as continued sales in the U.S., 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 diagnostics 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 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. CoPrimers 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 continuously 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, etc., 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, etc. The Eikon platform has been designed from the beginning with the ability to operationalize testing on a regular basis in 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 over time. 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.

Thank you, Dwight. Our revenue for the second quarter was $27.4 million, which is an increase of $3.3 million or 13.8% compared to $24 million in the same quarter of 2020, largely due to ongoing sales of the Logix Smart COVID-19 test. Gross profit for the quarter rose by $6.8 million or 37.6% to $24.9 million, up from $18.1 million in the second quarter of 2020, reflecting both the persistent impact of the COVID-19 pandemic and an improved product mix compared to the previous year. In Q2 2021, we recognized less revenue from equipment sales than in the prior year, contributing to a higher gross margin. We achieved a favorable gross margin for the quarter due to the pricing structure of some international sales, which included higher third-party commissions. Year-to-date, our revenue increased to $47.4 million, an increase of $21.8 million or 85.2%. The gross profit reached $41.6 million, an increase of $22.5 million, which is more than 100%. Total operating expenses for the quarter were $13.1 million, an increase from $3.4 million in the second quarter of 2020 and up from $6.4 million in the first quarter of 2021. The rise in operating expenses was driven by anticipated increases in sales and marketing as well as research and development costs. Sales and marketing expenses for the second quarter rose by $5.5 million compared to the same quarter in 2020 due to higher third-party commissions attributed to increased international sales. Research and development expenses were up by $3.9 million compared to the second quarter of 2020, primarily for planned expenditures of $3.5 million for our point-of-care device development. Total operating expenses for the first half of 2021 were $19.5 million, up from $5.5 million for the first half of 2020, reflecting the same increases in sales and marketing and research and development costs observed in the second quarter. Second-quarter operating income was $11.8 million, down from $14.7 million in the second quarter of 2020, mainly due to the increased operating expenses discussed earlier. Year-to-date operating income was $22.1 million, an increase of $8.5 million from the same period in 2020. Income before taxes for the second quarter of 2021 was $11.9 million compared to $15 million in the prior year quarter. For the first half of 2021, income before taxes was $21.8 million, up by $7.9 million compared to the $13.9 million recognized in the same six-month period of 2020. Regarding income taxes, the expense for the second quarter was $2.1 million, leading to an effective tax rate of 18.0%; for the first half of 2021, the tax expense was $4.1 million, with an effective rate of 18.9%. Our effective tax rate typically differs from the U.S. federal statutory rate of 21.0% due to state taxes, permanent differences, and discrete items. In the three and six months ended June 30, 2020, we were in a full valuation allowance position, resulting in no recorded expense or benefit from taxes, yielding an effective tax rate of 0.0%. Our net income for the second quarter was $9.8 million, or $0.33 per fully diluted share, compared to net income of $15 million, or $0.51 per fully diluted share in the prior year quarter. The $5.2 million decline in net income was primarily due to increased operating expenses and the income tax expense of $2.1 million, though partially offset by higher product revenues and resulting margins from increased sales. Our balance sheet was further strengthened in the second quarter of 2021, with cash, cash equivalents, and marketable securities totaling $72.4 million as of 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, debt-free balance sheet, we are well-positioned to continue executing our strategic growth plan by investing in our personnel, processes, and research and development for future growth. As mentioned in our first-quarter call, we anticipated increases in both sales and marketing and research and development expenses for the second quarter of 2021. Nevertheless, we managed to significantly grow our cash balance, emphasizing our strong debt-free position. Net cash from operating activities for the first half of 2021 was $24.7 million compared to cash used in operating activities of $0.3 million for the prior year period, an increase of $25 million in cash flow from operations. This notable increase is primarily due to ongoing process enhancements and strong revenue growth attributable to the efforts of our team. We achieved strong results in the first half of 2021 and remain confident that these ongoing efforts will lead to solid financial returns in the latter half of 2021. We anticipate third-quarter revenue to be between $23 million and $25 million, reflecting continued strong domestic and international demand for our products. Additionally, we expect diluted earnings per share to range from $0.19 to $0.22, taking into account the impact of our increased research and development spending on our new diagnostics platform. We are very pleased with our robust financial position, which allows us to invest in significant growth opportunities such as the Eikon platform. We will continue to strengthen our solid business foundation and are well-positioned to make consistent progress on our strategic growth initiatives. I will now hand the presentation back to Dwight.

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. Our first question comes from Yi Chen with H.C. Wainwright. Please go ahead.

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 variants could increasingly become lower?

As I said earlier in my remarks Yi, we believe that the COVID problem is not something 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. Variants, 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 onto 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.

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

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.

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

Our initial test on the Eikon platform will focus on COVID-19, followed by other upper respiratory diseases. We see our strong international and domestic sales of COVID products as a crucial step towards launching our Eikon product globally. We believe that Eikon represents the most promising and innovative opportunity for our company to expand our patented CoPrimer technology into the diagnostics field beyond COVID. The advancements in our chemistry and device are remarkable for enabling testing in home and point-of-care settings on this platform. We are not anticipating any specific catalysts; instead, we aim for consistent performance from our existing centralized laboratory products as we prepare to introduce Eikon to the market. COVID has paved the way for our international business, and the evolution of our centralized laboratory products serves as our pathway to Eikon. That's our plan moving forward.

Got it. Thank you.

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

Thank you and congratulations on a great quarter. I understand that the decision on cash management is up to the board, but it seems you have more cash than is necessary for your business. How should we consider the plans for that surplus?

We have a strong cash balance and no debt. We are preparing for an ambitious international launch of our Eikon product, which targets 7.7 million businesses in the United States, along with numerous physician offices, dental offices, senior care centers, and educational institutions. We need our cash reserves to execute this launch without worrying about funding. Our primary focus is on getting Eikon into the market, and while I wish we could have it ready sooner, I believe we've moved as quickly as possible. Getting it to market fast, both domestically and internationally, is crucial, and having sufficient funds will help us do that effectively.

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?

The Eikon product provides results in under 30 minutes from sample to result. Unlike a traditional PCR test that requires an extraction process, the Eikon uses a direct saliva sample. For the test, we ask individuals to take about two milliliters of purified water, swish it in their mouth for approximately 10 seconds, and then spit it into a cup to help generate saliva. When we say fast, we mean results are ready in less than 30 minutes. The result is then sent from the device to the person’s smartphone and can be uploaded to the cloud. For instance, if someone is boarding a cruise, there could be an Eikon in every state room, allowing the ship's operators to understand the COVID status of all passengers within a few hours. Passengers can retest during the cruise or before boarding a plane, and they will have proof of their PCR test on their phone, all self-administered. It's a remarkably elegant product. Additionally, the bioinformatics and cloud operations are managed through secure servers for notifying government entities and health departments. Its ability to function in nearly any home or point-of-care setting is what makes it truly revolutionary.

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.

Yeah, 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.

Okay. 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 the June quarter last year to the June quarter this year in sales just in the US?

The main point to consider is the extensive vaccination rollout in the United States, which outpaced much of the world. As Americans became focused on their vaccinated status and felt more secure, testing naturally decreased in that climate. Now, we are witnessing two significant issues: the rise of variants like the Delta variant, which may hinder the effectiveness of vaccinations due to increased transmissibility, and the ongoing push for normalization. This combination is driving a resurgence in testing demand. While the country was celebrating, only certain settings like bars and sporting events achieved normalization. We began to see unmasked crowds at events like basketball games. Looking ahead, especially in light of variant concerns, there is a pressing need for continuous testing to facilitate what we previously called normal living—activities like shopping, working, and banking. These require a consistent level of testing, which must be widespread to ensure safety. Despite high vaccination rates, the pandemic's narrative is still unfolding, as vaccinated individuals continue to contract and transmit infections. Ultimately, knowing one's COVID status is essential for maintaining a COVID-safe environment in workplaces, schools, and events. This need is driving sustained demand for tests in the domestic market. Although there was a temporary decline in testing, I believe our business model is more resilient than many other COVID-related companies. We are not reliant on a few testing sites with long queues; instead, we operate nearly 189 labs in the U.S. alone, alongside a significant number of international labs, which gives us a more robust and diverse business model. It has been frustrating to be categorized alongside other companies that are less diversified and more dependent on traditional testing methods, especially since we have not seen a decrease in overall test sales due to vaccinations.

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.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.