Earnings Call Transcript - CODX Q4 2020

Operator, Operator

Good afternoon, and welcome to the Co-Diagnostics Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in listen-only mode. 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, Head of Investor Relations

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, Brian Brown, our newly appointed Chief Financial Officer, and Reed Benson, General Counsel. 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 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 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 issued 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, CEO

Thank you, Andrew, and thank you all for joining us. On this call, we will provide an overview of our results for the quarter and year, updates on key financial performance metrics, and a discussion of our progress and future strategy. Then we will take questions from our analysts. Before we turn to the results for this quarter, I would like to welcome Brian Brown to the call this afternoon as our recently appointed Chief Financial Officer. Following the significant growth we experienced this past year and the anticipated growth in the future, it was critical to expand our resources in our financial department. Brian has previously played integral accounting and financial roles for a variety of other public and private companies, and we are pleased to have him join Co-Diagnostics at such a crucial juncture in our growth trajectory. We are grateful to Reed Benson for his leadership and dedicated service as our CFO and look forward to continuing to leverage his expertise and experience as our general counsel. Turning to our results this year, 2020 represented a solid year of development and strong execution for Co-Diagnostics. We are very pleased with the record results in the fourth quarter and for the full year. Our core strategy to position the CoPrimer technology platform as an important player in the molecular diagnostics space has yielded exceptional results. Demand for our Logix Smart COVID-19 test drove sales and profits to record levels this year. Although COVID-19 test sales may not be as robust in 2020 as in 2021, we anticipate demand for our portfolio of products to continue in 2021. Full-year revenue achieved a record level of $74.6 million, while pre-tax net income finished the year at $42.6 million. These solid results were driven by sales of our Logix Smart COVID-19 tests to our global network of laboratories, hospitals, and distributors. The three COVID-19 tests we launched during the year enable the company to address the needs of different countries in battling the Coronavirus. Our achievement of 10 million COVID-19 tests sold globally this year is a testament to the ability of our CoPrimer technology platform to quickly develop a high-quality, versatile infectious disease PCR test while also scaling it to meet global demand. The CoPrimer technology platform was developed by the company to dramatically enhance the output of molecular diagnostic tests conducted via real-time PCR, while also improving cost efficiencies and throughput. We believe these advantages prove substantial in various situations, including manufacturing agricultural environments in addition to clinical laboratory settings. Receiving the additional patent earlier this year and enhancing the US patent protection for our CoPrimer technology was critical to our long-term success. Not only does this emphasize the uniqueness of our technology, but it also facilitates our growth into other verticals, such as liquid biopsy and next-gen sequencing applications. As the company further develops a diverse and successful business model, the reputation of our products has grown. The company has already begun to benefit from its expanded distributor network. For example, dengue virus will often manifest in similar ways to COVID-19, and the company's Logix Smart ZDC, Zika, Dengue, Chikungunya test is seeing wider distribution to help combat the current outbreak of dengue in Peru and differentiate dengue from COVID-19, following our successful distribution throughout that country. Co-Diagnostics continues to participate in successful joint government-private collaborations in several states and countries. The reach of our Coronavirus test has also expanded to high-throughput laboratories to serve a nationwide customer base. We are very pleased with the sales generated from those collaborations and important laboratory relationships. We remain committed to achieving our long-term goals and improving the lives of others around the world by providing safe, high-quality, and cost-effective diagnostics. Let me now turn things over to Brian Brown for a review of the key metrics and numbers, after which I will conclude with a discussion of future plans, including our at-home and point-of-care platform. Brian?

Brian Brown, CFO

Thanks, Dwight. For the quarter, revenue increased to $27.1 million, primarily due to worldwide sales of the Logix Smart COVID-19 test, which was developed in response to the current COVID-19 pandemic. Gross profit increased to $22.8 million, representing 84.1% of consolidated revenue due to an improved product mix compared to the prior year period. For the year, revenue increased to $74.6 million, again due to sales of the Logix Smart COVID-19 test. Gross profit increased to a record $58.0 million, representing 77.7% of consolidated revenue. The increase in gross margin was due to the mix of products sold, as the majority of our 2020 revenue came from sales of our test reagents, which have a higher margin than sales of equipment. During 2019, a larger percentage of revenue generated came from sales of equipment and test kits. Total operating expenses for the quarter, inclusive of corporate, general and administrative, sales and marketing, research and development, and depreciation, amortization increased by $5.1 million to $6.8 million compared to the fourth quarter of 2019, primarily driven by increased activity to support the growth of our business. This includes higher personnel and incentive compensation to our employees, our sales team, and our distributors. Additionally, we added employees to our research and development team to increase our research and product development activities. For the full year, total operating expenses of $16.3 million increased by $10.3 million from 2019, primarily due to the increase in business activities required to support our revenue growth. We anticipate higher operating expenses as a percentage of sales throughout 2021 compared to 2020, as we invest in our people and expand our technology through additional research and development. We had a great 2020, which afforded us the opportunity to invest back in the company and provide a longer runway for future growth. Through these operational investments, we will be able to take on projects we believe are valuable to society and to the continued success of the company. Due to record revenue and gross profit, income from operations for the fourth quarter improved to $16.0 million. For the full year, income from operations improved to $41.7 million. For the fourth quarter of 2020, we achieved income before taxes of $15.8 million, compared to a loss of $1.7 million in the prior year comparative quarter. For the full year 2020, income before taxes was $42.6 million, compared to a loss of $6.2 million in 2019. Now moving to taxes. As you may recall, we reported a credit to our income tax provision in Q3 of 2020 due to the reversal of valuation allowances related to income taxes. During the fourth quarter, we utilized all of our historical net operating losses and recorded income tax expense of $3.0 million due to our strong results. As a result of our income tax expense for the fourth quarter, offset by the credit reported in the third quarter, we recorded income tax expense of $0.1 million during the year ended December 31st, 2020. Having utilized all historical net operating losses, we anticipate continued profitability in 2021, and estimate an effective tax rate of approximately 26%. We achieved net income for the fourth quarter of $12.8 million, or $0.43 per fully diluted share, compared to a net loss of $1.7 million in the prior year quarter. For the full year, net income increased to $42.5 million or $1.52 per fully diluted share from a net loss of $6.2 million in the prior year. Turning now to our balance sheet and liquidity. Our balance sheet remained strong, allowing us to invest in additional growth opportunities. At year-end, cash, cash equivalents, and marketable securities totaled $47.3 million, an increase of $46.4 million from December 31st, 2019. We remain well capitalized with no debt and a strong cash position. In prior years, we financed our operations through the issuance of equity and debt. In 2020, we financed our business primarily through profitable operations. Our strong cash-generating capabilities provide Co-Diagnostics with ample financial flexibility as we execute our strategic growth plan. We ended the year generating $28.2 million in cash from operations, representing an improvement of $33.7 million over the prior year period's use of operating cash of $5.5 million. Now turning to some directional guidance, we would like to provide for the first quarter of 2021. We anticipate revenue for the quarter totaling between $19.0 million and $20.5 million, while gross margins are expected to remain consistent with the prior year period as we continue to grow our cash position. The first quarter 2021 effective tax rate is forecasted to be approximately 26%. Fully diluted shares outstanding are expected to be approximately 29 million at quarter-end. We do expect to remain profitable and will continue to invest those dollars back into our growth. Because of the structure of our business and the foundation we have built, we are in a great position to continue progressing on scaling the company. We believe a capital allocation strategy focused on organic and acquisitive growth aligns well with our long-term growth strategy, as well as the underlying trends our business is uniquely positioned to leverage.

Dwight Egan, CEO

Thanks, Brian. 2020 was truly an inflection point for Co-Diagnostics for many reasons. I would like to thank our valued employees, management, vendors, and distributors for their hard work and dedication in helping to deliver outstanding results in a year that was as full of challenges as it was successes. While it is understandable that our recent accomplishments following that amazing year might overshadow where we've come from to arrive at this point, it's important to remember that when Co-Diagnostics was founded in 2013, our mission was to bring affordable, high-quality molecular diagnostics products to people in places who need them the most. Every step we have taken since our beginning helped prepare us for 2020. Our mission has remained unchanged, even during the COVID-19 pandemic when the need for our products extended from our own neighborhood to the other side of the planet. We leveraged our unique proprietary CoPrimer technology platform to develop our first COVID-19 diagnostic early in the pandemic, followed by several more products in the months that followed. Those who have been following Co-Diagnostics over the years know that this design platform has been utilized long before 2020 to successfully develop a number of diagnostic molecular testing products. With our healthy margins and low overheads, the company now has the resources to fully realize our vision and continue to expand our menu of state-of-the-art molecular diagnostics. This menu includes several infectious diseases for both domestic and overseas markets, as well as continuing development of products in our exciting liquid biopsy vertical, which we believe has the potential to fundamentally change how patients are tested for cancer and their ongoing treatment monitoring. Perhaps the most exciting advance to result from this past year is our new point-of-care and at-home PCR platform currently in development. We agree with epidemiologists that the rapid spread of the Coronavirus and the appearance of mutant strains mean that COVID-19 will remain with us for years or even decades, leaving the world population to coexist with COVID-19, similar to other endemic diseases like flu, the common cold, and HIV. Experts have predicted a range of scenarios, including those where the disease returns in waves each year, where COVID-19 shifts from a pandemic disease to an endemic one in many parts of the world, or where the disease is with us in one form or another forever, and lasting modifications to societal and personal behavior will likely be required. While we believe we are a long way off from achieving normalization, the good news is we believe we have been through the worst of it. The zero-tolerance approach to last year mitigated the effects of the pandemic and helped the world to realize the importance of accurate, reliable testing as a long-term strategy to reopen schools, public venues, and travel. Regular COVID-19 testing is becoming a part of the long-term protocol for many organizations. We plan to revolutionize the availability of accurate, fast, and economical PCR test with our new initiative designed to provide cheap, fast, and accurate COVID-19 PCR test results using saliva or swab samples in under 30 minutes, essentially as easy and convenient as over-the-counter pregnancy tests. Ultimately, we expect that other tests will also become available on the device, such as Strep A, RSV, influenza A, influenza B, and potentially any other pathogen that can be sampled from a patient using saliva or a swab. The development of these tests is either already underway or expected to begin soon. The company has already had great success in selling its COVID-19 products around the world, and while we believe testing demand will continue in the future, we also believe the way testing will be done will migrate strongly to point-of-care and at-home locations. In this context, at-home does not refer solely to tests done at home, but rather any location, such as a business or school where a caregiver is not involved in the process. In a post-vaccinated world, seeking normalization, the question is not whether there will be testing; there will be an enormous amount of testing. The question is how and where the testing will be done. The testing has to be conducted around points of normal interaction at work, at home, at school, and as we travel. We refer to these locations cumulatively as the workflow of life. Normalization requires routine organizational testing to create COVID-safe work, play, and travel environments. In particular, travel beginning this summer in the US and globally is likely best enabled by gold-standard PCR testing. As vaccination programs continue their rollout throughout the world, governments and regulators are developing necessary protocols to enable travel. As those considerations are evaluated, we believe the clearest path to ensuring travelers are COVID-safe is through PCR testing. Similar to how building on previous company achievements prepared us for the challenges of the pandemic, this new initiative is made possible as a result of several innovations accomplished by the company over the last year, beginning with our direct saliva testing technology. PCR tests usually require a costly, time-consuming process intended to extract any genetic material present from the cells contained in the sample. These extracted samples are then analyzed for the presence of the target pathogen using PCR technology. Co-Diagnostics' CoPrimer technology has been shown to be able to consistently detect SARS-CoV-2, the virus that causes COVID-19 directly from minimally processed saliva samples. Elimination of the extraction process has the potential to simplify the testing process, increase throughput, and lower costs of COVID-19 testing, all without compromising quality or accuracy. This testing technology utilizing CoPrimer’s unique capabilities was developed specifically to address the efficiency demands of high-throughput lab applications, as well as the accessibility imperatives of point-of-care and at-home markets, all while delivering lower processing costs, and increased accessibility of gold-standard PCR diagnostics worldwide. Early on in the pandemic, we also began the process of engineering testing reagents for lyophilization or freeze-drying, which will extend their shelf life and allow products to be stored at ambient temperatures in commercial packaging, a vital step for facilitating the widespread adoption of tests that can be administered outside of clinical laboratory settings. After considering the needs of the market and understanding that normalization will require regular testing with inexpensive, fast, and accurate PCR tests, the company entered into an agreement with world-renowned experts in rapid PCR technology to engineer the at-home, point-of-care testing device designed to be combined with the company's proprietary chemistry. The scientists engineering the hardware have previously designed several PCR-based platforms that are in use worldwide by leading healthcare companies. We expect to submit the platform to the US, European, Indian, and other regulatory authorities in the back half of 2021, following validation. As populations around the world go back to the office, as students return to school, as people again travel and participate in entertainment venues, we believe this direct saliva technology and our new platform will help ensure COVID-safe environments through fast, accurate, affordable, and accessible testing solutions, including point-of-care and at-home applications for businesses, schools, and home settings. Co-Diagnostics has always envisioned ultimately developing a point-of-care, at-home diagnostic device, making PCR accessible at affordable prices worldwide. We are pleased that the combination of years of development has resulted in a realization of this vision. With this product, our mission to make affordable gold-standard PCR accessible around the world comes full circle. We are proud of our accomplishments over the past year, and we believe the company has the technology, resources, experience, and roadmap for an exciting future. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

Operator, Operator

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

Yi Chen, Analyst

Thank you for taking my question and congratulations on a solid quarter. My first question is, as COVID-19 vaccines get wider distribution, the testing demand will eventually trend down from peak levels, even though it could exist for a very long time. So apart from the new point-of-care and at-home testing platform, are there other elements that Co-Diagnostics is planning to ensure continuous top-line growth in 2021 and 2022?

Dwight Egan, CEO

Thank you for the question, Yi. The first thing I would like to emphasize is that we believe there will be a migration to PCR testing in a post-vaccination environment, as opposed to antigen or antibody tests. I think this is becoming widely known that because the PCR test is able to detect the genetic material of the virus in a post-vaccination world, it becomes the test of choice in terms of giving true accuracy. So, our real view, Yi, is that we're going to transition heavily from the kind of stadium parking lot, grocery store parking lot, hospital parking lot testing lines that take three or four hours to get through, and then a couple of days to a week to get test results. We're going to be transitioning to a world where people have to get tested at the points of interaction, actually at their business, in their homes, at the schools, at venues, on cruise ships, on planes, etc. With that in mind, we have developed the Eikon product to meet that need. First and foremost, we think there will be a major transition in terms of how and where testing is done. We believe there will still be a great deal of testing as the disease transitions from a pandemic to an endemic phase, and then probably continues year after year with infection and re-infection and then vaccination and re-vaccination, and such. In addition to that, of course, we have several other verticals that we're pursuing. One of the most exciting is our liquid biopsy product for cancer detection. In this environment, we are developing panels of tests to address the biggest killing cancers in terms of the mutations associated with those cancers, which would include breast cancer, colorectal cancer, non-small cell lung cancer, prostate cancer, and stomach cancer. We believe that our CoPrimer technology is uniquely positioned to provide those types of detections through the PCR process, especially as it relates to the monitoring after someone has been diagnosed and screening before they have a cancer diagnostic, which would allow for earlier detection when there may only be a small number of mutated cells. We are also actively engaged in important work in the agricultural area with companies like Bayer and LGC. Bayer purchased Monsanto some time ago, and we're doing important work with them related to agriculture, which is a vertical addressing the need to double the food supply in less than 30 years. We think this is also a viable place to apply our technology. Keep in mind, COVID is just one of the tests that we provide. We also have a solid menu of tests for tuberculosis, Hepatitis B, Hepatitis C, human papillomavirus, malaria, chikungunya, dengue, and Zika. Therefore, we will now be selling to a worldwide audience through more than 50 distributors in countries all over the world, where we have established brand recognition and trust with our products. We are poised to sell our broader array of products into those markets.

Yi Chen, Analyst

With respect to the new PCR point-of-care and at-home testing platform, do you expect it to enter the market in early 2022? For at-home use, are consumers expected to pay for the device and tests out of pocket? What is the potential market size for this device?

Dwight Egan, CEO

Yes. We certainly are hopeful to introduce this product into the market by early 2022 as soon as we can. We expect to be able to present this for submission to regulatory authorities both here and abroad in the second half of 2021. We believe the addressable market is enormous. For instance, there are approximately 132,000 schools just in the US, 7.7 million businesses, over a million people in skilled nursing facilities that need to be addressed. Moreover, there are about 5.6 million people playing basketball in the United States, 6,100 hospitals, and about 230,000 physician offices and 186,000 dental offices, which leads to the staggering figure of 128 million residential locations in the United States alone. Therefore, the potential market for this device is immense. We anticipate that the device will be priced around $300, with tests costing between $15 and $20. These tests will be lyophilized, purchasable at drug stores, and can be stored in a person's medicine cabinet or in business locations for a prolonged time. Imagine what happens in India, where it may become one of the largest healthcare markets in the world, with thousands of labs lacking PCR capability for tests such as tuberculosis. This testing device allows for widespread implementation of our technology in locations previously without access. It's important to note that this will be real-time PCR testing. The product will not only be affordable and fast, but it will also maintain accuracy. We've worked hard on this concept for much of the last year, collaborating with some of the top scientists in the world to achieve this integration. We think it has the potential to revolutionize testing worldwide.

Yi Chen, Analyst

Thank you.

Operator, Operator

The next question is from Jason McCarthy with Maxim Group. Please go ahead.

Michael, Analyst

Hey, guys. This is Michael on the line for Jason McCarthy. Thanks for taking the question. I wanted to ask about your thoughts on COVID testing for this current year. You did 75 million tests last year, how is that tracking with the overall testing? Could you provide a bit more granularity on 2021? Also, did you expect $20 to $20.5 million for the first quarter?

Dwight Egan, CEO

We said that we expected $19 to $20.5 million in sales for the first quarter. As for our viewpoint on COVID testing, it's a commonly held belief, promulgated by mainstream media, that widespread vaccinations will decrease the need for COVID testing. We think that while we won't remain in a pandemic phase indefinitely, widespread and aggressive COVID-19 testing will persist for a long time. However, it will change how it's conducted. People won't be lining up in parking lots for hours, waiting days to get test results. Instead, testing will occur at points of interaction, such as workplaces, homes, schools, venues, cruise ships, planes, etc. We believe a significant amount of demand will continue even as our products service various countries. There are places where people will not have access to vaccinations until late next year or later. Because we have a global distribution network, we anticipate that we can sustain our market presence compared to companies relying solely on U.S. testing clients. Our current pipeline demonstrates strong demand for our products through at least the second quarter. We aren't heavily reliant on specific contracts, allowing us to distribute efficiently. Our distribution base spans over 50 countries, which contributes to our resilience.

Michael, Analyst

Could you break down how much of your sales are US focused versus international?

Brian Brown, CFO

For 2020, about 60% of our sales were in the US, and 40% were outside the US.

Michael, Analyst

Thank you.

Dwight Egan, CEO

You might see a model where that mix inverts slightly, becoming 60-40 in favor of international sales over time.

Michael, Analyst

Can you discuss the properties of your rapid point-of-care device, specifically time to receive results and throughput? For instance, would it require multiple devices at high-traffic locations like airports?

Dwight Egan, CEO

Yes, some locations, like hotels and airports, may require multiple devices. This device is designed for one-off testing it is not cartridge-based. A patient, for example, provides a saliva sample that is inserted into a compact box about 4.5 by 4.5 inches. From there, testing commences, and results are available on a smartphone approximately 30 minutes later. This product will also include a digital connectivity feature to notify relevant health authorities or provide necessary travel documentation. These tests will be affordable and accessible, costing between $15 and $20 which will encourage frequent, routine testing.

Michael, Analyst

Thank you.

Operator, Operator

The next question is from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill, Analyst

You mentioned previously about needing to evaluate if customers would pay their bills adequately. Given the large increase in selling and marketing expense in the quarter, do you now have those resources? Can you elaborate on this increase?

Dwight Egan, CEO

Thank you for the question, Theodore. Our experience early on was driven by the urgency for tests, which meant we worked with credible foreign customers better known to us, so we insisted on upfront payments to mitigate risks. We’ve successfully managed receivables and minimized collectible risks as we serviced large international orders. Today, we’re in a much stronger cash position than earlier on, enabling us to execute our plans for the Eikon initiative to get this product to market. Investments in marketing and branding efforts are necessary as we rapidly scale our operations in light of our revenue growth.

Brian Brown, CFO

The increase in sales and marketing expenses reflects our support for growth. We noticed opportunities to build our teams and develop operational capabilities. Therefore, you'll see continued growth in these key operational areas as we proceed through the year.

Theodore O'Neill, Analyst

Thanks. Lastly, with the emergence of COVID variants, do you think this affects how people perceive testing?

Dwight Egan, CEO

Testing is critical for normalization. Many people still work from home, and entertainment and sports venues remain closed. This pandemic's narrative is shifting, but public sentiment regarding testing still reflects significant demand. We anticipate continued need for reliable testing, especially as normal practices return. We don't view this as a simple COVID play. Rather, we believe our success in COVID testing has positioned us to leverage our technology for many infectious diseases and cancers in the future. Considering world infection rates of COVID-19 pale in comparison to the burden of diseases like malaria and tuberculosis, we are well-prepared to bring value with our diversified product portfolio.

Theodore O'Neill, Analyst

Thank you very much.

Dwight Egan, CEO

Thank you all for joining us on the call today. We are very excited about our future and express our gratitude to all those who have helped make this happen for the company: great employees, great vendors, and great customers. We look forward to making meaningful changes going forward, not just in the COVID world, but also in infectious diseases, cancer detection, and agriculture needs. Thank you all for joining us. We look forward to speaking with you again next quarter and providing updates on our progress.

Operator, Operator

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