Co-Diagnostics (NASDAQ:CODX) Q2 2020 Earnings Call

0:00 Good afternoon, everyone, and welcome to the Code Diagnostics Q2 2020 earnings conference call. All participants are currently in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. 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.

0:36 Thank you, Jamie, 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. Any statement about company expectations, beliefs, plans, objectives, assumptions of future events or performance are forward-looking statements. For example, statements concerning 2020 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 may involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future result expressed or implied by such statements.

1:24 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 out shortly before this call, which contains reconciliation to the non-GAAP financial measures presented to their most comparable GAAP results.

2:10 I will now turn the time over to Dwight Egan, CEO of CoDiagnostics. Dwight?

2:17 Hello, everyone, and thank you for joining us on the call. At the beginning of the second quarter, CoDiagnostics received emergency use authorization from the FDA for our Logic Smart COVID-19 test. Since that time, the company has successfully launched an internationally recognized business and brand, with clients in over 50 countries, over 25 U.S. states, and validations of test accuracy from numerous regulatory and reference institutions from around the world, The company has established a durable production and distribution platform designed to continue sales and profitability as our tests have gained widespread acceptance in the market.

3:02 And while the whirlwind pace of activity during the second quarter has taken the company to record revenues leading to 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 of the company's past success, but more importantly, a window on where we are going over the coming months and years. In that regard, I'm 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 activity from our India joint venture, which we are also pleased to announce also achieved profitability in the second quarter.

3:49 In addition to the US FDA, India, and the European community, our COVID-19 test has also been granted clearance in several other large markets, including Mexico, Australia, Colombia, Argentina, South Africa, and others. Authorizations from Anvisa in Brazil and Health Canada are also in process. The Logic Smart COVID-19 test was designed to target the RDRP gene of SARS-CoV-2, which target continues to show 100% coverage for all strains of the virus in the global genetic databases. In order to proactively respond to global concerns about potential genetic drift in viral strains, we have also completed principle design and feasibility for the next iteration of this test to include an additional genetic target to maintain testing specificity and sensitivity. We expect this test to be complete before the end of the current quarter.

4:54 After having achieved significant earnings during the second quarter, Thank you for joining us. Liquid Biopsy for Cancer Detection, West Nile and Eastern and Western Equine Encephalitis for Mosquito Abatement Programs, and Critical Agricultural Genomics.

5:39 Today, I will focus on our activities addressing COVID-19 and the current pandemic. The most significant initiative the company has been addressing is the development of a multiplex test designed to differentiate between COVID-19, Flu A, and Flu B. This test is more appropriately referred to as a panel since it interrogates more than two dozen strains in a single test. Why is this important? Experts expect the US 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 symptoms of the flu, which are very similar to COVID-19 symptoms, they will need to know whether their infection is a routine flu or a potentially deadly case of COVID-19.

6:32 Our tests will make that differentiation. Moreover, our tests will be able to be used in high throughput settings where labs are capable of performing 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 in order to obtain a result. Even if a result can be obtained in a shorter time, the throughput limitations severely constrain the utility of these platforms where wide-scale testing is required. So, while such a closed-system test may have an important role in testing the disease status in a hospital patient bound for surgery in the next few hours, the one-off cartridge does not provide a viable solution to wide-scale testing or surveillance testing applications.

7:30 The company has attracted important clients, such as the 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 handling the most demanding requirements of companies and other organizations that need high volume testing. The company's strategy has been to attract large numbers of CLIA labs throughout the United States in order to obtain a continuous demand for our tests. As a general rule, CLIA labs fill a vital role in the infectious communicable and genetic disease testing landscape with existing clients who rely on the laboratory services for all kinds of daily testing needs.

8:28 These same legacy customers often turn to their existing CLIA lab relationships to obtain 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 self-evident. We provide highly accurate, economical, and open architecture tests that meet the current COVID-19 high throughput needs and also set up a client relationship to sell other tests to these labs, including custom tests using our co-primer platform. It is important to emphasize the significance of the company's development of the upper respiratory flu A, flu B, and COVID-19 panel in relationship to the CLIA lab model.

9:21 Our competitors who market single-use cartridges for upper respiratory diagnostics will now have to contend with CoDiagnostics' new test. Our test will have significant advantages in pricing and high throughput capabilities. It is well known that the upper respiratory panels provided by these other companies constitute a significant percentage of the sales volume of those organizations. Now, for the first time, CoDiagnostics will enter the competitive landscape with a superb product offering with the 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 the world.

10:08 This new test, which we refer to as the ABC test for flu A, flu B, and COVID-19, is one of the most important 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 in addition to social distancing, masks, contact tracing, and other preventative measures. Our expectations also anticipate the adoption of our new ABC test by customers around the globe who will be able to conduct our new test on the same platforms on which they are running our current COVID-19 tests.

11:01 We have made key additions to our scientific team during 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 continue to expand the footprint of our unique patented technology platform across multiple applications. I will now turn the time over to Reid Benson, our Chief Financial Officer, who will take us through the numbers. We will then take questions from our analysts.

11:27 Reid?

11:30 Thank you, Dwight. The revenue comparisons I'll present reflect increases from quarter to quarter rather than a comparison with last year since we had only minimal revenues in 2019 and since we were primarily a development company just beginning to enter into sales. Because of the current pandemic and our ability to respond to the diagnostic needs of the world during the pandemic, the company has been transformed to a sales and manufacturing company. In the second quarter of 2020, total revenue was $24 million, an increase of approximately 15 times the 2020 first quarter revenue. The exponential and sudden growth in revenue brought many challenges and was due almost exclusively to the sales of our Logic Smart COVID-19 test.

12:18 Second quarter gross profit was $15.7 million, or net income per common share of 43 cents a share. representing the gross margin of approximately 64% of revenue. Our profit margin on sales of our tests is approximately 70%, but sales of equipment, which we provided as a convenience to our customers through our established relationships with manufacturers such as LGC BioSearch, had a lower margin and had the effect of lowering overall margins. Our profits are also the result of the operating leverage we enjoyed by being able to employ relatively few employees to generate a significant level of revenue.

13:03 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. 24% represented an increase in salaries and related benefits as we have added three PhDs and six technicians to aid in the completion of our development projects and the manufacturing of tests to help ensure continued profitable operations after the current pandemic. and 10% represented expenses we incurred as we examined the possibility of lyophilization of our test products to more easily ship tests to all of the foreign countries we service.

13:56 And we're in the process of finalizing those contracts. In addition, we 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, which includes approximately $18 million of net proceeds from the sale of common stock and a series of registered direct offerings during the first quarter. Excluding these financing activities, We generated sufficient cash from sales to fund the raw materials and finished goods inventory at the end of the quarter of approximately $10 million and $5.3 million of accounts receivable, and we still had $18.6 million of cash at the end of the quarter.

14:51 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 the strong revenue growth and healthy gross margins, even after the increased operating expenses in the second quarter, driven mainly by the explosive growth we experienced and our desire to prepare for the fall flu season and beyond. With that, we'll accept questions now from our analysts. Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please cut the handset before pressing the numbers to ensure the best sound quality.

15:40 Once again, that is star and then 1 to ask a question. Our first question today comes from Yi Chen from HC Wainwright. Please go ahead with your question.

15:51 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?

16:06 It's approximately equal. The U.S. revenue is probably a little bit more, probably 55 to 60 percent of total revenues.

16:16 Got it. Okay. And could you also give us some color on the recent trend of the volume of tests you shipped in July and August so far?

16:32 The tests that have been actually shipped in July and August so far is probably in the neighborhood of $7 to $8 million. Okay.

16:42 Do you see any slowdown in terms of customer ordering?

16:47 Quite the contrary. I think orders are now speeding up a little bit in response to the acquisition of certain of our new clients and customers.

16:59 Got it. Okay. And regarding the new ABC test panel, do you need to have FDA emergency use authorization before marketing this test panel? And if so, when do you expect to obtain it?

17:16 Yee, this is Dwight. How are you doing? I want to let you know that when we do a test, the development is basically in four different stages. Number one, we do the test design, then we do the co-primer selection, and then we do testing verification, and then finally testing validation. And so after we are through with those four processes, we submit the test to regulatory bodies for approval. That will include a CE marking submission to the European Union and will also include a permissioning from the FDA for an emergency use authorization for that test.

18:08 We would anticipate then, Yi, that the first marketing of that test will be on an international basis. Followed by its introduction into the U.S. market.

18:22 Okay, thank you. And my last question is that the FDA has recently issued the authorization for the first screening test for screening asymptomatic population for COVID-19 infection. I think so far there's only one test that has got the screening on its EUA. So is that something of interest to COVID Diagnostics?

18:54 We're very, very focused on knowing what business we're in. And our business is providing a polymerase chain reaction test that is the current gold standard. There are other tests that are being put on the market to interrogate for antigens, for example. and for antibodies. They all have a role at a certain level, but our particular focus is providing a very highly accurate test. It's very economical. I want to emphasize especially the high throughput nature of our test and our clients. We have brought on some important clients that have the capacity of doing very high throughput testing. and as you try and meet the needs of countless businesses and schools and colleges and universities and sports teams and that are trying to get back to a normalization of their routines, the ability to do high throughput is incredibly important.

20:01 So, what we're focusing on with our flu AB and our COVID test and our current COVID-19 test is servicing clients who require a high degree of throughput. That will continue to be our focus in the near-medium term. There are various strategies that are used to do what we refer to as surveillance testing or what you may be referring to in the context you refer, but it's an environment where whether you're using pooling or you're using scientific random probability sampling of a particular population, we're going to continue to focus on the gold standard of polymerase chain reaction in a high-throughput setting.

20:59 We've done that in numerous states across the United States, and that's really what's driving our revenue. And if you compare the number of tests that are being done by co-diagnostics, and others, especially those that are using closed system one-off cartridges and things. I think we're holding up very, very well in that regard.

21:21 Okay. Thank you very much. Our next question comes from Jason McCarthy from Maxim Group. Please go ahead with your question.

21:32 Hey, guys. Thanks for taking the question. This is Michael Cunewich on the line for Jason. I'd like to see if you could comment on The testing backlog at all, because that's been kind of, you know, an issue faced in the U.S. in general. I know that in some places it can take up to two weeks to get a result back, making it essentially useless. I'd like to see you comment on where the bottleneck's coming from. Is it the reagents, lab capacity, and with co-primers requiring fewer reagents, and with the LogicSmart test being compatible with high throughput, do you think that LogicSmart could offer a potential way to alleviate the bottleneck.

22:15 Michael, you're right on. And, of course, our high-throughput model with the CLIA labs is being applied in that very area. Indeed, we are not familiar in any way with the clients that We provide tests for experiencing those kinds of delays in providing results to their end user customers. Generally speaking, if a test gets to one of our testing laboratories that we supply, they're able to do a turnaround in 24 to 48 hours. You know, in a typical environment, a test can be taken, shipped to the lab, and sometimes by the next evening they have their result or the next day. This is the way we test our own employees at Co-Diagnostics.

23:15 Our lab employees are tested every week, our accounting and other staff members are tested every other week and if they take their test on Monday morning, oftentimes by Tuesday evening or the next morning they have their result. So our particular The structure of co-primers and the nature of our tests and high throughput nature of them facilitates getting results quickly. And we're very excited about the kinds of laboratories in the United States that are adopting our tests to do this kind of high throughput volume. Clinical Reference Lab is one of the ones that we cite.

24:02 They have given us permission to use their name in that regard. And they went through numerous other different tests as they ultimately chose the co-diagnostic solution for what they wanted to do. That is a very unique test in all of the tests that are currently authorized under emergency use authorization. It's a saliva-based test. It's self-administered. Very easy to use and very quick and rapid response. And this is a company that has the capacity to do an enormous amount of tests. And they're properly amped up to do that using equipment from places like LGC, such as the Occupure. And there are other labs in the country that have also scaled up for quantal units of tests utilizing our product.

24:55 That's where we're going to be concentrating over the next several months and into next year.

25:02 All right. Thank you very much. And then I have one more. I'd like to see if you could kind of break out that 50 million year-to-date number, how much of that goes towards the COSERA sales versus actual co-diagnostics, because I just The number of tests that we have received orders for, as we mentioned in the press release, are approaching 50 million year-to-date. And of that...

25:48 About 44.5 million are from the outside of India, and that would include the United States and other places of the world. And about 4.5 million come from the Indian market. So our Coursera joint venture has kicked in very nicely, as you know, India is the third largest hotspot for COVID-19 in the world. So our timing there was fortunate in terms of getting a lab that was able to manufacture and get it up and running so that we could get government approval and begin to market those tests there.

26:33 So that's in full swing now and that's basically the breakdown. So when you look at that approximately $50 million, a good way to look at that is to Take the revenue that we generated in the first quarter and then the revenue that we reported in the second quarter, and then do a calculation where you take the roughly 50 million tests that have been ordered, take out those 50 million dollars in tests that you take out the first and second quarter results, and that shows you what kind of a backlog we're currently filling with tests. And as you know, we have a very robust ability to produce tests, both in our laboratory and manufacturing facility in Salt Lake City, in what we're doing in India, and we also have engaged ProMega in Madison, Wisconsin.

27:32 So we have an ability to supply tests very quickly to customers that call. within a few days generally, sometimes the next day shipments on request. So I hope that gives you enough metrics to kind of figure out where we look like and how this $50 million worth of test flows into the overall expectation of what we're going to be doing in Q3 particularly and onward into Q4.

28:03 Definitely helpful. And if you don't mind, I'd like to just do a quick follow-up on that. Where do you expect your production capacity? Where does it sit now, and then how are you expecting that to ramp?

28:16 Well, our production capacity is still very robust. We have previously cited our ability to manufacture in the neighborhood of 3 million tests a week if it were necessary. We end up, as it turns out, doing our manufacturing work Thank you very much. They need a response very quickly, and sometimes they almost need it the next day if we can get an order out on the same day that we receive it.

29:10 So we have good inventory of tests. As we had previously announced, we ordered components early on for tens of millions of tests, and so we're in very good shape with inventory and very good shape with our ability to fulfill a test order.

29:30 Thank you very much. And our next question comes from Theodore O'Neill from Richfield Hills Research. Please go ahead with your question.

29:40 Thank you. In your queue on page 18, there's a nice table here that talks about the market opportunity for molecular diagnostic testing for tuberculosis, hepatitis, etc., But there's nothing here for COVID-19. Do you have a feeling about what the annual market for diagnostic tests is globally for COVID-19?

30:08 That's an excellent question, Theo, and it's nice to hear from you. I'll tell you what, I don't have an off-the-cuff answer for exactly how big the worldwide market is going to be for COVID-19, but I'll tell you what we're focused on at the moment. We're focused on our The utilization of our COVID-19 test in conjunction with our ABC test, which is the upper respiratory flu A, flu B, and COVID-19 panel to address what's going on worldwide and particularly here in the United States. As an example, the United States will experience one billion colds this coming year, and they'll experience you know every child gets six to ten colds per year so what's going to happen is that somebody's going to be in school and they're going to have a runny nose and the question is going to immediately arise is that COVID or is that just the flu is it just a cold which is why we have spent so much time and effort in getting this ABC test ready.

31:16 I think the uh I want to make you aware and everybody on the call aware that this is a panel. This is an upper respiratory panel. It's the kind of test that generates a great deal of the revenue for some of the companies with which we're going to now compete. The upper respiratory panel is a high percentage in many cases of the total revenue for those companies. And now, for the first time, we're going to be in that landscape. and we're not only going to be in that landscape with a high quality and economical test, we're going to be in that landscape with a high volume, high throughput test that can be used on the same kinds of equipment that are currently running our COVID-19 tests. So, you know, we're going to be concentrating on trying to generate business from those billion people that are going to have a cold in the United States over the next year. as you know the Rockefeller Foundation has suggested that we're going to have a hundred million cases of flu descend upon us in short order here in just the United States and those are the kinds of situations that we're playing to as we enlist large CLIA labs and mid-size and smaller CLIA labs to take care of their clientele with the need to differentiate between cold and COVID-19.

32:45 Okay. Well, that leads into my next question is what about the working capital requirements to meet that demand?

32:57 I'm going to let Reed answer that question.

32:59 Right. I think we're well positioned to handle any working capital needs as we go. We have been following the policy of having Money paid up front for our tasks so that we can fund all of our operations through the cash flow from our sales. And that has given us the opportunity to not only pay for all of the expansion that we've done, but has allowed us to accumulate some cash. So from a working capital standpoint, I think we're well positioned to be able to satisfy any level of sales that might come to us.

33:42 Okay, thanks very much. And ladies and gentlemen, at this time, we've reached the end of today's question and answer session. I'd like to turn the comments call back over to Dwight Egan for any closing remarks.

33:59 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 or so for the company since we received an FDA UEA approval. We have a great test. We're going to have a great ABC test. And we're very excited about all of the different aspects of our test in terms of its accuracy, in terms of sensitivity and specificity. in terms of the economical nature of it and its ability to play on an open architecture and particularly in the high throughput area that we think is going to be so critical.

34:45 And so it's going to be a busy second half of the year. We've had a very good start in the third quarter. Now that we're halfway through the third quarter, we're going to be very busy filling orders on the Approaching $50 million worth of tests that include our year-to-date activity. We've got a lot of orders to send out. We'll be getting a lot of additional orders, which we're going to be excited to show the strength of the company and our ability to meet those types of demands. So thanks again for joining us on the call and for your participation and support as shareholders. That concludes my remarks.

35:33 And ladies and gentlemen, at this time with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.