Co-Diagnostics, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Mar 2022

[Operator:]

Good day, and welcome to the Co-Diagnostics, Inc. Fourth Quarter and Full Year 2021 Earnings 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.

[Andrew Benson:]

Thank you. I am 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 or future events or performance are forward-looking statements. For example, statements concerning 2021 financial and 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 result 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 may contain reconciliations to the non-GAAP financial measures presented to the most comparable GAAP results. At this time, I would like to turn the call over to Co-Diagnostics’ Chief Executive Officer, Dwight Egan. Dwight?

[Dwight Egan:]

Thank you, Andrew, and thank you all for joining us. On this call, we will provide an overview of our results for the quarter and for the year, updates on key financial performance metrics and discuss progress against our strategic initiatives, after we will open the line for questions. Our performance in the fourth quarter contributed to what was an impressive year for Co-Diagnostics, both from an operations and execution perspective. The dedication of our team, along with our innovative product portfolio drove strong sales and gross margin performance. We remain committed to improving the health of our balance sheet, which remains strong, and has allowed us to opportunistically invest in growth opportunities that will drive future shareholder value. Most recently, we completed the acquisition of Idaho Molecular, Inc. and Advanced Conceptions, Inc., providing Co-Diagnostics with all existing and future assets and intellectual property related to the Company’s proprietary and innovative at-home point-of-care diagnostic device. The acquisition, first announced on December 22, 2021, is expected to streamline the commercialization of our Co-Dx YourTest PCR device as it nears completion. The device has been designed to accommodate multiplex assays as the Company expands its future suite of products to include additional respiratory, STI and other infectious diseases, utilizing our patented CoPrimer technology. We strongly believe this technology will enable us to reach a broader and more diverse universe of customers. We remain committed to investing in the platform and recently welcomed two new team members that will further oversee the products development, Dr. Kirk Riri and Dr. Carl Wittwer, pioneers of rapid and real-time PCR, and key personnel in the platform’s development to date were named President of the wholly owned subsidiary and Chairman of the company’s Scientific Advisory Board, respectively. The Chief Science Officer of Co-Diagnostics’ newly acquired subsidiary is Mark Poritz, Ph.D., a Harvard University and UC San Francisco Educated molecular biologist, with more than 30 years of experience in the application of PCR and related methods to gene cloning, drug discovery, infectious disease diagnostics and aptamer selection. While at BioFire Diagnostics, Dr. Poritz led the molecular biology development for the FilmArray IVD platform. Dr. Poritz has served as a reviewer for more than 30 different NIH/NIAID study sections, focusing on infectious disease diagnostics. We are also pleased with the recent addition of three new members of our Scientific Advisory Board. Starting with Dr. Anne Wyllie, a research scientist of epidemiology at Yale School of Public Health. Dr. Wyllie validated and optimized saliva for SARS-CoV-2 detection and developed SalivaDirect, a simple, scalable and importantly, cost-effective method to help alleviate SARS-CoV-2 testing demand. Dr. Karen C. Carroll, M.D, Professor of Pathology and Director of the Division of Medical Microbiology at Johns Hopkins University School of Medicine joins us, contributing significant knowledge and experience in medical microbiology and infectious diseases. Finally, we welcome Noriko Kusukawa, Ph.D. and former ARUP Laboratories Vice President of Innovation and Strategic Investments. We are excited to welcome these impressive individuals to the Scientific Advisory Board, and we’re confident that their knowledge, guidance and expertise will help us achieve further growth and profitability. As we move forward with our new team, the strategic vision of Co-Diagnostics is built on the following 4 pillars

[Brian Brown:]

Thanks, Dwight. And thank you, everyone, for joining today’s call. As Dwight mentioned, we made significant progress during fiscal 2021. I’m encouraged with the progress we’ve made during the year, both from an operational and financial standpoint and remain excited for the future. For fiscal year 2021, revenue increased to $97.9 million as compared to $74.6 million for fiscal 2020. The increase in revenue on a year-over-year basis was primarily driven by increased global sales of our Logix Smart COVID-19 tests. Gross profit for the year increased to $86.3 million compared to $58.0 million in fiscal 2020. Our gross margin percentage of 88.2% for the year increased from 77.7% in fiscal 2020, reflecting continued improvement in our manufacturing processes and a shift in our product mix as compared to the prior year. Record revenue and gross profit performance, driven by increased sales of our Logix Smart COVID-19 tests, enabled us to achieve significant year-over-year growth. Total operating expenses for the 12 months ended December 31, 2021, were $40.2 million, an increase of $23.9 million over the $16.3 million in fiscal 2020. The year-over-year change was driven primarily by an $11.8 million increase in our research and development expenses over the prior year period, most of which can be attributed to the investment in our Co-Dx YourTest PCR device. Sales and marketing expenses for the year also increased to $13.4 million from $4.7 million in the prior year. The year-over-year change was primarily driven by increased third-party commissions on higher international sales. Additionally, we continue to invest in our people and processes, including our sales and marketing team and marketing mediums. For the full year, income before taxes increased 7.3% and to $45.6 million as compared to $42.5 million achieved in the prior year same period. Income tax expense for the year was $9.0 million, representing an effective tax rate of 19.7%. Our effective tax rate will generally differ from the U.S. federal statutory rate of 21.0% due to state taxes, permanent items and discrete items. Income tax expense for fiscal year 2020 was less than $100,000, resulting from the release of our valuation allowance in Q3 of 2020, offset by our Q4 2020 tax expense. Full year net income for 2021 was $36.7 million or $1.23 per fully diluted share compared to net income of $42.5 million or $1.52 per fully diluted share in the prior year. The decrease year-over-year was primarily the result of increased income tax expense compared to the prior year. Now, turning to a new metric that we will provide on a quarterly basis. For the full year 2021, and for each quarter moving forward, we will provide adjusted EBITDA as a key financial metric. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, with an add back for stock-based compensation and any material nonrecurring expenses. This metric will be beneficial for our shareholders as it more accurately represents our operating results for each respective period. For the year ended December 31, 2021, we generated $52.1 million of adjusted EBITDA, an increase of 14.9% compared to adjusted EBITDA of $45.3 million in the prior year. We remain committed to improving the health and flexibility of our balance sheet. Our diligent approach during fiscal 2021 allowed us to opportunistically close on two acquisitions during the fourth quarter, both of which were key to the continued development and future manufacturing of our Co-Dx YourTest PCR device. Cash, cash equivalents and marketable securities increased to $89.9 million at December 31, 2021 from $47.3 million at December 31, 2020, representing an increase of $42.6 million or 89.9%. Our highly liquid no-debt balance sheet enables us to execute on strategic growth plan. We continue to invest time and money into our people, processes, and research and development as we look to scale and expand to new verticals to solidify our future. Net cash provided by operating activities for the year ended December 31, 2021, was $41.1 million compared to operating cash flows of $28.2 million in fiscal 2020. The meaningful increase in cash flow from operations is a reflection of the efficiencies we’ve gained as well as the process enhancements we continue to make throughout the organization. Just over a week ago, we announced the authorization of a $30 million share repurchase program. We believe this element of our capital allocation strategy is aligned with our commitment to return value to our shareholders, and also reflects confidence in our balance sheet and strong cash flow generation. Additionally, we believe that this authorization provides us with an opportunity to strategically allocate capital in a way that demonstrates our positive outlook for the future of Co-Diagnostics. Our team’s dedication to the success of our business was on display during the year. Our strong performance would not be possible if it were not for their many contributions. As we look to the balance of fiscal 2022, we have established the right operational and scientific teams that will support our future growth. Turning now to our guidance. During the first quarter of 2022, we have experienced strong demand for our diagnostic products. These demand trends provide us with visibility and confidence in the near term and enables us to provide a financial outlook for the first quarter ended March 31, 2022. Our first quarter guidance assumes the following

[Dwight Egan:]

Thank you, Brian. This concludes our prepared remarks. Operator, we will now take questions from our analysts.

[Operator:]

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

[Yi Chen:]

Thank you for taking my questions. The first question is regarding the repurchase program. Could you share with us how many shares have already been repurchased? And also, do you think it would be better to save the cash for additional acquisition opportunities? Thank you.

[Brian Brown:]

Actually, Dwight, if you don’t mind, I can answer this question.

[Dwight Egan:]

Go ahead, Brian.

[Brian Brown:]

Yes. We haven’t purchased any shares back because we’re in a blackout. So, we certainly can’t do that during a blackout. And so that’s answer to number one. Number two is, we’re looking at both, the need to commercialize the Co-Dx YourTest PCR device in addition to share buybacks. So, we’re managing both of those needs simultaneously. And so, we’ve done our analysis on our end and know what makes the most sense for us, both -- on both things. We know that it’s going to require cash to be able to commercialize the product. So, we’re making sure we have that still with us so we can make that happen because that’s our number one goal.

[Yi Chen:]

Got it. And could you comment on the -- any potential new initiatives outside the infections -- infectious disease space, such as oncology diagnostics?

[Dwight Egan:]

Thank you for joining the call, and it’s nice to hear from you again. We’re very enthused about several different initiatives other than the COVID and infectious disease opportunity. But, let me touch a little bit more on the infectious disease, because I mentioned the sexually transmitted infections or STI, which is a big area that we’ve been working on and with some of our clinical partners. And there are about 1 million STIs every day in the world. And so, this is another huge market that we think we can play an important role in. And also, in India, we have had a dozen of our tests approved by the CDSCO, which is their version of the FDA. And so, we’ve done a lot of work preparing India. COVID has given us an opportunity to do a tremendous expansion. And we’ve spent some money there to open up the number of labs, which now are at about 250 within the country. And this is an area where we expect it to be one of the largest healthcare markets in the world. COVID gave us an opportunity to garner market share at a significant rate. And now that we have the opportunity to go forward with a whole bunch of new tests, about a dozen in all, that significantly expand the market opportunity there. With respect to liquid biopsy, as you know, we have been doing research, significant research in that space for some time now. This is an area that is one of the most exciting areas in human healthcare. And we have done significant work, learned a lot of things and prepared a 6 different EGFR panel test that we expect we’ll be able to move towards commercialization in the future. This is rocket science in molecular biology. So, it’s not something that will be looked at in anything but a very serious context in terms of how ready we are to enter into that market and provide a product. I think, like in infectious diseases, our ability to service the liquid biopsy market will center mostly in the areas of high-burden developing countries. It will also have appeal in the United States, but we will be concentrating not on the diagnostic side of it, but on the monitoring side and in looking at people that don’t know they have cancer, don’t know they have symptoms. So, it’s something that goes ahead of the diagnostic where we can detect a way ahead of time, the presence of these mutations in a person’s blood. That’s a significant area for us. We’ve done a great deal of research on it, and we look forward to commercializing a product in the future. We’ve also done very important work in other areas, including what we’re doing with Bayer Crop Services and LGC. We’re happy that, recently, the Bayer Crop Services has begun offering products utilizing our CoPrimers in certain places of the world, and that’s the combination of a great deal of research and development and having them look at our product and our technology and being able to embrace it. So, we’re excited about that. Of course, we’ve continued to make strides in our mosquito abatement program. We continue to sign counties in certain places in the United States, and we think this is going to be an ongoing and growing product. I’d just add that the mosquito is the most deadly creature on the planet. And it’s one of the areas that we have developed a specific product with some real good results and continue to sell new counties on this program. I think, finally, with respect to what we’re developing, I mentioned what we’re doing in dentistry, for example, done a lot of significant research there. And some of the things that we’re doing are in preparation for not only what we’re doing with our centralized lab segment, but that we expect to port over to the point-of-care and at-home device. We think that some of these products like that we’re doing for dentistry and veterinary and even in agriculture we’ll have application in both of those two different business segments, that is centralized lab business segment and the point-of-care and at-home product.

[Operator:]

Our next question comes from Jim Sidoti with Sidoti & Company. Please go ahead.

[Jim Sidoti:]

Good afternoon. Thanks for taking the questions. Can you give us a little more detail on milestones you have left towards the YourTest system?

[Dwight Egan:]

The new system is -- I would say, to characterize it as that we’re on the precipice of beginning our clinical trials. As I mentioned in my prepared remarks, our focus has been to make sure that we have a product that meets the highest performance levels that we can possibly obtain before we put it into the market. And so, we’re in the process of tweaking certain elements of its performance so that when we release it, we have something that is really superior. And we haven’t been trying to hit a particular deadline as much as we’ve been trying to optimize the breadth of the product. As I mentioned in my prepared remarks, originally, we had contemplated this being a saliva-direct product. But in our work with the FDA, we decided we would expand it to include, not only the saliva-direct, but also the nasal swabs, and swabs, of course, that can be used in other parts of the body, depending on what it is you’re trying to test. So, it took some -- made a little bit of a delay, but made -- so when we do have an authorization, we anticipate it to be for a much broader market and a lot less sort of fits and starts as we have to continue to develop further iterations of the device. We’re not trying to game the next Omicron surge. We have a very solid product line to deal with that in the centralized lab environment. We, of course, want to put this point-of-care and at-home device out there as soon as we possibly can. And it is the single biggest focus in the Company. When we went from our parent company employment base of about 50 people at the end of the year through these two acquisitions, we now have in the neighborhood of 125 people. So, we have a lot of folks that are working on this particular project, a lot of great engineers and PhDs that are really super focused on this. So, we don’t anticipate it being an extraordinary long period of time until we’re able to commence our clinical trial and then make a submission. But when we do that, we expect it to be a product that is really worthy of notice in its performance and in the breadth of the market that it’s going to be able to serve.

[Jim Sidoti:]

So, is it fair to say the delay is something you measure in months and not in years?

[Dwight Egan:]

That’s certainly correct. Yes.

[Jim Sidoti:]

And then on the fourth quarter performance. The revenue was down, but gross margins jumped up from around 84% last -- or in 2020, it looks like it was around 88% in 2021. What happened there?

[Brian Brown:]

Yes. Jim, that’s a couple of things. One of the biggest things is the mix. Last year, in 2020, we would have sold a significantly higher number of devices that had a much lower margin than the tests. And so it was just -- the biggest thing is the mix between -- one of the biggest things is the mix between what we are selling tests versus devices. Most of what we sold this year in Q4 would have been tests, very little in devices. So, it’s higher-margin product. The other piece of it is just enhancing the production process and becoming more efficient. Those are, I think, the two key things to think about.

[Jim Sidoti:]

All right. And seeing as we only have about a week left in the quarter, is it fair to say that you’re fairly confident in the first quarter revenue guidance?

[Brian Brown:]

I guess, the question for you, Jim, is we probably wouldn’t put it out there if we weren’t confident in it. So, I think, yes, we’ve got about a week left in the quarter. We’re confident in the numbers we put out there for guidance.

[Operator:]

Our next question comes from Theodore O’Neill with Litchfield Hills Research.

[Theodore O’Neill:]

Thanks very much. And congratulations on results for the year. So, first question is a follow-up on margins. Your 2022 margins improved year-over-year, partly because of mix, more test reagents than equipment. So, can you talk about the margin impact as you start to sell the Co-Dx platform and the reagents for it?

[Brian Brown:]

Yes. We don’t -- just in terms of margins for the new products, we don’t expect that the total margins over time are going to be much different than the margins we have currently. They’re clearly -- initially, if you commercialize a product, clearly, one piece of that product is probably going to be a little lower margin than the other. And until we get some -- a number of months behind us, I think, our margins will suffer a bit, but they’ll come back to where they currently are, maybe a hair lower than that, I think. There’s certainly going to be a little bit of a drag when it comes to everyone knows selling a device, the margins aren’t typically as high as just as we experienced with the devices we sell for centralized labs, the margins aren’t as high as they are for the tests. So, there’s going to be a mix issue also as we commercialize that, and that will have an impact on margin initially.

[Theodore O’Neill:]

Okay. Makes sense. And if the U.S. government does not reauthorize any additional money for COVID testing, would this have an impact on your business?

[Dwight Egan:]

I think, we’d have to say that the free money from the government certainly would enhance sales. So, I think it would have an impact on us or anybody else that’s in the COVID space, which is the reason why we have had the foresight 1.5 years ago to say, what happens after COVID traverses from a pandemic to an endemic phase. Molecular Diagnostics was a big business before COVID. It will continue to be a big business after COVID. The question becomes what kind of platform will win in a post-COVID environment that is a post-pandemic environment. And we believe, and I think other people believe such as Dr. Scott Gottlieb that this paradigm shift in the FDA allowing the at-home testing is going to make it so these other endemic diseases will also have an opportunity, as Dr. Gottlieb says that it opens up a whole new range of home testing for a whole -- a big range of products of different pathogens. So, I think it’s just important to realize that we had the foresight more than a year and a half ago to recognize that and to begin the development of a product so that when we came through that whole period, our product offering would have applicability to lots of other diseases. Keep in mind that COVID is so pernicious in terms of its lethality that these other things like the flu and RSV, even strep, for example, they will need to be tested along with COVID. COVID will have to be a part of the mix of what people are tested for. And in that regard, the multiplexing capability of our device will be critical in making it so people can test for a number of different diseases for a very small price at home or at the point-of-care. And that’s all part of the strategy going forward. So, I think if you were to look before COVID and say, what would have been the best device to have on the market during COVID had we been able to do this two years ago, that would, of course, been awesome. But going forward, it is clearly the best solution and going to be very powerful in our belief.

[Operator:]

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

[Dwight Egan:]

Thank you, operator, and thanks to all of you for participating on the call. We look forward to an exciting 2022 as we launch the anticipated commercialization of our new Co-Dx at-home, point-of-care platform. It’s a PCR gold standard platform. And we’re also very excited about the continued progress in our other significant initiatives. And we look forward to visiting with all of you on our next call. Good day.

[Operator:]

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