Co-Diagnostics, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[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:]

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 to call with management's prepared remarks and then open up the call to questions to 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.

[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 year, updates on key financial performance metrics and the discussion of progress and future strategy. Then we will take questions from our analysts. Before we turn to the results 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 growth we anticipate in the future, it was critical we expanded 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 represent 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. And although COVID-19 test sales may not be as robust in 2020, as in 2020, we anticipate demand for our portfolio of products to continue in 2021.

[Brian Brown:]

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 improve product mix, as compared to the prior year period. For the year, revenue increase 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 we 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 from sales of test kits. Total operating expenses for the quarter, inclusive of corporate, general and administrative, sales and marketing, research and development and depreciation, amortization increased $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 as compared to 2020, as we invest in our people and expand our technology through additional research and development. We had a great 2020 which has afforded us the opportunity to invest back in the company and provide a longer runway of 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.

[Dwight Egan:]

Thanks, Brian. 2020 was truly an inflection point for Co-Diagnostics for any number of reasons. And I would like to thank our valued employees management, vendors and distributors for their hard work and dedication and 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 that we've had 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. But 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 on in the pandemic, followed by several more products in the months to follow. 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. But 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 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.

[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:]

Thank you for taking my question and congratulations for a solid quarter. My first question is, as COVID-19 vaccines gets 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 any other elements that Co-Diagnostics is planning to ensure continuous top line growth in 2021 and 2022?

[Dwight Egan:]

Thank you for the question, Yi. The first thing I would like to emphasize is that we believe that 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 be transitioning 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 from that into a world where people have to get - be able 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, et cetera. And it's with that in mind that we have developed the Eikon product to meet that need. And, so first and foremost, we think there'll be a major transition in terms of how and where testing is going to be done. And we think there will still be a great deal of testing, as the disease traverses 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. And the most probably exciting one of those is in 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. And we believe that our CoPrimer technology is uniquely positioned to be able to provide those types of detections through the PCR process, especially as it relates to the monitoring after somebody has been diagnosed. And the screening before they have had a cancer diagnostic, which would make it so they could - maybe get a jump on the fact that they could detect cancer, perhaps when they have only maybe 12 million cells in their body that have these mutations, as opposed to the 100 billions of cells that requires to have even the smallest amount of a tumor that could be picked up on a scan. So we're very excited about that particular vertical. As you know, we're also doing important work in the agricultural area, with companies like, like Bayer and LGC. Bayer purchased Monsanto some time ago, and we're doing important work with them, as it relates to agriculture, which is a vertical in which we have to double the food supply in less than 30 years from now. And so we think this is also a good place to apply our technology. And we're excited about that vertical. And keep in mind, COVID is just one of the tests that we provide. We also have a solid menu of tests for tuberculosis, a solid menu of tests, including things like Hepatitis B, and C, human papillomavirus, malaria and chikungunya, dengue, and Zika. So we're going to be selling now to a worldwide audience through more than 50 distributors in countries all over the world, where we have established a branding recognition, and people who know our product and trust us. And now we're going to be able to sell our broader array of products into those markets, like I’ve mentioned. So we have a number of tests that have already been through regulatory approval either at the European Union or through the CDSCO in India. And we're going to continue to pursue that aggressively as time goes on here.

[Yi Chen:]

Got it. So with respect to the new PCR point-of-care and at-homes testing platform, do you expect it to enter the market in early 2022? And 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:]

Yeah. So we certainly are hopeful that by early 2022, that we can introduce this product into the market. We're going to introduce it as soon as we can possibly do so. We expect to be able to present this for submission to regulatory authorities both here and abroad in the in the second half of 2021. We believe the addressable market is really gigantic. We're talking about in the neighborhood of 132,000 schools just in the US, 7.7 million businesses, again, just in the US, well over a million people are in skilled nursing facilities that are elderly, that needs to be addressed. We have more than 56 million people that play basketball in the United States. We have 5.6 million buildings, they have their wastewater tested for the presence of COVID or new strains. And of course, add to that 6100 hospitals and about 230,000 physician offices, and 186,000 dental offices and a whopping 128 million residential locations in the United States alone. So the margin for this is truly enormous. The device that we're talking about is something that will be very affordable. We anticipate - and this is of course subject to change, but we anticipate a pricing of the of the box that's associated with this PCR unit to be in the neighborhood of about $300, with test costing between $15 and $20. And these tests, again, are lyophilized, they would be able to be purchased at a drug store, and have shelf life in a person's medical - medicine cabinet or in a business location for a long time. And imagine what happens in India, where you have, you know, perhaps what will become one of the largest healthcare markets in the world, where you have thousands and thousands of labs that have no PCR capability to test things like tuberculosis, where they lose thousand people a day to tuberculosis death, because 400 million people carry latent TB in that country. This type of product allows the availability of our testing to really go to town in terms of making labs out of places before they didn't have access to this type of technology and I encourage you to remember that this is real time PCR testing. The thing that makes this product unique is not so much that it's cheap and fast, you can buy cheap and fast test now, you just can't buy cheap and fast tests that are also accurate. But now that we have the whole trifecta of the value proposition intact in this device, we're going to be able to offer this in a way that has not been offered before in the marketplace. And we - you know, we didn't do this. This isn't something we just dreamed up recently, this is something we've been working on with the chemistry and such for much of the last year. And when we got to the point where our chemistry was ready to go, we engaged some of the greatest scientific minds in the world. And I really mean that, these are the top scientists in the world that have to – that know what to do with PCR, real time PCR and even extreme PCR. So that's why we're able to develop a product that gives cheap, fast and accurate results all in a single package. The ability to do saliva and swab samples without extraction, combined with these other technologies that we've harvested are what give life to this new product. We think it is actually going to revolutionize what's going on around the world in terms of testing.

[Yi Chen:]

Got it. Thank you.

[Operator:]

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

[Unidentified Analyst:]

Hey, guys. This is Michael on the line for Jason McCarthy. Thanks for taking the question. So I wanted to just ask about, you know what your thoughts are on COVID testing for this current year? You did 75 million this past year, how that was kind of tracking with the overall testing? Could you provide a bit more granularity on 2021? And then I also wanted to clarify, you said that you're expecting 20 to 20.5 million for the first quarter?

[Dwight Egan:]

We said that we were expecting 19 to 20.5 million in sales for the first quarter. And so let me say that with respect to our viewpoint on COVID testing, you know, it's a commonly held viewpoint and promulgated by mainstream media and others that, you know, with widespread vaccinations, that the expectation is that the need for COVID testing will attenuate. We think that, yes, we're not going to be in a pandemic phase forever. But we believe that a widespread and aggressive COVID-19 testing will be with us for a long time, it's just going to change and how it's done. As we've mentioned before, on this call, it's going to traverse from the parking lot into an individual's bathroom counter, or into a business or school, and such. So we believe that, you know, there's going to be a lot of testing and - but our technology is well-suited to making it available in these other at-home, and in point-of-care venues. Now, with respect to - you know, our current experience and what's going on in our world, because we're not the same as a lot of these other companies out there. Our distribution base is worldwide. We service more than 50 countries with this product, and have customers in virtually all of the states of the US. So we're not like a CLIA lab that has one or two different locations in the country where we provide tests, where we're relying on so government contract to provide us with these grocery store parking lot type testing environments. We are distributing through multiple distributors around the world, and they don't just need COVID, they need other things. But even with respect to COVID, that is a market that still is widely moving ahead very aggressively. As you may well know, there is no vaccination yet available for any children. And there are many places in the world where people will not have access to a vaccination until late next year as predicted. So, you know, because we sell a large percentage of our products to an overseas market, I think we have some installation from the attenuation of COVID testing that other companies may experience. And indeed, our current pipeline would demonstrate that we have a strong pipeline of forthcoming deliveries for COVID through, you know, the second quarter, and I don't have a lot of optics, you know, beyond mid-year, because people just don't order out that far in advance. But certainly, as far as we have optics, the optics are good in terms of the demand for our products. And I would also add that because we are doing PCR testing, we're also not likely to experience the same kind of attenuation that a company might experience if their primary products revolved around either antibody or antigen tests, which have, you know, severe limitations to begin with. And when you put them on top of a vaccinated person, it's kind of adding confusion to the already existing confusion. Our tests are real time gold-standard PCR tests, and we believe that's where this is going to migrate. And I think you'll find other experts agree.

[Unidentified Analyst:]

Thank you. Could you break down a little bit, how much of your sales are US focused versus international, at least for you know, the data we have so far?

[Dwight Egan:]

Yeah. Brian do you want…

[Brian Brown:]

Yeah, absolutely. So we just filed a case. So it's going to be - the date is also going to be in there. For 2020, approximately 60% of our sales were in the US and 40% was outside the US.

[Unidentified Analyst:]

Thank you. And then I have – go ahead.

[Dwight Egan:]

I was just going to say, if you're looking at a model, you might, as this year goes by, you could even see potential of that inverting a bit, so that you know, you go to a 60-40 mix in the other direction, foreign versus domestic. Go ahead.

[Unidentified Analyst:]

Yeah, so I wanted to ask a bit more about the - the properties of your rapid point-of-care device, how does that look in terms of - you know, time to get a result and throughput, because obviously, if you have a box in your home, will get - only being able to do one test every, let's say 15 minutes works fine for you. But if you're doing something like at an airport where people are waiting to get in, you might need higher throughput, so they need multiple devices to run in parallel, could you kind of help me understand that a little bit more?

[Dwight Egan:]

Yes. And certainly there'll be places like hotels and at airports and things where they may want to have a number of these devices. But indeed, this device is a one-off test device, so that - you know, it's a single person, it does not involve a test cartridge, per se, it involves a collection mechanism to get the saliva from the patient. The patient basically expectorates or spits into the device. And that device is then inserted into the little box, which is about a 4.5 by 4.5 inch cube, you close the lid. And then the test begins at that point. All of the results of the test are manifest on a cell phone, on smartphone. So the person can start the test, go about their work, at their office or in their home. And about 30 minutes later is when they'll see the results of the test, it will show that the virus is either detected or not detected. And then, of course, into the cloud, they'll be able to notify any kind of regulatory requirements in terms of state health departments or others and it could also give them a passport if it's recognized as such to board a plane or to get on a cruise ship or to go to a concert venue and so on because it will be a real time PCR test and it will be as date stamped and such as to when it was achieved. And they can do it frequently because it doesn't cost a lot. These are not tests that costs 100 or more dollars to do, they'll be test that they can purchase for, say $15 to $20.

[Unidentified Analyst:]

All right. Thank you very much.

[Operator:]

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

[Theodore O'Neill:]

Thank you. You talked in the past about how - when the business started ramping up, you didn't have the resources to evaluate whether customers would actually end up paying their bills or not. So you went with, you know, customers that more or less paid upfront. And I am wondering, in light of the large increase in selling and marketing expense in the quarter, do you have those resources now? And then more broadly, could you talk about the increase in that category?

[Dwight Egan:]

Thank you for the question, Theodore. Let me just say that, again, because we had such a heavy mix, to begin with in foreign customers. And remember, Co-Diagnostics was the very first US based company to have a test approved by the European Union with a CE Mark. So while the United States was still trying to figure out what they were doing with their borders, and everything else, we began selling tests overseas, because we received clearance there in late February of 2020. And it was April 3rd of last year that we received our clearance for the EUA in the United States. So because we were dealing with a bunch of foreign entities, and you know, we didn't know them. And it was very difficult to check, credit or to know whether somebody was actually viable. And because there was such a fury of people wanting tests and ordering tests, I mean, literally, our sales guys would go to lunch, and they'd come back, and there could be hundreds of inquiries over email of places all over the world. So sort of the only way we had to really verify who we were dealing with, and whether they could actually pay us was to have them pay in advance or substantial amounts of money down so that we knew that they were not impecunious. And that we could rely on them paying their bills. And I think if you look at our 10-Q's, in case all through the periods, you'll notice that we've done a very good job of managing our receivables. And the people, in fact, pay us and we are oftentimes dealing with very large purchase orders from overseas customers. You may notice that our – some of our biggest other countries, besides the US are places like Mexico or the Middle East. And so, you know, billing people upfront, making sure that we have their wire in our account before we shipped millions of dollars worth a test was one of the ways that we assured ourselves of having - you know, not having a big problem with receivables as time went on. And I'm just really pleased to say that that has been very well managed by our accounting department and accounts receivable. We're very proud of that record. So yeah, maybe we could have sold more tests if were willing to take the risk on people that we didn't know or couldn't verify. But we were very careful that way. And it's just one of the ways we build our business. Now in the meantime, we've continued to accumulate cash on a monthly basis and continue to do so now. And so, you know, we're at a much different position than we were earlier on in terms of our cash position. But I really think that our investing public ought to look at that, not as a way to make it so we could be more reckless with what kind of client we accepted, but rather that we will be able to execute on our plans for our icon initiative, in terms of this device, and getting it to regulatory and getting it out and into the market. And I might add in that connection, that you know, we expect to, you know, expend some significant money in putting this product on the market. As I mentioned, we have engaged the top minds in the world, as it relates to real time PCR to make such a device that will do what we're trying to do here. And so we're also looking at other ways to partner this in terms of branding and manufacturing, and commercialization. So it will be letting the public know as these types of developments mature. But it is a - it's an incredibly heavy-duty undertaken by the company. It is consuming a great deal of our resource internally and what we're doing from our scientific staff and everything else. So it is a very important and main, you know, sort of long suit for the company at this point.

[Theodore O'Neill:]

Can you talk more broadly about why sales and marketing went up so much quarter - from third quarter to fourth quarter?

[Dwight Egan:]

You want to take Brian?

[Brian Brown:]

I can, yeah. I mean, really, it's supporting the business. To sell product, it cost money to sell product and there is a bit of marketing and things that we have to do to be able to sell products. We've also taken the opportunity now to start to build our teams here and grow and develop those operational teams to be able to support the growth that we have. I think over the past year, because it moves so quickly, we didn't have that opportunity. So now we have that opportunity. So we will see, you know, as you've seen in Q4, a little bit of growth in some of those operational areas, you'll continue to see some of that going forward in the next year.

[Theodore O'Neill:]

Okay. Thanks. And my other question is, like, as you think about - as we think about COVID - it's COVID variants being either more infectious or more deadly or both? Does that change the way people think about testing do you think?

[Dwight Egan:]

Well, I think it's just going to mean that testing is going to continue to be part of what has to happen in order to normalize. Everybody is sort of assuming that normalization is well underway, well let me tell you something, it's not at all underway. People are working out of their homes, they're not at school, they're not at college. There's just a great deal of non-normalization going on right here, all around the world. And there's a whole bunch of media, and from the White House to the governor's to the mayor's trying to act like a party on, dude, everything is fine. And yet, everybody still at home and not out into the workforce or at the schools or at the concert venues or watching their local sports teams. So we think it's going to continue to be that way. And keep in mind, we live in a world that has just in the United States, a billion cases of the common cold every year. And we have in the neighborhood of 8% to 9% of the entire world population that's infected with the flu every year. And the flu and the common cold have very common presentations to COVID, at least in the initial phases. So as we get back into school, as we get back into going to all these places, we're way beyond the place where people are going to be able to show up at work, or school, and have sneezing and coughing and runny noses and red eyes. And in order to not have that they're going to be having to test at home, they're going to have to be testing at the schools, they're going to have to be testing at the businesses and create a way to normalize. And we think this is going to require a great deal of additional testing. Like I said earlier, it's not that there's going to be no testing, just how and where is it going to be done. Hence the development of the icon initiative to make it so there is a device and a test that is cheap, fast and accurate for the first time on something that's affordable, accessible, and not just in the United States, but all over the world. So we have a long ways to go before we get into a normalization environment. And this is in an environment where we're going to have infection and then re-infection and so on. And same with vaccinations, we believe, let the scientists do the talking on that. But I think it's pretty commonly accepted at this point that, you know, this is not going to be a one shot deal, not in the US and not anybody else. And a lot of people around the world are not even going to have access for quite some time. So I think the public should realize that our asset of having a worldwide distribution network, where the significant amount of our business is coming from overseas, is a great asset in our company going forward in terms of our durability. Because, you know, we don't - as a company, we don't view this as a COVID play, we view this, that COVID put us in a position to leverage our technology, and specifically our CoPrimer technology, so that we can play a meaningful role going forward for all of these other important infectious diseases. If you look at how many cases of COVID we have around the world right now, from the beginning, it pales in comparison to what we have in diseases like malaria and dengue, and sexually transmitted infections and the flu. You know, we have a million cases of sexually transmitted infections a day in the world, 40 or 50 million in the US and the European Union a year, we just have tremendous burden there. And all these - these are the kinds of tests that we'll be able to be done on our new point-of-care and at-home initiative. It's going to be - it's going to really radicalize how and where people get tested, not only where they are getting tested, but how much they're going to pay to be tested and how often they can afford to be tested to keep themselves in a COVID safe work, play, and home environment. This is the future of where this is going in terms of testing. And we are in the vanguard of it. So we are having this device developed by the best experts in the world, it is the best chemistry in the world. We're looking really forward to being able to exploit this on a worldwide basis. And to really stake the claim of our technology and where we are with that respect.

[Theodore O'Neill:]

Thank you very much.

[Dwight Egan:]

Thanks, Theodore.

[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 all for joining us on the call today. We are very excited about our future, again, express our gratitude to all of those who have helped make this happen for the company, great employees, great vendors, great customers. And we look forward to making a very meaningful change as we go forward in this - not just the COVID world, but the infectious disease and cancer and agricultural needs heading forward. Thank you all for joining us. We look forward to talking to you again next quarter and give you some update as to where we are.

[Operator:]

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