Co-Diagnostics, Inc.

Good afternoon, and welcome to the Co-Diagnostics second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need any 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, then one on your telephone keypad. To withdraw your question, please press star, then two. Please do note that this event is being recorded. I would now like to turn the conference over to Andrew Benson, Head of Investor Relations. Please go ahead.

Thank you. I'm Andrew Benson, and joining me this afternoon are members of the Co-Diagnostics Management Team, including Dwight Egan, Chief Executive Officer, and Brian Brown, Chief Financial Officer. We will begin the call with management's prepared remarks and then open up the call to questions from our analysts. Before we begin, we would like to inform the listeners that certain statements made by co-diagnostics during the course of this call may constitute forward-looking statements. Any statement about company expectations, beliefs, plans, objectives, assumptions of future events or performance are forward-looking statements. For example, statements concerning 2022 financial and operational guidance, the development of regulatory clearance, commercialization and features of new products, plans and objectives of management and market trends are all forward-looking statements. This includes statements concerning the company's forthcoming PCR home testing platform, which is subject to FDA review and is not yet available for sale. The company believes these statements are based on reasonable assumptions. However, these statements are not guarantees of performance and involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results expressed or implied by such statements. Important factors which could cause actual results to differ materially from those in these forward-looking statements are detailed in co-diagnostics filings with the SEC. Co-diagnostics assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events. In addition, the company may discuss certain non-GAAP financial measures during today's call. These non-GAAP financial measures should not be considered a replacement or 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 in the non-GAAP financial measures presented to their most comparable GAAP results. At this time, I would like to turn the call over to Co-Diagnostics Chief Executive Officer Dwight Egan. Dwight.

Thank you, Andrew, and thank you all for joining us. On this call, we will provide an overview of our results for the quarter, updates on key financial performance metrics, and a discussion of progress against our strategy. Then we will take your questions. While we maintain strong execution during the second quarter and achieve further progress on the development and optimization of the COTIX PCR home testing platform, Lower volumes for our logic smart COVID-19 test drove a year-over-year decline in revenue. We believe that several factors contributed to the second quarter's results, including a reduction in mandated testing for travel and public venues, a reduction in public funding assistance for testing programs, and an increase in overall weariness for the disruption to daily life after a multi-year pandemic, specifically the Omicron variant earlier this year. This dramatic shift in testing behavior was widely felt across the diagnostics industry. Experts believe other waves of COVID variants are all but inevitable. However, the timing and severity are impossible to predict. With every new variant, including the possibility of immune escape as variants and subvariants vie for dominance. In the U.S. alone, we are still seeing around 100,000 new COVID cases reported per day. over 6,000 COVID-related hospital admissions, and nearly 400 deaths. All evidence to date points to a resilient, mutable virus with no indication it will go away, and that we will be living with it for years to come. Friends observed since the original outbreak of the virus suggest a buildup in the number of positive cases increasing as we move further into the fall and winter seasons. While there is significant public resistance against future lockdowns and other mitigation measures, we are confident that reliable, accurate testing will remain a critical line of defense to identify and counter future waves of the virus. While we were presented with a number of challenges during the quarter, with those challenges came opportunities for growth and for growing our unique portfolio of innovative testing products and devices. Prominent among those is the progress we have made in the Kodiak's PCR home testing platform. The company has assembled a world-class team of developers, scientists, and engineers working tirelessly to bring this platform to market with significant breakthroughs and optimizations that have been made since formally initiating its development. It is important to remember the high standard to which we hold ourselves and our goal of delivering products that are high quality, reliable, and durable, and we look forward to announcing soon that we have commenced clinical trials. This device and platform is transformative, and it will fundamentally alter the way the world thinks about at home and point of care testing. However, timelines for such innovations are always fluid. To put it simply, if it were easy, anyone could do it. With every obstacle we have encountered, the team has presented several solutions each one of which has been rigorously analyzed and tested to determine not just which one works, but which works best. Just one example of this was when the presence of bubbles in the saliva or swab samples was interfering with the results. Several options were considered and evaluated. Variations of the device and sample collection cups were engineered, built, and thoroughly tested to determine which combination of options yielded the most optimal solution. What might have been considered a challenge was instead an opportunity for an even better, more robust, higher quality platform. Our progress in the development of the Kodi X PCR home platform is reflected in the expansion of our campus where it is being developed, optimized, and manufactured. We have expanded our operations to include four buildings housing more than 70 engineers, scientists, and support staff working to help make gold standard PCR ubiquitously available. including in areas of the world where infrastructure and pricing have traditionally made PCR unfeasible. With e-commerce, sales and customer support, marketing, and logistics initiatives well into the advanced planning stages, incorporating the lessons learned from observing others entering into this relatively uncharted space, and from extensive market research by a recognized research firm, We look forward to the time in the near future where we are able to remind the public that while we have never said we would be the first, we have always believed that we would be the first to get it right. To this end, the optimizations continue to ensure the platform and manufacturing processes will fit the needs of a dynamic but enduring market for affordable, operationalized, and decentralized gold standard PCR testing for COVID-19 and a range of other pathogens. We would like to emphasize that we believe this PCR platform, which is subject to FDA review and not yet available for sale, will come to represent the highest level of utility for at-home point-of-care applications, encompassing far more than just COVID. The device has been designed to incorporate specialized optics and other innovative features to accommodate multiplexed assays as we expand its future suite of products to include additional respiratory, STI, and other infectious diseases utilizing the company's patented co-primer technology. This patented molecule has unique properties associated with facilitating multiplexing PCR, and we intend to bring the full power and capabilities of our proprietary technology to our new COTIX PCR platform. In addition to ultimately representing the future of at-home and point of care testing, we believe this powerful new platform also has the potential to help build a cloud-based surveillance system to thwart future infections and communicable disease outbreaks. Our conspicuous presence at conferences and trade shows this year has helped reinforce and increase our visibility, not only for this exciting new platform, but also among the centralized lab customers we have served across our growing distribution network of more than 50 countries. The high throughput laboratory market is responsible for driving most of our sales, providing the cash flow for our R&D efforts as we grow the product pipeline for this business channel. In addition to other products, we have discussed in previous public statements, such as our ongoing development of a multiplex STI panel to detect and differentiate between four prevalent causes of sexually transmitted infections, We also recently announced this quarter that we have completed the design of our monkeypox PCR test, and monkeypox testing reagents have already been shipped to a distributor to meet the demands of that region. Sample kits of this product have also been tested by other distributors and labs around the world, helping to provide valuable feedback as we prepare for a wider market release of a multi-gene product that meets and exceeds the global standards of PCR testing for a disease that has been declared a public health emergency in the United States and by the World Health Organization. Already, more than 31,000 cases have been confirmed in 89 countries, 82 of which have historically not reported monkeypox. These figures include over 10,000 in the United States alone. It is important to remember that our co-primer technology is more than just an innovative molecule. It is a platform technology with wide-ranging applications. Other PCR assays are being developed for several pathogens of significance in dentistry, mental health, and liquid biopsy for detection of cancer associated mutations present in human blood. Analytical performance is being evaluated for these assays with partnerships in each of these areas. Our work with Bayer Crop Services and LGC likewise continues within our agricultural vertical, and the company's mosquito abatement business has seen a record number of laboratory installations this year along with continued purchases from our existing customers. Overall, we believe our advancements in the field of at-home and point-of-care testing, our team of experts working diligently to achieve our shared company vision, and our solid balance sheet are positioning co-diagnostics to execute against our strategic growth initiatives. Our continued investments in talent and R&D remain indicators of the progress we are achieving to drive further value for our shareholders. This includes my initial remarks. Let me now turn things over to Brian Brown for a review of key metrics and numbers. Brian.

Thanks, Dwight. And thank you for joining today's call. For the second quarter of 2022, Revenue decreased 81.6% to 5.0 million as compared to 27.4 million during the prior year comparable period. This decrease in revenue on a year-over-year basis was primarily driven by lower demand for our logic smart COVID-19 tests. Gross profit for the year decreased 83.5% to 4.1 million compared to 24.9 million in Q2 of 2021. Our gross margin percentage of 81.8% for the quarter decreased approximately 900 basis points from 90.8% in the prior year period. The decrease in gross margin percentage from the prior year reflects operational inefficiencies stemming from lower sales volumes. While lower demand for our logic smart COVID-19 test impacted our performance during the quarter, we remain enthusiastic for the progress we made, strengthening our team and operations to support future growth. Total operating expenses for the three months ended June 30th, 2022, were 8.3 million, a decrease of 36.8% compared to 13.1 million in the second quarter of 2021. The year-over-year decline was primarily driven by variable expenses related to lower sales volumes as compared to the prior year period. Research and development expenses for the second quarter of 2022 decreased from the prior year same period by 16.7% to 3.9 million as compared to 4.7 million. The decline in R&D expenses can primarily be attributed to the acquisition of entities that were previously third-party vendors in the prior year period. The most significant portion of research and development expenses from Q2 of 2021 were paid to third parties where they were incurred in-house in Q2 of 2022. We remain committed to investing in the development of our Codex PCR home platform and other advances through our research and development activities. As we disclosed in the recently filed 10-K and as part of the consideration given in our recently completed acquisitions, the acquirees received contingent consideration based on the achievement of certain milestones. At each quarter end, we are required to remeasure the value of the contingent consideration. The remeasurement calculation of June 30, 2022, created a gain of $0.8 million that has been recognized as other income in our consolidated statements of operations. For the second quarter of 2022, income before taxes decreased to a loss of 3.4 million as compared to income of 11.9 million achieved in the prior year's same period. We experienced an income tax benefit for the second quarter of 0.7 million. 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. Second quarter net loss for 2020 2022 was $2.7 million or a loss of $0.08 per fully diluted share compared to net income of $9.8 million or $0.33 per fully diluted share in the prior year comparable period. Adjusted EBITDA for the second quarter of 2022 was a loss of $2.3 million, bringing adjusted EBITDA to $9.1 million for the six months ended June 30, 2022. As a reminder, We define adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization, adjusted for stock-based compensation, and other one-time costs. Please refer to the 8-K filed earlier today for a reconciliation of net income to adjusted EBITDA. We continue to prioritize the health and flexibility of our balance sheet. As we continue to make progress on nearing the ramp-up of production for the device, we continue to evaluate opportunities should they enhance our capabilities or the timing to bring the device to market. In spite of decreased revenue for the quarter, we were able to successfully convert receivables into cash. As a result, cash, cash equivalents, and marketable securities ended the quarter at $96.0 million at June 30, 2022, up from $89.9 million at December 31, 2021. Additionally, we continued to experience positive net cash flows from operating activities as we reported $9.5 million for the six months ended June 30, 2022 of the 9.5 million i am pleased to report that 1.7 million of positive net cash flows were generated from our operating activities in q2 of 2022 as we look to scale and expand into new verticals that position us for the future and drive increased value for our shareholders our highly liquid no debt balance sheet enables us to further execute on our strategic growth plan we remain committed to investing time and money into our people, processes, and research and development. We announced the authorization of a $30 million share repurchase program earlier this year, and we believe this element of our capital allocation strategy remains aligned with our commitment to return value to our shareholders. This authorization reflects confidence in our balance sheet and strong cash flow generation capabilities. During the second quarter of 2022, we repurchased greater than 532,000 shares at a cost of just under $2.6 million. We believe 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. Turning now to our visibility and near-term outlook, variability in our operating environment has restricted our near-term visibility. We will continue to navigate the near-term environment with caution, but as a result, we will not be providing quarterly guidance at this time. We remain very confident about the long-term potential of our business and the demand for our products and continue to believe we are at an important point in our growth trajectory. With the impressive team we have in place, we are confident that their hard work and dedication will enable us to expand into new verticals, new markets, and innovative molecular diagnostic solutions. I'll now turn the presentation back over to Dwight. Dwight?

Thank you, Brian. We will now take calls from our analysts. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from Yi Chen with HC Wainwright. Please go ahead.

Hi, guys. This is Rob on the line for Yi. A few questions for me, if I may, and congrats on the quarter. And, you know, as we think about the second half of 2022, you know, how are you thinking about the COVID test volume trend, just broadly speaking? And then secondly, you know, with regard to your monkeypox test, you know, can you point out the major points of differentiation relative to the CDC-developed test? And do you think that the volume of monkeypox testing would make a meaningful contribution to top-line revenue? Thank you.

As to the first part of your question, as to the second half of the year and COVID-19 testing, we're still experiencing a great amount of COVID infection in the United States and around the world. We cited the numbers of about 100,000 cases a day, 6,000 new hospitalizations a day, and about 400 deaths a day just in the U.S. And so, as we head into the fall and into the winter, I think our expectations are consonant with what we're hearing from others, including government officials, that we could be heading for some additional stress on the whole system as we head into the winter months. COVID is going to be with us for many, many years to come. It certainly appears to be traversing from a pandemic to an endemic environment, but endemic is not good. And we think as the as the country learns how to operationalize testing, where people are, to some degree, taking it upon themselves to take care of their own COVID-safe environments, that we'll see testing continue to persist and be one of the primary parts of sort of a trimodal defense against COVID, which includes testing, you know, vaccinations and therapeutics. So testing is not going to go away. We're going to have to see where it lands in sort of an endemic environment. And we believe as we are able to introduce a point of care at home device that will play a prominent role in not just COVID, but as we have maintained for a long time for a whole new field and a whole new range of pathogens that goes far beyond COVID. With respect to monkeypox, Our test is going to be a very strong player meeting or exceeding the requirements put forth by the World Health Organization. I'll leave the CDC to speak for the strength of their test. But our test is going to be a terrific test. And we're enthused about being able to make it available, you know, people, don't want to die of COVID, but believe me, they really don't want to die of monkeypox. It's an awful, awful disease. And, of course, it's already surprising most people as to the pervasiveness of it and how much it's growing and how fast it's growing. So we'll see where that goes, but we will be ready.

Awesome. Thanks, guys.

Our next question will come from Jim Sidoti with Sidoti and Company. Please go ahead.

Good afternoon. Thanks for taking the questions. Do you have any sense on what inventory levels are at your distributors? Do you think the second quarter was a quarter where distributors let inventory levels come down as demand declined? And do you think that they're at historically low levels at this point, and likely to restock, or do you think that they have enough inventory on hand for the current level of demand?

You know, great question, and of course, one that we keep a close eye on every day. And we certainly saw the, as the second quarter progressed, you know, the the fall off, and we've cited the reasons we think that fall off occurred in terms of public funding of testing initiatives and just the assuaging of the pressure put on by Omicron. But because it's not going to go away, we're just going to have to see where it normalizes. And we have a very broad distribution base in over 50 countries. and with a lot of distributors and some very powerful labs and distributors. So, to the extent COVID reasserts itself, as we believe it probably will, and presents itself with additional surges, I think we could expect that our company would be the beneficiary of that phenomenon. But we're not, we don't have optics on it. And so, we're not giving guidance as to what level or timing of the surges may obtain.

Okay. But do you think that your distributors now are at an inventory level where they'll need to reorder during the next quarter? Or do you think that they have enough on hand to handle it?

We would very much expect that our distributors would be reordering.

Okay. And you said you expect to commence clinical trials soon. for the new point of care device. Can you give us a little more color on what that means? Is that something you expect in weeks or months or longer than that?

We expect they will, that they will commence when we're highly confident that we have the very best product that we can present to the FDA. And we're, you know, basically in the last mile of delivery here. in terms of being ready for our clinical trials. And we're not trying to put out a product that will just be good enough to get through EUA. We're trying to put out a product that we have total confidence in as we put it out into the market. And so, we're really doing some terrific optimizations of the product. I mentioned the bubble issue, but, you know, there are other issues that enhance things like shelf life of the reagents. and the way the optics work and other elements that we think will really set this instrument apart from everything that's going on out there. We believe that ultimately the whole equation of putting this new instrument and this new platform in the market from a competitive standpoint, we believe it all comes down to two issues. And that is specs, meaning specifications, and price. And we believe that we are in the vanguard of both of those elements because we are going to have the best spec. We are real-time gold standard PCR. We're not sort of like PCR. We're not isothermal or lamp technology. We're certainly not antigen technology, which is sort of like flipping a coin. We are gold standard. And as to price, the way our product has been engineered, it gives us incredible – flexibility in terms of our pricing models, both domestically and internationally. So we think that we're in the vanguard there. We believe we're in the leadership position, and we're very enthused about, you know, getting it to market. We'll have it into clinical trials, as we said, in the near term, but we're not going to put it in before we are totally confident in how it's performing and how much we've been able to optimize it. But it's not far away.

And then last one for me. Are you aware of any budget proposals that will restore government funding in 2022 for COVID testing?

I'm not really aware of that. And I'm not really counting on the government driving it. You know, the government has not been in many respects, you know, has not been the big driver of what we've done for the last two and a half years. And, you know, we haven't been a company that's come out and said, yes, the government just bought a whole big boatload of our tests. We have serviced a more private-oriented market and an international market. And I believe that as you see this thing progress, that people, you'll see people take it upon themselves to protect their own families and their own selves both in an at-home environment at businesses and in their business situation, restaurants. There's a whole lot of things that companies are going to need to do in terms of operationalizing testing so that they don't end up being on the negligent side of liability when either customers or employees become sick and potentially die. So we think that there's some refinement that's going to go on in society and in our culture. Right now, we sort of are in an environment where there's just reckless abandon. There's very little testing in the main compared to what we saw earlier. And we have virtually no mitigation measures when it comes to masks or social distancing or other things. So, you know, you're going to see, I think, a whole new world emerge of how this actually normalizes over time to give us maximum protection as individuals. And the burden is going to shift largely from governmental mandates and policies to individuals and individual families and individual businesses, you know, that have to manage their own environment as it relates to COVID and other infectious diseases.

Got it. All right. Thank you for answering the question.

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

Yeah. Hi. I want to follow up on previous question. With the dramatic fall off of business in the rest of the world and question about inventory, do you think there's an inventory issue in the channel or do you think it's just there's no inventory issue, it's just simply the demand fell off? That's one question. And the other one is, Do you foresee a at-home monkeypox test and how would you participate in that?

So with respect to the inventory question, you know, clearly the demand that was there during Omicron subsided. But I don't think that we have as a general phenomenon a buildup of inventory at our customer locations that's still trying to burn off. I don't believe that that's what we're facing here, and I think our orders will continue to come in, you know, at a measured pace. And we'll see if we have additional bolstering of that by infection getting worse during the fall and summer months. With respect to the at-home environment with our at-home PCR device, we certainly expect that almost any important disease, infectious disease, would be able to be ported onto this system. We indeed are concentrating on certain high-volume tests. We've mentioned sexually transmitted infections, and there are others that are high-level targets, a multiplexed upper respiratory panel with flu, RSV, COVID, all in the same test utilizing the same sample. So, you know, monkeypox is a relatively straightforward double-stranded DNA target, so it can be used in our at-home device quite easily. The caveat here, of course, Theo, is that you have to have FDA approval. for the proliferation of these devices in the United States, individual tests being classified also as a device. So depending on whether, for instance, the FDA opens up an emergency use authorization for monkeypox, which they may well do, but I don't have a finger on that, if they don't approve that, we would have to take it through a 510K clearance to make it available on that device.

Okay, thank you.

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

Thank you. To conclude today's call, I want to highlight the growth we have experienced over the past couple of years that are putting the company closer than ever to realizing our long-term vision of making high-quality gold standard PCR testing affordable and available to all. COVID-19 was unquestionably the catalyst but also the crucible. When CoDiagnostics became the first U.S.-based company to receive a CE marking for a COVID test, it was the result of years of preparation and discovery that allowed the company to answer the call. And we are immensely proud of what we have accomplished since that time. Every hurdle along the way has been followed by opportunities to grow and improve, which is why even despite a decrease in revenue for the quarter, we are still able to report $96 million in cash, cash equivalents, and marketable securities on June 30, 2022, an increase of over 6 million from December 31, 2021, notwithstanding the additional expense of acquiring and incorporating two new entities and the attendant R&D spending during that period. One of the most important developments in recent years has been the willingness of regulatory bodies to allow for a dramatic expansion in at-home testing Once those barriers started to fall, we realized that decentralized testing will inevitably become ubiquitous. Now we find ourselves at the epicenter, once again, building on years of experience and ready to answer the call for a new world of more operationalized testing. Make no mistake, the genie is out of the bottle and it's not going back. We believe that our Kodiak's PCR home testing platform has the potential to become the standard in in-home testing against which all others are measured, encompassing far more than COVID. This device is expected to increase our market opportunity and also drive growth over the long term. We also expect recent headwinds that we have experienced to be fluid and fluctuate as new variants of COVID sweep across the globe and cause countries to reinforce cautionary testing procedures. And we are confident that our expanding test menu will meet the needs of our growing distributor base. Lastly, I want to thank our employees for their continued dedication, enabling us to deliver affordable and accurate PCR testing solutions around the world. We have some of the best and brightest minds in the industry, and I'm confident that they will remain critical to delivering against our growth strategy. Thank you again, and we look forward to bringing you more exciting updates on our next earnings call three months from now. Good day.

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