Q2 2022 Co-Diagnostics Inc Earnings Call
Good afternoon, and welcome to the code Diagnostics second quarter 2022 earnings Conference call.
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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.
Hi, I'm, Andrew Benson and joining me. This afternoon, I'll remember co diagnostics management team, including the White 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.
We're looking statements for.
For example, when it's concerning 2022 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. This includes statements concerning the company's forthcoming PCR home testing platform, which is subject to FDA review and is not yet available for.
A 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 S E C.
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 shortly before this call which may contain reconciliations of 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 right.
Thank you Andrew and thank you all for joining us on this call. We will provide an overview of our results for the quarter.
Dates on key financial performance metrics and a discussion of progress against our strategy. Then we will take your questions.
While we maintained strong execution during the second quarter and achieved further progress on the development and optimization of the Kodiak P. C. Our 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 quarters 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 wariness for the disruption to daily life after a multiyear 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 variance are all but inevitable. However, the timing and severity are impossible to predict with every new variants, including the possibility of immune escape there's variance in sub variance by for dominance.
The U S alone we are still seeing around 100000, new Covid cases reported per day over 6000, 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.
And that we will be living with it for years to come.
Trends 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.
Well, 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.
Among those is the progress we have made in the Coty X P C. Our 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 had been made since formally initiating its development.
It is important to remember the highest 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.
An 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 of an opportunity for an even better more robust higher quality platform.
Our progress in the development of the Kodiak P C. Our own platform as 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 sports staff working to help make gold standard PCR ubiquitously available.
<unk>, including in areas of the world, where infrastructure and pricing have traditionally made P. C. R 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.
Good space and from extensive market research by our recognized research firm, we look forward to the time in the near future, where we are able to remind the public but 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 and the optimizations continue to ensure the platform and manufacture.
<unk> 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-19. The device has been designed to incorporate specialized optics and other.
<unk> features to accommodate multiplex assays as we expand its future suite of products to include additional respiratory S. T I and other infectious diseases utilizing the company's patented co primary technology is.
This patented molecule has unique properties associated with facilitating multiplexing P. C. R and we intend to bring the full power and capabilities of our proprietary technology to our new Kodiak Pcr platform.
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 observed across our growing distribution network of more than 50 countries. The high throughput laboratory market is responsible for driving most of our say.
<unk>.
Riding 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 a differentiate between four prevalent causes a sexually transmitted infections. We also recently announced this quarter that we have completed the design of our monkey pox PCR test a monkey pox testing reagents.
<unk> 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 in 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 31000 cases have been confirmed in 89 countries 82 of which have historically not reported monkey pox.
These figures include over 10000 in the United States alone.
It is important to remember that our co primary 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 are work with Bayer crop services and L. G. C. 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 customer.
Yes.
Overall, we believe our advancements in the field of at home and quantity care testing our team of experts working diligently to achieve our shared company vision and our solid balance sheet, our positioning code diagnostics to execute against our strategic growth initiatives. Our continued investments in talent and R&D remain indicators.
The progress we are achieving to drive further value for our shareholders.
This concludes my initial remarks, let me now turn things over to Brian Brown for a review of key metrics and numbers Brian .
Thanks, <unk> 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 large 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 or.
Our gross margin percentage of 81, 8% for the quarter decreased approximately 900 basis points from 98% 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 tests impacted our performance during the quarter. We remain enthusiastic for the progress we've made strengthening our team and operations to support future growth.
Total operating expenses for the three months ended June 32022 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 'twenty 'twenty. One we're paid to third parties, where they were incurred in house in Q2 of 2022.
We remain committed to investing in the development of our Kodiak PCR home platform and other advances through our research and development activities.
As we disclosed in our recently filed 10-K and as part of the consideration given in our recently completed acquisitions. The acquired <unk> received contingent consideration based on the achievement of certain milestones at each quarter and we were required to re measure the value of the contingent consideration the remeasurement calculation at June 30th 2002.
<unk> created a gain of zero point $8 million that has been recognized as other income in our consolidated statements of operations.
For the second quarter of 2020 to income before taxes decreased to a loss of $3 4 million as compared to income of $11 9 million achieved in the prior year same period.
We experienced an income tax benefit for the second quarter of zero point $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 'twenty four 2022 was $2 7 million or a loss of eight cents per fully diluted share compared to net income of $9 8 million or 33 cents 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 32022, as a reminder, we define adjusted EBITDA as earnings before interest taxes, depreciation and amortization adjusted for stock based compensation and.
The 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 30th 2022 up from $89 9 million at December 31, 2021.
Additionally, we continued to experience positive net cash flows from operating activities, we reported $9 5 million for the six months ended June 30th 2022.
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 are 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 reach our 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 532000 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 code 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.
Now I'll turn the presentation back over to Dwight.
Yeah.
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 one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw a question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from <unk> Chen with H C. Wainwright. Please go ahead.
Hi, guys. This is Rob on the line for you.
A few questions from me, if I may and congrats on the quarter Oh, you know as we think about the second half of 2022 or yeah. How are you thinking about the Covid test volume trend just broadly speaking and then secondly, with regards to your Monkey Pox. A test you know could you point out the major points of differentiation relative to the C D.
D C developed tests.
And do you think that the volume of Monkey pox testing would make a meaningful contribution.
Contribution to topline revenue. Thank you.
As to the first part of your question as the second half of the year and COVID-19 testing.
We're still experiencing a great amount of COVID-19 infection in the United States and around the World, who decided the numbers of about 100000 cases, a day 6000, 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 that the including government officials.
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 reversing from a pandemic to an endemic environment, but didn't demick is not good.
We think as the as.
The country.
Turns out of operationalized testing, where people are to some degree taking it upon themselves to take care of their own COVID-19.
Covid safe environments that we'll see that.
Testing continued to persist and be one of the primary parts of sort of a try model.
Defense against Covid, which includes testing you know vaccinations and.
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-19, but as we have maintained for a long time for a whole new fill in a whole new range of pathogens that goes far beyond COVID-19 with respect to monkey pox, our test is.
<unk> going to be a very strong player meeting or exceeding the.
Requirements put forth by the World Health organization.
I'll leave the sea seem to speak for the strength of their test.
But our test is going to be a terrific test.
And were 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 a monkey pox.
Awful awful disease.
And 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.
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 <unk> Company. Please go ahead.
Good afternoon, thanks for taking the questions.
Do you have any sense on what inventory inventory levels are at your distributors do you think the second quarter was a quarter where in distributors.
You know what inventory levels come down as the demand decline and do you think that there are you know.
Historically low levels at this point and Lycoming restock or do you think that.
They have enough inventory on hand.
Current level of demand.
Like you know a 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 falloff.
And we cited the reasons, we think that falloff occurred in terms of public funding of testing initiatives.
And just the assuage any of the pressure put on by Omicron.
But.
Because it's not going to go away, we're just gonna have to see where it normalizes.
And and we have a very broad distribution base in over 50 countries and with a lot of distributors in some very powerful our labs and distributor so to the extent.
Covid reasserts itself as we believe it probably will and presents itself with additional surges I think we can expect that our company would be the beneficiary of that phenomenon, but 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 surge as the may obtain.
Okay, but do you think that your distributors now or it.
The inventory level, whereas on me to reorder.
And then the next quarter or do you think that they have enough on hand.
To Oh.
Yeah.
We would very much expect that our distributors would be reordering.
Okay.
You said you expect to come.
Commenced clinical trials.
From 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.
Well I'm in a minute.
Yeah.
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 FTA and so 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 either a 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 <unk>.
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 in this new platform in the market from a competitive standpoint, we believe it all comes down to two issues and that is specs meeting 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.
<unk> gold standard PCR, we're not sort of like P C or we're not isothermal or lamp technology, we're certainly not antigen technology would just sort of like flipping a coin.
We are gold standard and as the price.
The way our product has been engineered it gives us a incredible.
Incredible.
Flexibility in terms of our pricing models, both domestically and internationally.
So we think that we're in the Vanguard. There. We are we believe we're in the leadership position and and we're very enthused about getting it to market. We will 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 and how its 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.
Our budget proposals that will restore government funding.
In 2022 for for Covid testing.
I'm, not really aware of that and I'm I'm not really counting on the government driving it you know the government has not been in many respects you know there's not been a big driver of what we've done for the last two and a half years.
And we haven't been a company that's come out and said, yes. The government just bought a whole boatload of our tests.
We have serviced.
Our private oriented market and an international market.
And I believe that.
That as you see this thing progressed the people you'll see people take it upon themselves to protect their own families and their own cells. Both in an at home environment businesses.
And their business situation restaurants, there's a whole lot of things that companies are going to need to do in terms of operationalized testing. So that they don't end up being on the negligence 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 theres very little testing and in the main compared to what we saw earlier and we have virtually no mitigation measures when it comes to masks or social distancing.
And sing or other things so.
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' an individual families and individual businesses.
They have to manage their own environment as it relates to COVID-19.
And other infectious diseases.
Got it alright, thank you for answering the questions.
Yeah.
Our next question will come from Theodore O'neill with Litchfield Hills Research. Please go ahead.
Yeah, Hi, I wanted to follow up on previous question.
With the dramatic falloff of business in the rest of the world.
And question about about inventory do you think there is an inventory.
Issue in the channel or do you think it's just there's there's no inventory.
Inventory issue was just simply the demand fell off that's one question and the other one is do you foresee a at home.
Monkey pox tests, and how would you participate in that.
So with respect to the inventory question.
Clearly the man that was there during omicron subsides.
Subsided, but I don't think that we have as a general phenomenon.
A buildup of inventory at our customer locations, there'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 at a measured pace.
And we'll see if we have additional bulk.
Bolstering of that buy.
Infection getting worst during the fall and summer months with respect to the at home environment with our at home.
We see our 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 are a malls.
Complex upper respiratory panel with flu RSV Covid all in the same test utilizing the same sample. So monkey pox 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.
Oh is that you have to have FDA approval.
For the proliferation of these devices in the United States.
Individual testing classify it also as a device so depending on whether for instance, the F. D. A opens up an emergency use authorization for monkey pox, 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 five 10-K clearance to make it available on that device.
Okay. Thank you.
Yeah.
This concludes our question and answer session I would now like to turn the conference back over to the CEO Duane Aegean for any closing remarks.
Yeah.
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.
So diagnostics became the first U S based company to receive a CE marking for a COVID-19 test. It was the result of years of preparation and discovery that allowed the company to answer the call and.
And we are immensely proud of what we've 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 were still able to report $96 million in cash cash equivalents in marketable securities on June 32022, an increase of over 6 million from December 31, 2021, notwithstanding the additional expense of acquiring it.
Corporation, 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 P C. Our 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-19.
Device is expected to increase our market opportunity and also drive growth over the long term. We also expect our recent headwinds that we have experienced to be fluid and fluctuate as new variance of COVID-19 sweep across the globe and caused 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.