Good afternoon, everyone, and welcome to the Co-Diagnostics Q2 2020 Earnings Conference Call. All participants are currently in a listen only mode. [Operator instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Andrew Benson. Sir, please go ahead..

Thank you, Jaime. And thank you everybody for joining us today. Before we begin, we would like to inform the listeners that certain statements made by Co-Diagnostics during the course of this call may constitute forward-looking statements.

In these statement of our company expectations, beliefs, plans, objectives, assumptions of future events or performance our forward-looking statements.

For example, statements concerning 2020 financial operational guidance, the development and 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 or performance and may 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 detail Co-Diagnostics filings with the SEC.

Co-Diagnostics assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events. In addition, the company will discuss certain non-GAAP financial measures during today's call.

These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. We refer you to the company's earnings release out certainly before this call which contains reconciliation to the non-GAAP financial measures presented to their most comparable GAAP results.

I'll now turn the time over to Dwight H Egan, CEO of Co-Diagnostics.

Dwight?.

Hello, everyone and thank you for joining us on the call. At the beginning of the second quarter Co-Diagnostics received emergency use authorization from the FDA for our Logix Smart COVID-19 test. Since that time, the company has successfully launched an internationally recognized business and brand, with clients in over 50 countries over 25 U.S.

states and validations of test accuracy from numerous regulatory and reference institutions from around the world. The company has established a durable production and distribution platform designed to continue sales and profitability is our test of gain widespread acceptance in the market.

And while the Whirlwind pace of activity during the second quarter has taken the company to record revenues, leading to Co-Diagnostics crossing well into profitability.

The sales momentum we are experiencing midway through the third quarter not only provides important context for understanding the progress that the company's past success, but more importantly, a window on where we are going over the coming months and years.

In that regard, I'm pleased to report that the company has received and is currently fulfilling orders, approaching $50 million a year-to-date business. This includes the sales and activity from our India joint venture, which we are also pleased to announce also which achieved profitability in the second quarter. In addition to the U.S.

FDA, India, and the European community, our COVID-19 test has also been granted clearance in several other large markets, including Mexico, Australia, Colombia, Argentina, South Africa and others. Authorizations from visa in Brazil and Health Canada are also in process.

The Logix Smart COVID-19 tests designed to target the RDRP gene of SARS-CoV-2 which target continues to show 100% coverage for all strains of the virus in the global genetic databases.

In order to proactively respond to global concerns about potential genetic drift and viral strains, we have also completed principle design and feasibility for the next iteration of this test to include them additional genetic target.

To maintain testing specificity and sensitivity, we expect this test to be complete before the end of the current quarter.

After having achieved significant earnings during the second quarter, and having established a robust distribution network and client base around the world, the current mission of Co-Diagnostics is focused on the durability of our product offerings, not only as it relates to COVID-19, but to other ongoing infectious disease targets, which are going to be with us for decades to come.

And while the company is seriously engaged in many molecular diagnostics initiatives, such as TB, Zika, Dengue and Chikungunya, liquid biopsy for cancer detection, West Nile and Eastern and Western equine encephalitis from mosquito abatement programs and critical agricultural genomics.

Today, I will focus on our activities addressing COVID-19 and the current pandemic. The most significant initiative the company has been addressing is the development of a multiplex test designed to differentiate between COVID-19 Flu A and Flu B.

This test is more appropriately referred to as a panel, since it interrogates more than two dozens strains in a single test. Why this important, experts expect the U.S. alone to have about 100 million cases of the flu and flu like symptoms in the coming fall and winter months.

When a person has symptoms of the flu, which are very similar to COVID-19 symptoms, they will need to know whether their infection is a routine flu or a potentially deadly case of COVID-19. Our test will make that differentiation.

Moreover, our tests will be able to be used in high throughput settings, where labs are capable of performing as many as a 1,000 to 50,000 tests daily.

Many analysis of the testing landscape has failed to recognize the inherent throughput limitations of certain closed system platforms that require single cartridges or cassettes in order to obtain a result.

Even if a result can be obtained in a shorter time, the throughput limitations severity constraint the utility of these platforms or wide-scale testing is required.

So, while such a closed system test may have an important role in testing the disease status in a hospital patient down for surgery in the next few hours, the one-off cartridge does not provide a viable solution to wide-scale testing or surveillance testing applications.

The company has attracted important clients, such as the Clinical Reference Lab, which recently obtained FDA emergency use authorization for a saliva-based COVID-19 tests that can be self administered at home, work or other settings without professional care assistance, and then analyzed in their laboratory using Co-Diagnostics technology.

This is a high throughput organization capable of handling the most demanding requirements of companies and other organizations that need high volume testing. The company's strategy has been to attract large numbers of CLIA labs throughout the United States, in order to obtain a continuous demand for our tests.

As a general rule, CLIA lab still a vital role in the infectious communicable and genetic disease testing landscape, with existing clients who rely on the laboratory services for all kinds of daily testing needs. These same legacy customers often turn to their existing CLIA lab relationships to obtain COVID-19 testing.

By building relationships with numerous CLIA labs, we are able to leverage our reach to businesses, schools, senior care centers, and other organizations both big and small. The value proposition of Co-Diagnostics test is self evident.

We provide highly accurate, economical and open architecture tests that meet the current COVID-19 high throughput needs, and also set up a client relationship to sell other tests to these labs including custom tests using our CoPrimer platform.

It is important to emphasize the significance of the company's development of the upper respiratory Flu A, Flu B and COVID-19 panel in relationship to the CLIA lab model.

Our competitors who market single use cartridges for upper respiratory diagnostics will now have to contend with Co-Diagnostics new test, our tests will have significant advantages in pricing and high throughput capabilities.

It is well known that the upper respiratory panels provided by these other companies constitute a significant percentage of the sales line, with those organizations. Now for the first time, Co-Diagnostics will enter the competitive landscape with a superb product offering with the previously stated advantages.

Now we have established a worldwide distribution channels with a respected COVID-19 test. We are understandably excited to participate in one of the most high volume diagnostic markets in the U.S. and the world.

This new test, which we refer to as the ABC test for Flu A and Flu B, and COVID-19, is one of the most important aspects of our durability and consistency strategy in the near and medium-term. Our expectations for the next few quarters anticipate ongoing demand for our existing COVID-19 tests.

As businesses, colleges, schools, senior care centers and other organizations strive to normalize their environments, which should include a testing component in addition to social distancing, masks, contact tracing and other preventative measures.

Our expectations also anticipate the adoption of our new ABC test by customers around the globe, who will be able to conduct our new test on the same platform in which they are running our current COVID-19 tests. We have made key additions to our scientific team during the last couple of quarters.

This was done to ensure that the company can continue to move ahead aggressively with other initiatives mentioned earlier as we continue to expand the footprint of our unique patented technology platform across multiple applications. I will now turn the time over to Reed Benson, our Chief Financial Officer who will take us through the numbers.

We will then take questions from our analysts.

Reed?.

Thank you, Dwight. The revenue comparisons Dwight present reflect increases from quarter-to-quarter rather than a comparison with last year since we had only a minimal revenues in 2019. And since we were primarily a development company just beginning to enter to sales.

Because of the current pandemic and our ability to respond to the diagnostic needs of the world during the pandemic, the company has been transformed to a sales and manufacturing company. In the second quarter of 2020, total revenue was $24 million, an increase of approximately 15 times to the 2020 first quarter revenue.

The exponential and sudden growth in revenue brought many challenges and it was due almost exclusively to the sales of our Logix Smart COVID-19 test. Second quarter gross profit was $15.7 million or net income per common share of $0.43 a share, representing the gross margin of approximately 64% of revenue.

Our profit margin on sales of our tests is approximately 70%, but sales of equipment, which we provided as a convenience through our customers through our established relationships with manufacturers, such as LGC Biosearch have a lower margin, had the effect of lowering overall margins.

Our profits are also the result of the operating leverage we enjoyed by being able to employ relatively few employees to generate a significant level of revenue. This quarter, we generated $650,000 of revenue per employee.

Total operating expenses were $3.4 million, representing an increase of approximately $1.9 million over the second quarter of 2019. Of the increase, approximately 24% was a reserve for doubtful accounts, which was established for the first time.

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

In addition, we added office, laboratory and warehouse space to accommodate the new employees and facilitate manufacturing and shipping. Moving to the balance sheet.

We ended the quarter with $34.5 million of current assets, compared to $1.6 million of current assets at January 1, 2020, which includes approximately $18 million of net proceeds from the sale of common stock and a series of registered direct offerings, during the first quarter.

Excluding these financing activities, we generated sufficient cash from sales to fund the raw materials and finished goods inventory at the end of the quarter of approximately $10 million and $5.3 million of accounts receivable. And we still had $18.6 million of cash at the end of the quarter.

Our stockholders' equity increased to $33.4 million, compared to $1.7 million at the beginning of the year.

The improvement of our balance sheet was driven by the strong revenue growth and helped to grow gross margins even after the increased operating expenses in the second quarter, driven mainly by the explosive growth we experienced and our desire to prepare for the fall flu season and beyond. With that, we'll accept questions now from our analysts..

[Operator Instructions]. Our first question today comes from Yi Chen from HC Wainwright. Please go ahead with your question..

Good afternoon, and thank you for taking my question. My first question is could you give us a breakdown of the second quarter revenue in terms of U.S. and ex-U.S.

revenue?.

It's approximately equal the U.S. revenue is probably a little bit more probably 55% to 60% of total revenues. .

Got it. Okay.

And could you also give us some color on the recent trend of the [Bollinger] test you shift, I mean, in July and August so far?.

The tests that have been actually shifted so far is probably everywhere to $7 million to $8 million. .

Okay, do you see any slowdown in terms of customer ordering?.

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

Got it. Okay. And regarding the new ABC test pattern.

Do you need to have FDA emergency use authorization before marketing to the test panel? And if so, when do you expect to obtain it?.

Yi this is Dwight, how you doing? So, I want to let you know that when we do a test, the development is basically in four different stages. It's number one we do the test design, then we do the CoPrimer selection. And then we do testing verification, and then finally testing validation. And so after we are through with those four processes.

We submit the test to regulatory bodies for approval that will include a CE marking submission, European Union and will also include a permission from the FDA for an emergency use authorization for that test. We would anticipate and use it the first marketing of that test will be on an international basis, followed by an introduction into the U.S.

market. .

Okay, thank you. And my last question is that the FDA has recently issued the authorization for the first screening test for screening an asymptomatic population for COVID-19 section. I think so far there's only one test that has got the screening is [UA].

So, is that something of interest to Co-Diagnostics?.

We were very, very focused on knowing what business we're in and our business is providing a polymerase chain reaction test. That is the current gold standard. There are other tests that are being put on the market to interrogate for antigens, for example.

And for antibodies, they all have a role a certain level, but our particular focus is providing a very high accurate test. It's very economical. I want to emphasize especially the high throughput nature of our tests and our clients. We have brought on some important clients that have the capacity of doing very high throughput testing.

And as you try and meet the needs of countless businesses and schools and colleges and universities, sports teams, and that are trying to get back to a normalization of their routines. The ability to do high throughput is incredibly important.

So, what we're focusing on with our Flu A, B and our COVID test and our current COVID-19 tests is servicing clients who require a high degree of throughput. And that will continue to be our focus in the medium term.

There are various strategies that are used to do what we refer to as surveillance testing, or what you may be referring to in the context you refer.

But it's an environment where whether you're using pooling or are you using scientific random probability sampling of a particular population, we're going to continue to focus on the both standard of polymerase chain reaction and a high throughput setting.

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

Our next question comes from Jason McCarthy from Maxim Group. Please go ahead with your question..

Hey, guys. Thanks for taking questions. This is Michael Okunewitch on the line for Jason. I'd like to see if you could comment on the testing backlog at all, just been kind of an issue facing the U.S. in general and in some place you can take up to two weeks to get a result back making it essentially useless.

So, I'd like you to comment on where the bottlenecks coming from. Is the range in lab capacity and with CoPrimer is requiring fewer agents, and with a lot of smart tests being the paddle of high throughput.

Do you think that Logix Smart could offer a potential way to elevate bottom?.

Michael, you're right on, and of course, our high throughput model with the ClIA Labs is being applied in that very area. Indeed, we are not familiar any way with the clients that we provide tests for experiencing those kinds of delays in providing results to their end user customers.

Generally speaking, if the test gets to one of our testing laboratories that we supply, they are able to do a turnaround in 24 to 48 hours. In a typical environment, a test can be taken, shipped to the lab, and sometimes by the next evening they have their result or the next day. This is the way we test our own employees at Co-Diagnostics.

Our lab employees are tested every week. Our counting and other staff members are tested every other week, and if they take their test on Monday morning, oftentimes by Tuesday evening or the next morning they have their results.

So our particular structure of CoPrimer is the nature of our tests and high through nature of them facilitates getting results quickly. And we're very excited about the kinds of laboratories in the United States that are adopting our tests to do this kind of high throughput volume. Clinical Reference Lab is one of the ones that we cite.

They've given us permission to use their in that regard. And they went through numerous other different tests as they ultimately chose the Co-Diagnostics solution for what they want to do. That is a very unique test in all of the tests that are currently authorized under emergency use authorization. It's a saliva base test. It's self administered.

It's very easy to use and very quick and rapid response. And this is a company that has the capacity to do an enormous amount of tests and their property and up to do that using equipment from places like LGCs such as the occupier and there are others labs and apparently they've also scaled up for quantity units of tests, utilizing our product.

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

All right, thank you very much.

And then, I have one more I like to see if you could kind of break out that 50 million year-to-date number? How much of that, goes towards the CoSara sales versus actual Co-Diagnostics, because I just on the previous question we just mentioned doing around you said, I think he said 7 million to 8 million so far in July and August.

So, if you could help break down that number? I'll appreciate it. .

Yes. So, the number of tests that we're that we have received orders for, as we mentioned in the press release, are approaching 50 million year-to-date and of that about 44.5 million are from the outside of India. And that would include United States and other places of the world. And about 4.5 million come from the Indian market.

So, our CoSara joint venture has kicked in very nicely. As you know, India is the third largest hotspot for COVID-19 in the world. So, our timing there was fortunate in terms of getting a lab that was able to manufacturer and get it up and running, so that we could get government approval and begin to market those tests there.

So that's in full swing now. And that's basically the breakdown.

So, when you look at that the present 50 million or now a good way to look at that is to take the revenue that we generated in the first quarter and then the revenue that we've reported in the second quarter, and then do a calculation where you take the 50, roughly 50 million tests that have been ordered to take out those, that's $50 million and test that you take out the first and second quarter results.

And that shows you what kind of a backlog we're currently filling with tests. And as we have a very robust up -- ability to produce tests, both in our laboratory in manufacturing facility in Salt Lake City, in what we're doing in India, and we also have engaged Promega in Madison, Wisconsin.

So, we have a ability to supply tests very quickly to customers that call within a few days, generally sometimes next day, shipments on request.

So, I hope that gives you enough net hope that gives you enough metrics to kind of figure out where we look like and how this $50 million with a test flows into the overall expectation of what we're going to be doing in Q3 and particularly in Q4..

Definitely help. If you don't mind, I'd like to just do a quick follow-up on that.

Where do you expect your production capacity? Where does it sit now? And then, how you are expecting that to ramp?.

Well, our production capacity is still very robust. We have previously cited our ability to manufacture in the neighborhood of 3 million tests a week, if it were necessary.

We ended up as it turns out doing our manufacturing in sort of a lumpy fashion where we produce a number of tests and have them in storage, so that when a customer calls, we can immediately respond with the right kind of quantity.

So, we send out quantities everywhere from a two hundred to half a million tests at a time, when we're sending them out to customers. But, I mean, they need a response very quickly and sometimes they almost need it the next day, if we can get an order out on the same day that we receive it. So, we have good inventory of tests.

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

And our next question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead with your question..

Thank you. In your Q, on Page 18, there's a nice table here that talks about the market opportunity for molecular diagnostic testing for tuberculosis, hepatitis, et cetera. But there's nothing here for COVID-19.

Do you have a feeling about what the annual market for diagnostic test is globally for a COVID-19?.

That's an excellent question, Theo, and it's nice to hear from you. I'll tell you what, I don't have a off the cuff answer for exactly how big the worldwide market is going to be for COVID-19. But I'll tell you what we're focused on at the moment.

We're focused on the utilization of our COVID-19 tests in conjunction with our ABC test, which is the upper respiratory Flu A, Flu B and COVID-19 panel to address what's going on worldwide and particularly here in the United States.

As an example, the United States will experience 1 billion colds this coming year and they'll experience, every child gets 6 to 10 colds per year.

So, what's going to happen is that, something's going to be in school and they're going to have a runny nose, and the question is going to immediately arise, is that COVID or is that just the Flu or is it just a cold, which is why we have spent so much time and effort in getting this ABC test ready.

I think I want to make, you aware and everybody on the call aware that this is a panel, this is an upper respiratory panel. It's the kind of test that generates a great deal of the revenue for some of the companies with, which we're going to now compete.

The upper respiratory panel is a high percentage in many cases of the total revenue for those companies, and now for the first time, we're going to be in that landscape, and we're not only going to be in that with a high quality and economical test, we're going to be in that landscape with a high volume, high throughput test that can be used on the same forms of equipment that are currently running our COVID-19 tests.

So, we're going to be concentrating on trying to generate business from those billion people that are going to have a cold in the United States over the next year. As the Rockefeller Foundation is suggested we're going to have 100 million cases of flu to spend upon us in short order here in just the United States.

And those are the kinds of situations that we're playing to, as we enlist large CLIA labs and midsize and smaller CLIA labs to take care of their clientele with the need to differentiate between cold, flu's and COVID-19.

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

I'm going to let Reed answer that question..

Right. I think we're well positioned to handle any working capital needs as we go. We have been following the policy of having money paid upfront for our cash so that we can fund all of our operations through to cash flow from our sales.

And that has given us the opportunity to not only pay for all of the expansion that we've done, but that has allowed us to accumulate some cash. So, from a working capital standpoint, I think we're well positioned to be able to satisfy any level of sales that that might come to us..

Ladies and gentlemen, at this time we've reached the end of today's question-and-answer session. I'd like to turn the conference call back over to Dwight H Egan for any closing remarks. .

Thank you, Jamie. And thank you, again, everyone for joining the call. This has been an incredibly busy and interesting, four and a half months yourself for the company since we received an FDA UA approval. We have a great test, or we're going to have a great ABC test.

And we're very excited about all of the different aspects of our tests in terms of its accuracy, in terms of sensitivity and specificity, in terms of the economical nature of it. And its ability to play on an open architecture and particularly in the high throughput area that we think is going to be so critical.

And so it's going to be a busy second half of the year, we've had a very good start in the third quarter. Now that we're halfway through the third quarter, we're going to be very busy filling orders on the approaching $50 million -- $50 million worth of tests that included what we know our year-to-date activity.

But we've got a lot of orders to send out. We'll be getting a lot of additional orders which we're going to be excited to show the strength of the company and our ability to meet those types of demands. So, thanks again for joining us on the call and for your participation and support to shareholders. That concludes my remarks..

Ladies and gentlemen, at this time with that we will conclude today's conference call. We do thank you for attending. You may now disconnect your lines..