Co-Diagnostics (NASDAQ:CODX)is a company that makes PCR and molecular diagnostics. Its stock symbol is CODX.

Before the pandemic, the company had just started putting its products on the market. It wasn’t profitable at all and didn’t bring in much money. When COVID came along and made a lot of money, the business moved quickly to get a license to sell its PCR tests.

The company is once again not making money, but there is a big difference: it now has $85 million in cash, which, compared to its market cap of $90 million, means that its EV is close to zero.

CODX stock looks good just based on how much cash it has on hand. But I say that the cash reserves should only be looked at from the point of view of a controlling shareholder, and even then, the company is not a good investment at its current price. Since management has not said that it intends to pay money to shareholders in the form of a dividend, a minority shareholder must look at the company from a functional standpoint. CODX is no longer possible in terms of how it works.

Enterprise Description

Before the pandemic, CODX was trying to sell its PCR and other molecular testing methods.

Most of the time, these kinds of businesses don’t make much money, but what interested me was that CODX spent more on general and administrative costs than on sales and research and development combined. In FY19, the difference between SG&A and G&A was about $1 million, which is what the graph below shows.

The pandemic spread quickly. The business quickly took advantage of the chances that the pandemic gave it. CODX made a COVID PCR test by January 14, 2020. They were the first company to get permission to make the test in the U.S., which they did as early as February 2020.

The resulting rise in sales and profits can still be heard in today’s financials, though not as loudly as in 2020 and 2021.

The company was able to build up capital by selling shares at high prices (for the company, not for the shareholders) and running profitable businesses. It now has cash and securities worth $85 million.

The Business’s Future and Its Value

As the market for COVID PCR tests goes down, the company is once again not making money. Since COVID is now an endemic disease, there will always be a need for COVID diagnostics. This is a big change from the situation before the pandemic.

One of the most optimistic claims about CODX is that the investor isn’t paying anything for the stock because the company has no debt and a market cap equal to the amount of cash it has.

This way of thinking is wrong in two ways. Second, the investor must own the company in order for the money to be given out, which is not the case for most readers. Even if someone wanted to own the company, they would have to pay a higher price to do so. Second, if the company doesn’t start making money soon, it will need $6.5 million every quarter to keep running. This is because the company has never made money before the pandemic. So, the investor isn’t really paying anything for a business that loses $26 million a year.

For the minority shareholder, how capital is used and how much the company is worth depends on what CODX does and what the management plans for it.

The company’s leaders have never told the public about their plans to return some or all of the cash reserves to shareholders as dividends. CODX has been buying back shares at an average price of $3.6 per share, which is 20% more than the current share price. As of 3Q22, $13 million had been spent on this. The idea of buying back shares has the same problem as regulating how much shareholders are worth. If the company bought back all the shares except for the one the investor owns, the investor would get a loss-making company for free.

The company has no plans to go out of business. Instead, it wants to keep doing business as usual. Management, in particular, backs Co-Dx PCR, which is a home PCR platform that lets users do their own tests.

The platform has not yet been approved by the FDA. But even if it did, we’d be right back where we started in 2019 trying to convince the market that it needs this new gadget. At the current rate, the company loses millions of dollars every quarter, and that’s assuming that demand for COVID doesn’t drop much more.

Is the patent portfolio valuable? CODX, not PCR, came up with two ways to reduce the number of false positive results in the tests. Because PCR tests are very sensitive to contamination, the results are often not clear.

Before the epidemic, the company tried unsuccessfully to get the word out about these methods. There is only one article that praises the method that wasn’t written by someone from the company or the person who made the system. In a press release from last year, the company said that the method had been used in many peer-reviewed articles from around the world. But the only link that could be found was to a study that looked at how COVID spreads among golfers.

Lastly, the company is working on getting a patent for its at-home testing tool. Even if this product does well, it will take years to get it to market, as I’ve already said.

Low managerial ownership: Directors and executives, who make up most of the management, don’t own more than 1.5% of the company when options and share-based payments are added in. This isn’t a bad thing in and of itself, but it would be nice if managers were in the same position as investors in a business whose value depends so much on the future.

Risks

This idea is not a quick one. I can only tell you not to buy the stock. In this section, I talk about a few things that help the stock.

Another pandemic: Given how well the company did during the last pandemic, even the rumor of a new worldwide epidemic would definitely raise CODX’s share price.

Cost savings: CODX’s management says that the home PCR kit has caused R&D and SG&A costs to go up. I think it will be a while before the business can start making and selling a new product. I don’t plan to cut costs because of this. Based on current revenue and gross profits, the business could, however, make money if it cut G&A and R&D costs by a lot.

Acquisitions: CODX could use some of the money it has to buy another company. When figuring out how much the acquisition is worth, the details of the deal must be taken into account. Acquisitions can temporarily raise the price of a company, though. The company could also be bought, probably for more than its NAV.

Plans for buying back shares: The company has an aggressive $30 million plan to buy back shares, of which $13 million has already been used. CODX could announce a new plan, which could raise the stock price again for a short time. In my explanation of why the repurchases don’t make sense, I went so far as to buy back all but one share.

Bottom Line

The most positive thing about CODX is that it has a lot of cash. I think it’s hard for a minority shareholder to get these, and even if they did, the investors would end up with a failing business that loses money for nothing.

The company is already losing money again, and I don’t think its new ideas will be very successful in the future. During the epidemic, two have been tried, but they have not shown that they are better than other methods (or at least no significant evidence published by the company). If the second one ever makes money, it will take a while because it is still in its early stages.

Because of these things, I don’t think CODX is a good place to invest, no matter what its financial situation or operational and technological capabilities are.

Featured Image: Pexels @ MART PRODUCTION

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