Maskot/DigitalVision via Getty Images

Co-Diagnostics (NASDAQ:CODX) is a developer of PCR and molecular diagnostics treatments.

The company was in the early stages of commercializing its products before the pandemic. It had negligible revenues and was very unprofitable. When COVID arrived, the company was quick to obtain permits to market its PCR tests and made a killing.

Today, the company is back to unprofitability, but with a big difference; it now sits on $85 million in cash, which, compared to a market cap of $90 million, implies an EV close to $0.

CODX stock could seem attractive based on its cash reserves alone. However, I argue that the cash reserves can only be considered from the perspective of a controlling shareholder, and even then, the company is not a good opportunity at current prices. For a minority shareholder, the company has to be considered from the operational perspective because management has not commented that it plans to return cash to shareholders in the form of a dividend. When considered operationally, CODX is no longer an opportunity.

Diagnostics development: Before the pandemic, CODX was trying to commercialize its patented methodology for PCR and other forms of molecular testing.

Being unprofitable is something normal for these companies, but what caught my attention is that CODX spent more on general and administrative expenses than on selling and R&D combined. In the chart below, selling expenses is the difference between SG&A and G&A, or about $1 million for FY19.

Data by YCharts

The pandemic boom: The company quickly realized the opportunity opened by the pandemic. By January 14th, 2020, CODX had developed a COVID PCR test and was the first company to obtain approval for manufacturing in the U.S., as early as February 2020.

The revenue and profitability boom that ensued is still reverberating in today's financials, although at a much lower volume than during 2020 and 2021.

Data by YCharts

The cash mountain: The company accumulated cash through the issue of shares at fantastic prices (for the company, not for shareholders) and operating profitability. Its cash and securities holdings now stand at $85 million.

Data by YCharts

Back to unprofitability on a different level: As demand for COVID PCR tests recedes, the company is back to unprofitability. Of course, the situation is very different from before the pandemic, because there will always remain a demand for COVID tests, as it is now an endemic disease.

Data by YCharts

The problem with a cash-based valuation: One of the main bullish arguments behind CODX is that the investor is paying nothing for the company because its market cap equals its cash holdings and the company has no debt.

There are two problems with that reasoning. First, to distribute the cash, the investor should control the company, which is not the case for most readers, and even someone trying to control the company would need to pay a premium to acquire it. Second, because CODX is unprofitable on a recurrent basis absent the pandemic, the company requires cash to operate, at a rate of $6.5 million per quarter if current unprofitability continues. So the investor is paying 'nothing' for a company that losses $26 million a year.

For the minority shareholder, the question of cash and company valuation is tied to what management will do with that cash, and, therefore, to CODX's operations.

Management's shareholder return plans: The company's management has never mentioned plans to return at least part of its cash reserves to shareholders in the form of dividends. CODX has been repurchasing shares, $13 million as of 3Q22, at an average purchase price of $3.6 per share, or 20% above current share prices. The share repurchase idea suffers from the same problem as the controlling shareholder valuation. If the company repurchased all shares except those of the investor reading this, he would own an unprofitable company for free.

Management's operational plans: The company does not have any plans to liquidate, but rather to continue as a going concern. In particular, management believes in a home PCR platform that would allow users to test themselves, called Co-Dx PCR.

The platform does not have FDA approval yet. But even if it did, we would be back to square 2019, that is, trying to convince the market that it needs this new device. At the current rhythm, and considering that COVID-related demand does not decrease even more, the company is losing millions per quarter.

Is the patent portfolio valuable?: CODX is not the developer of PCR, but rather of two methods for reducing the tests' false positive reactions. PCR tests are very sensitive to contamination and tend to provide nonconclusive results.

These were the methods that the company was trying to sell before the pandemic, without much success. There is a single publication not generated by company employees or the method's inventor commenting on its effectiveness. In a press release from last year, the company commented that the method had been used in several international peer-reviewed papers. Still, the only available link was to a single paper studying COVID transmission among golf players.

Finally, the company is in the process of patenting its home testing device. I commented above that this product, even if successful, will take years to introduce.

Low managerial ownership: No director or executive has a meaningful portion of the company, with total directors and executives ownership (including options and share-based payments) not reaching 1.5% of the company. This is not necessarily a negative aspect, but it would be reassuring to have managers in the same boat as investors in a company whose value depends so much on future developments.

This is not a short recommendation. I only recommend not purchasing the stock. However, in this section, I treat some positive catalysts for the stock.

Another pandemic: Even the rumor of another global pandemic would probably increase CODX's share price, considering how well the company did in the previous pandemic.

Costs reductions: CODX's management has said that current R&D and SG&A costs are elevated for introducing the home PCR kit. I believe the introduction stage will last a while, and the company can begin developing and introducing a further product. Therefore I do not count on a cost reduction. However, on the current revenue and gross profits level, the company could become profitable if it significantly scaled back G&A and R&D costs.

Acquisitions: CODX could use part of its cash to acquire another company. The value of that acquisition has to be judged based on the deal's specifics. However, it is common for acquisitions to elevate a company's price temporarily. The company could also get acquired, probably at a premium to NAV.

Repurchase plans: The company currently has a relatively aggressive share repurchase plan of $30 million, $13 million of which have already been used. CODX could announce a new plan, which could, again temporarily, drive the stock price up. I commented on the logical problems behind repurchases, to the extreme of repurchasing all but one share.

The main bullish thesis behind CODX is its cash reserves. I believe these are difficult to access for a minority shareholder, and even if available, would imply that the investors get an unprofitable, cash-losing company for free.

On an operational basis, the company is already back to unprofitability, and I do not believe its technologies have enormous prospects. Two have been tested throughout the pandemic without showing any specific advantage over other methods (or at least no significant evidence published by the company). The other one is in the early development stage and will take time to generate profits if it ever does.

For these reasons, I believe CODX is not an opportunity, neither based on its cash reserves, nor on its operational and technological prospects.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.