Co-Diagnostics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020 AND 2019 Table of Contents Report of Independent Registered Public Accounting Firm 24 Balance Sheets 25 Statements of Operations 26 Statement of Changes in Stockholders’ Equity (Deficit) 27 Statements of Cash Flows 28 Notes to Financial Statements 29 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Co-Diagnostics, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Co-Diagnostics, Inc. (the Company) as of December 31, 2020 and 2019, and the related statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Haynie & Company Salt Lake City, Utah March 25, 2021 We have served as the Company’s auditor since 2016. 24 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 42,976,713 $ 893,138 Marketable investment securities 4,335,446 - Accounts receivable, net 12,136,833 131,382 Inventory 7,995,189 197,168 Prepaid expenses 369,028 362,566 Deferred tax asset 547,224 - Total current assets 68,360,433 1,584,254 Property and equipment, net 949,639 196,832 Investment in joint venture 1,927,125 434,240 Total assets $ 71,237,197 $ 2,215,326 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 598,318 $ 5,959 Accrued expenses 3,487,063 200,788 Accrued expenses (related party) 120,000 120,000 Deferred revenue 305,307 1,323 Total current liabilities 4,510,688 328,070 Accrued expenses-long-term (related party) 30,000 150,000 Total liabilities 4,540,688 478,070 Commitments and contingencies (Note 11) Stockholders’ equity Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 and 25,600 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively - 26 Common stock, $0.001 par value; 100,000,000 shares authorized; 28,558,033 and 17,342,922 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 28,558 17,343 Additional paid-in capital 49,157,236 26,687,701 Accumulated earnings (deficit) 17,510,715 (24,967,814 ) Total stockholders’ equity 66,696,509 1,737,256 Total liabilities and stockholders’ equity $ 71,237,197 $ 2,215,326 See accompanying notes to consolidated financial statements. 25 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2020 2019 Revenue $ 74,552,758 $ 214,974 Cost of revenue 16,591,346 112,431 Gross profit 57,961,412 102,543 Operating expenses Sales and marketing 4,665,113 1,061,676 General and administrative 8,278,734 3,497,273 Research and development 3,185,290 1,371,433 Depreciation and amortization 138,635 65,902 Total operating expenses 16,267,772 5,996,284 Income (loss) from operations 41,693,640 (5,893,741 ) Other income (expense) Interest income 97,215 36,652 Interest expense - (106,437 ) Gain (loss) on disposition of assets (175 ) 850 Gain (loss) on equity method investment in joint venture 778,385 (232,881 ) Total other income (expense) 875,425 (301,816 ) Income (loss) before income taxes 42,569,065 (6,195,557 ) Income tax provision 90,536 - Net income (loss) $ 42,478,529 $ (6,195,557 ) Earnings (loss) per common share: Basic $ 1.59 $ (0.37 ) Diluted $ 1.52 $ (0.37 ) Weighted average shares outstanding: Basic 26,720,133 16,756,912 Diluted 28,000,341 16,756,912 See accompanying notes to consolidated financial statements. 26 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Earnings Total Stockholders’ Equity Shares Amount Shares Amount Capital (Deficit) (Deficit) Balance as of December 31, 2018 - $ - 12,923,383 $ 12,923 $ 17,622,433 $ (18,694,167 ) $ (1,058,811 ) Public offering, net of offering costs of $592,764 - - 3,925,716 3,926 4,899,312 - 4,903,238 Issuance of preferred stock 30,000 30 - - 2,999,970 - 3,000,000 Conversion of preferred stock to common (4,400 ) (4 ) 366,667 367 (363 ) - - Warrant exercise price reset - - - - 78,090 (78,090 ) - Stock-based compensation - - 127,156 127 1,088,259 - 1,088,386 Net loss - - - - - (6,195,557 ) (6,195,557 ) Balance as of December 31, 2019 25,600 $ 26 17,342,922 $ 17,343 $ 26,687,701 $ (24,967,814 ) $ 1,737,256 Public offering, net of offering costs of $1,457,922 - - 7,242,954 7,243 18,004,840 - 18,012,083 Common stock issued for warrant exercises - - 856,660 857 269,143 - 270,000 Common stock issued for option exercises - - 871,229 871 1,459,728 - 1,460,599 Stock-based compensation expense - - 110,935 111 2,737,931 - 2,738,042 Conversion of preferred stock to common (25,600 ) (26 ) 2,133,333 2,133 (2,107 ) - - Net income - - - - - 42,478,529 42,478,529 Balance as of December 31, 2020 - $ - 28,558,033 $ 28,558 $ 49,157,236 $ 17,510,715 $ 66,696,509 See accompanying notes to consolidated financial statements. 27 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 Cash flows from operating activities Net income (loss) $ 42,478,529 $ (6,195,557 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 138,635 65,902 Stock-based compensation expense 2,738,041 1,088,386 Accretion of notes payable discount - 91,428 Loss (gain) on disposition of assets 175 (850 ) Loss (gain) from equity method investment (778,385 ) 232,881 Bad debt expense 954,804 11,000 Deferred income taxes (547,224 ) - Changes in assets and liabilities: Accounts and other receivable (12,960,255 ) (121,462 ) Prepaid and other assets (6,462 ) (292,463 ) Inventory (7,915,241 ) (179,015 ) Deferred revenue 303,984 1,323 Accounts payable and accrued expenses 3,758,634 (226,664 ) Net cash provided by (used in) operating activities 28,165,235 (5,525,091 ) Cash flows from investing activities Purchases of property and equipment (774,397 ) (113,246 ) Purchases of marketable investment securities (9,310,000 ) - Proceeds from maturities of marketable investment securities 4,974,554 - Investment in joint venture (714,500 ) (322,000 ) Net cash used in investing activities (5,824,343 ) (435,246 ) Cash flows from financing activities Proceeds from sale of common stock 19,470,005 5,496,002 Proceeds from sale of preferred stock - 1,000,000 Proceeds from exercise of options and warrants 1,730,599 - Payment of offering costs (1,457,921 ) (592,764 ) Net cash provided by financing activities 19,742,683 5,903,238 Net increase in cash and cash equivalents 42,083,575 (57,099 ) Cash and cash equivalents at beginning of period 893,138 950,237 Cash and cash equivalents at end of period $ 42,976,713 $ 893,138 Supplemental disclosure of cash flow information Interest paid $ - $ 15,000 Income taxes paid $ - $ - Supplemental disclosure of non-cash investing and financing transactions Inventory moved to property, plant and equipment $ 117,220 $ - Warrants issued for services $ - $ 379,487 Conversion of preferred stock to common $ - $ 440,000 Conversion of debt for preferred stock $ - $ 2,000,000 See accompanying notes to consolidated financial statements. 28 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2020 AND 2019 Note 1 – Overview and Basis of Presentation Description of Business Co-Diagnostics, Inc., a Utah corporation (the “Company” or “CDI”), is developing robust and innovative molecular tools for detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. The Company develops, manufactures and sells reagents used for diagnostic tests that function via the detection and/or analysis of nucleic acid molecules (DNA or RNA). In connection with the sale of these tests, the Company may sell diagnostic equipment and supplies from other manufacturers. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Such estimates include receivables and other long-lived assets, legal and regulatory contingencies, income taxes, share based arrangements, and others. These estimates and assumptions are based on management’s best estimates and judgments. Actual amounts and results could differ from those estimates. Basis of Presentation The accompanying audited consolidated financial statements of Co-Diagnostics, Inc. and its wholly owned subsidiary have been prepared to reflect the financial position, results of operations and cash flows of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. Note 2 – Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, money market funds and highly liquid investments with an original maturity date of 90 days or less from the date of purchase. The fair value of cash equivalents approximated their carrying value as of December 31, 2020 and December 31, 2019. The Company has its cash and cash equivalents with a large creditworthy financial institution and the balance exceeded federally insured limits. The Company has not experienced any losses in such accounts, and management believes the Company is not exposed to any significant credit risk on cash and cash equivalents. Marketable Investment Securities The Company’s marketable investment securities are comprised of investments in certificates of deposit. The Company determines the appropriate classification of its marketable investment securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable investment securities as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its marketable investment securities, including securities with stated maturities beyond twelve months, within current assets in the condensed consolidated balance sheets. Any unrealized gains or losses are immaterial. Accounts Receivable Trade accounts receivable are recorded at the invoiced amount (net of allowance) and do not bear interest. The Company maintains an allowance for doubtful accounts for amounts the Company does not expect to collect. In establishing the required allowance, management considers historical losses, current market condition, customers’ financial condition, the age of receivables, and current payment patterns. Account balances are written off against the allowance once the receivable is deemed uncollectible. Recoveries of trade receivables previously written off are recorded when collected. At December 31, 2020 total accounts receivable was $12,928,633 with an allowance for uncollectable accounts of $791,800 resulting in a net amount of $12,136,833. At December 31, 2019 total accounts receivable was $142,382 with an allowance for uncollectable accounts of $11,000 resulting in a net amount of $131,382. 29 Equity-Method Investments Our equity method investments are initially recorded at cost and are included in other long-term assets in the accompanying condensed consolidated balance sheet. We adjust the carrying value of our investment based on our share of the earnings or losses in the periods which they are reported by the investee until the carrying amount is zero. The earnings or losses are included in other income (expense) in the accompanying condensed consolidated statements of operations. Inventory Inventory is stated at the lower of cost or net-realizable value. Inventory cost is determined on a first-in first-out basis that approximates average cost in accordance with ASC 330-10-30-12. At December 31, 2020, the Company had $7,995,189 in inventory, of which $598,881 was finished goods and $7,396,308 was raw materials. At December 31, 2019, the $197,168 of inventory was finished goods. The Company establishes reserves to reduce low-moving, obsolete, or unusable inventories to their estimated useful or scrap values. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the property, generally from three to five years. Repairs and maintenance costs are expensed as incurred except when such repairs significantly add to the useful life or productive capacity of the asset, in which case the repairs are capitalized. The Company reviews its long-lived assets, including property and equipment, for impairment whenever an event or change in facts and circumstances indicates that their carrying amounts may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount exceeds the undiscounted cash flows, the assets are determined to be impaired and an impairment charge is recognized as the amount by which the carrying amount exceeds fair value. Revenue Recognition The Company generates revenue from product sales and license sales. The Company recognizes revenue when all of the following criteria are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as the Company satisfies each performance obligation. Based on the criteria above, the Company typically recognizes revenue upon delivery. The Company constrains revenue by giving consideration to factors that could otherwise lead to a probable reversal of revenue. The Company records any payments received from customers prior to the Company fulfilling its performance obligation(s) as deferred revenue. Deferred Revenue Deferred revenue primarily consists of payments received from customers prior to the Company fulfilling its performance obligation of providing the product. When this occurs, the Company records a contract liability as deferred revenue. Deferred revenue is recognized as revenue as the related performance obligations are satisfied. 30 Research and Development Research and development costs are expensed when incurred. The Company expensed $3,185,290 and $1,371,433 of research and development costs for the years ended December 31, 2020 and 2019, respectively. Stock-based Compensation The Company has granted stock-based awards, including restricted stock, stock options, stock warrants and restricted stock units (“RSUs”), to its employees, certain consultants and members of its board of directors. The Company records stock-based compensation based on the grant date fair value of the awards and recognizes the fair value of those awards as expense using the straight-line method over the requisite service period of the award. The Company estimates the grant date fair value of stock options using the Black-Scholes option-pricing model. When an award is forfeited prior to the vesting date, the Company recognizes an adjustment for the previously recognized expense in the period of the forfeiture. Income Taxes The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under this method, d eferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. Valuation allowances are provided when it is more-likely-than-not that some or all of the deferred income tax assets may not be realized. In assessing the need for a valuation allowance, the Company has considered its historical levels of income, expectations of future taxable income and ongoing tax planning strategies. Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial positions, result of operations, or cash flows. Net Income (Loss) per Share Basic net income or loss per common share is computed by dividing net income or loss applicable to common shareholders by the weighted average number of shares outstanding during each period. Diluted net income or loss per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased by common shares that could be issued upon conversion or exercise of other outstanding securities to the extent those additional common shares would be dilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income or loss per share by application of the treasury stock method. During periods when the Company is in a net loss position, basic net loss per share is the same as diluted net loss per share as the effects of potentially dilutive securities are anti-dilutive Concentrations Risk and Significant Customers The Company had certain customers which are each responsible for generating 10% or more of the total revenue for the year ended December 31, 2020. Two customers together accounted for approximately 38% of total revenue for the year ended December 31, 2020. 31 Two customers each accounted for more than 10% of accounts receivable at December 31, 2020. These two customers together accounted for approximately 48% of accounts receivable at December 31, 2020. Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption. As an emerging growth company (“EGC”), the Company has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires recognition of leased assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual periods and interim periods with those periods beginning after December 15, 2021, for public EGC companies like us. The Company expects to use the modified retrospective transition method with the option to recognize a cumulative-effect adjustment at the date of adoption. The Company expects its balance sheet will be impacted as it records right-of-use assets and lease liabilities on its consolidated balance sheet, but does not expect the adoption of this standard will have a material impact on its consolidated statements of operations and cash flows. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for certain financial instruments, which includes the Company’s accounts receivable. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The update is effective for annual periods and interim periods with those periods beginning after December 15, 2021, for public EGC companies like us, but the Company may adopt it upon election on January 1, 2021. The standard requires a cumulative effect adjustment to the balance sheet as of the beginning of the first early reporting period in which the guidance is effective. The Company is evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements and when it plans to adopt it. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which removes certain exceptions for investments, intra-period allocations and interim calculations and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020; early adoption is permitted. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures. Note 3 – Fair Value Measurements The Company measures and records certain financial assets at fair value on a recurring basis. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds. The following three levels of inputs are used to measure the fair value of financial instruments: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. 32 The Company’s financial instruments that are measured at fair value on a recurring basis consist of certificates of deposit. The following table summarizes the assets measured at fair value on a recurring basis as of December 31, 2020 by level within the fair value hierarchy: December 31, 2020 (Level 1) (Level 2) (Level 3) Total Marketable investment securities: Certificates of deposit $ - $ 4,335,446 $ - $ 4,335,446 Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, accounts payable, accrued liabilities, and other liabilities approximate fair value due to their short-term maturities and are excluded from the fair value tables above. Note 4 – Property and Equipment Property and equipment, net consisted of the following: Estimated Useful Lives December 31, in years 2020 2019 Lab equipment 3 - 5 $ 1,212,561 $ 386,802 Leasehold improvements 3 3,157 - Office equipment, furniture and other 2 - 5 38,344 7,133 Less accumulated depreciation and amortization (304,423 ) (197,103 ) Fixed assets, net $ 949,639 $ 196,832 Note 5 – Revenue The following table sets forth revenue by geographic area: Years Ended December 31, 2020 2019 United States $ 44,862,751 $ 214,974 Rest of World 29,690,007 - Total $ 74,552,758 $ 214,974 Percentage of revenue by area: United States 60 % 100 % Rest of World 40 % 0 % Deferred Revenue Changes in the Company’s deferred revenue balance for the year ended December 31, 2020 were as follows: Balance as of December 31, 2019 $ 1,323 Revenue recognized that was included in deferred revenue balance at the beginning of the period (1,323 ) Increase due to prepayments from customers 305,307 Balance as of December 31, 2020 $ 305,307 33 The Company expects to perform its performance obligation and recognize the deferred revenue as revenue during the year ended December 31, 2021. Note 6 – Stockholders’ Equity Common Stock and Preferred Stock On January 28, 2020, the Company completed the sale of 3,448,278 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.45 per share in a registered direct offering. The aggregate gross proceeds for the sale of the shares were $5,000,003 and the Company received net proceeds of $4,517,102 after deducting offering costs of $482,901. On February 13, 2020, the Company completed the sale of 3,324,676 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $3.08 per share in a registered direct offering. The aggregate gross proceeds for the sale of the shares were $10,240,002 and the Company received net proceeds of $9,612,561 after deducting offering costs of $627,441. On March 2, 2020, the Company completed the sale of 470,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $9.00 per share in a registered direct offering. The aggregate gross proceeds for the sale of the shares were $4,230,000 and the Company received net proceeds of $3,882,420 after deducting offering costs of $347,580. During the year ended December 31, 2020, the Company issued an aggregate of 2,133,333 shares of common stock upon conversion of all of the Company’s convertible preferred stock outstanding as of December 31, 2019. During the year ended December 31, 2020, the Company issued 856,660 shares of common stock upon the exercise of warrants and received $270,000. During the year ended December 31, 2020, the Company issued 871,229 shares of common stock upon the exercise of options and received $1,460,599. During the year ended December 31, 2020, the Company issued 83,935 shares of common stock for services provided by third parties primarily related to investment relations services. In January 2019, we entered into a securities purchase agreement with investors, whereby the investors purchased from the Company 30,000 shares of Series A Convertible Preferred Stock of the Company for a purchase price of $3,000,000. The Series A Convertible Preferred Stock was convertible to common stock at a conversion price calculated by multiplying the number of preferred shares being converted by $100 and dividing the result by $1.20. During the year ended December 31, 2019, 366,667 shares of our common stock were issued for the conversion of 4,400 shares of Series A Preferred Stock. In February 2019, the Company completed the sale of 3,925,716 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.40 per share in a registered direct offering. The aggregate gross proceeds for the sale of the shares were $5,496,002 and the Company received net proceeds of $4,903,238 after deducting offering costs of $592,764. During the year ended December 31, 2019, the Company issued an aggregate of 127,516 shares of common stock for services provided by third parties primarily related to investment relations services. 34 Note 7 – Earnings per Share The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share for years ended December 31, 2020 and 2019: Years Ended December 31, 2020 2019 Numerator Net income (loss), as reported $ 42,478,529 $ (6,195,557 ) Denominator Weighted average shares, basic 26,720,133 16,756,912 Dilutive effect of stock options, warrants and RSUs 1,280,208 - Shares used to compute diluted earnings per share 28,000,341 16,756,912 Basic earnings per share $ 1.59 $ (0.37 ) Diluted earnings per share $ 1.52 $ (0.37 ) 50,000 options were excluded from the computation of diluted earnings per share for the year ended December 31, 2020, because the effect would have been anti-dilutive. As a result of incurring a net loss for the year ended December 31, 2019, no potentially dilutive securities are included in the calculation of diluted earnings per share because such effect would be anti-dilutive. The Company had potentially dilutive securities as of December 31, 2019, consisting of: (i) 2,021,817 options, (ii) 983,535 warrants and (iii) 2,133,333 for shares of convertible preferred stock. Note 8 – Stock-Based Compensation Stock Incentive Plans The Co-Diagnostics, Inc. 2015 Long Term Incentive Plan (the “Incentive Plan”) reserves an aggregate of 6,000,000 shares of common stock issuable upon the grant of awards under the Incentive Plan. The number of awards available for issuance under the Incentive Plan was 3,278,683 at December 31, 2020. Stock Options The following table summarizes option activity during the year ended December 31, 2020: Number of Options Weighted Average Exercise Price Weighted Average Fair Value Weighted Average Remaining Contractual Life (Years) Outstanding at December 31, 2019 2,021,817 $ 1.69 $ 0.83 Granted 150,000 8.14 4.74 Expired - - - Forfeited/Cancelled - - - Exercised (871,229 ) 1.68 0.89 Outstanding at December 31, 2020 1,300,588 $ 2.44 $ 1.24 7.90 Exercisable at December 31, 2020 1,003,921 $ 2.32 $ 1.18 7.68 The total intrinsic value of options exercised during the year ended December 31, 2020 was approximately $11.8 million. The aggregate intrinsic value of outstanding options at December 31, 2020 was approximately $7.1 million. There were 296,667 of unvested options as of December 31, 2020. 35 Stock-based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as expense over the vesting period using the straight-line method. The Company uses the Black-Scholes model to value options granted. The following weighted average assumptions were used in estimating the grant date fair value of options: Years Ended December 31, 2020 2019 Risk-free interest rate 1.05 % 1.56 % Expected life (years) 7.3 10.0 Expected volatility 62.82 % 63.65 % Expected dividend yield None None As of December 31, 2020, there were 296,667 of unvested options and $270,147 of unrecognized stock-based compensation expense related to options. The unrecognized stock-based compensation expense is expected to be recognized over 1.5 years. Restricted Stock Units The grant date fair value of RSUs granted is determined using the closing market price of the Company’s common stock on the grant date with the associated compensation expense amortized over the vesting period of the awards. The following table sets forth the outstanding RSUs and related activity for the year ended December 31, 2020: Number of RSUs Weighted Average Grant Date Fair Value Outstanding at December 31, 2019 - $ - Granted 549,500 10.49 Vested (27,000 ) 10.49 Forfeited/Cancelled - - Outstanding at December 31, 2020 522,500 $ 10.49 As of December 31, 2020, there was $5.2 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 2.8 years. Warrants The Company has issued warrants related to past financings and as compensation to third parties for services provided. The Company estimates the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model. The Company amortizes the fair value of issued warrants using a vesting schedule based on the terms and conditions of each warrant if granted for services. 36 The following table summarizes warrant activity during the year ended December 31, 2020: Number of Warrants Weighted Average Exercise Price Weighted Average Fair Value Weighted Average Remaining Contractual Life (Years) Outstanding at December 31, 2019 983,535 $ 1.44 $ 1.03 Granted 20,000 1.40 15.19 Expired (9,090 ) 6.00 0.17 Forfeited/Cancelled - - - Exercised (924,445 ) 1.42 1.43 Outstanding at December 31, 2020 70,000 $ 1.83 $ 5.21 3.3 The intrinsic value of warrants exercised during the year ended December 31, 2020 was approximately $9.7 million. The aggregate intrinsic value of outstanding warrants at December 31, 2020 was approximately $523,000. The fair values for the warrants issued were estimated at the date of grant using the Black Scholes model with the following weighted average assumptions: Years Ended December 31, 2020 2019 Risk-free interest rate 0.34 % 1.98 % Expected life (years) 5.0 5.0 Expected volatility 61.42 % 50.88 % Expected dividend yield None None All outstanding warrants are exercisable at December 31, 2020 and there was no unrecognized stock-based compensation expense related to warrants. Stock Issued for Services The Company has issued restricted stock to third parties for services provided. The grant date fair value of the restricted stock granted is determined using the closing market price of the Company’s common stock on the grant date with the associated compensation expense amortized over the vesting period of the stock awards. The Company has issued 83,935 of restricted stock for services during the year ended December 31, 2020 and there was no unrecognized stock-based compensation expense related to restricted stock issued. Stock-Based Compensation Expense The Company recognized stock-based compensation expense related to the types of awards discussed above as follows: Years Ended December 31, 2020 2019 Options $ 901,345 $ 589,684 Restricted stock units 500,861 - Warrants 303,802 390,265 Stock 1,032,033 108,437 Total stock-based compensation expense $ 2,738,041 $ 1,088,386 37 Note 9 – Income Taxes The components of the provision for income taxes consists of the following for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Current: Federal $ - $ - State 637,760 - Total current $ 637,760 $ - Deferred: Federal (452,544 ) - State (94,680 ) - Total deferred (547,224 ) - Total income tax expense $ 90,536 $ - The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to income (loss) before income taxes for the years ended December 31, 2020 and 2019 due to the following: Year Ended December 31, 2020 2019 Federal income tax benefit at statutory rate $ 8,939,504 $ (1,610,800 ) State income tax benefit, net of federal tax benefit 1,395,541 - Permanent differences (4,633,255 ) 9,000 Change in valuation allowance (5,161,500 ) 1,258,300 Other (449,754 ) 343,500 90,536 - 38 Net deferred tax assets consist of the following components as of December 31, 2020 and 2019: December 31, 2020 2019 Deferred tax assets: Accrued liabilities $ 37,898 $ - Reserves and allowances 200,049 - Deferred compensation 241,652 - Research and development credits 423,001 - Net operating loss carryforwards - 5,131,100 SEC 179 carry-forwards - 1,600 Depreciation - 28,800 Total deferred tax assets 902,600 5,161,500 Deferred tax liabilities: Property and equipment, net (233,951 ) - Prepaids (66,456 ) - Other (54,969 ) - Total deferred tax liabilities (355,376 ) - Net deferred tax assets 547,224 5,161,500 Less valuation allowance - (5,161,500 ) Net deferred tax assets $ 547,224 $ - At December 31, 2020, the Company had no federal or state net operating loss carryforwards. At December 31, 2020, the Company had $750,634 of federal research and development credit carryforward. This credit has been offset by a liability for unrecognized tax benefits of $375,317. If not utilized, the credit will expire beginning in 2036. At December 31, 2020, the Company had $120,198 of state research and development credit carryforward. This credit has been offset by a liability for unrecognized tax benefits of $72,514. If not utilized, the credit will expire beginning in 2032. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, in part because in the current year we achieved three years of cumulative pre-tax income, management determined that there is sufficient positive evidence to conclude that it is more likely than not that its deferred taxes are realizable. It therefore fully reduced its valuation allowance accordingly by $5,161,500. ASC Topic 740-10-05 requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. At December 31, 2020, the Company had a $447,831 liability for unrecognized tax benefits which is fully netted against deferred tax assets for related carryforward credits. The Company expects no material changes to the liability for unrecognized tax benefits in the next 12 months. Interest and penalties associated with uncertain tax positions are recorded as a component of income tax expense. A reconciliation of the beginning and ending amount of unrecognized benefits is as follows: December 31, 2020 2019 Unrecognized tax benefits at the beginning of the year $ - $ - Gross increases - current year tax positions 232,145 - Gross increases - prior year tax positions 215,686 - Gross decreases - prior year tax positions - - Unrecognized tax benefits at end of year $ 447,831 $ - Interest and penalties in year-end balance $ - $ - 39 The Company is subject to taxation in the United States and other state jurisdictions. The tax years from December 31, 2016 through December 31, 2020 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject. The Company is not currently under examination by any taxing authority. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The income tax provisions of the CARES Act include temporary changes to income-based tax laws, including the ability to utilize net operating losses, interest expense deductions, alternative minimum tax credit refunds, charitable contributions, and depreciation of qualified improvement property. The income tax provisions of the CARES Act did not have a material impact on our consolidated financial statements for the year ended December 31, 2020. Note 10 – Related Party Transactions The Company acquired the exclusive rights to the CoPrimer technology pursuant to an exclusive license agreement, dated April 2014 (the “Exclusive License Agreement”), between the Company and DNA Logix, Inc., which was assigned to Dr. Brent Satterfield, an executive officer, prior to the Company’s acquisition of DNA Logix, Inc. On March 1, 2017, the Company entered into an amendment to its Exclusive License Agreement for its Cooperative Primers (“License”) technology with Dr. Satterfield. The amendment provided in part that all accrued royalties under the License ceased as of January 1, 2017, and the Company agreed to pay to Dr. Satterfield $700,000 of accrued royalties at the rate of $10,000 per month starting in January 2017. At December 31, 2020, the aggregate balance of this related party liability was $150,000. Note 11 – Commitments and Contingencies Lease Obligations The Company’s offices are located at 2401 S. Foothill Dr., Suite D, Salt Lake City, Utah 84109-1479. In February 2020, the Company entered into a 4-year lease agreement for its office space and in March 2020, the Company entered into an addendum with our landlord for additional space. The new aggregate space consists of approximately 13,687 square feet at a monthly rate of $28,825 and expires in February 2024. For the years ended December 31, 2020 and 2019, the Company expensed $311,963 and $175,137, respectively, for rent. The Company’s future minimum lease payments were as follows as of December 31, 2020: Year Ending December 31, 2021 $ 284,406 2022 293,595 2023 303,059 2024 50,774 Total lease payments $ 931,834 Litigation Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Five different securities class action complaints were filed in July, September and December by certain stockholders of the Company against the Company claiming that the Company promulgated false and misleading press releases to increase the price of our stock to improperly benefit the officers and directors of the Company. The plaintiffs demand compensatory damages sustained as a result of the Company’s alleged wrongdoing in an amount to be proven at trial. The Company believes these lawsuits are without merit and intends to defend the cases vigorously. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in these cases. As of the date of this report, the Company does not believe it is probable that these cases will result in an unfavorable outcome; however, if an unfavorable outcome were to occur in these cases, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. Note 12 – Subsequent Events The Company evaluated subsequent events pursuant to ACS Topic 855 and determined that there are no additional events that need to be reported. 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.