Co-Diagnostics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report and the documents incorporated by reference herein, including statements regarding future events, our future financial performance, business strategy, and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors and the documents incorporated by reference herein, which may affect our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a highly regulated, very competitive, and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report, and in particular, the risks discussed below and under the heading “Risk Factors” in other documents we file with the SEC. The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 25, 2021, and the audited financial statements and notes included therein. You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this Quarterly Report to conform our statements to actual results or changed expectations. You are advised, however, to consult any further disclosures we make on related subjects in our periodic and current reports filed with the SEC. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider this list to be a complete set of all potential risks or uncertainties. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation: ● the results of clinical trials and the regulatory approval process; ● our ability to acquire in a timely manner the materials necessary to manufacture our products; ● market acceptance of any products that may be approved for commercialization; ● our ability to protect our intellectual property rights; ● the impact of any infringement actions or other litigation brought against us; ● competition from other providers and products; ● our ability to develop and commercialize new and improved products and services; ● changes in government regulation; and ● and other factors (including the risks contained in the section entitled “Risk Factors” in other documents we file with the SEC) relating to our industry, our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. As used in this Quarterly Report, the terms “we”, “us”, “our”, and “Co-Diagnostics” means Co-Diagnostics, Inc., a Utah corporation and its consolidated subsidiaries (the “Company”), unless otherwise indicated. Executive Overview The following management’s discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition. This discussion should be read in conjunction with the accompanying unaudited financial statements and notes thereto included elsewhere in this report. The information contained in this discussion is subject to a number of risks and uncertainties. We urge you to review carefully the section of this report entitled “Cautionary Note Regarding Forward-Looking Statements” for a summary of the risks and uncertainties associated with an investment in our securities. 16 Business Overview Co-Diagnostics, Inc., a Utah corporation (the “Company” or “Co-Dx”), is developing robust and innovative molecular tools for detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. We develop, manufacture and sell 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 our tests we may sell diagnostic equipment from other manufacturers as self-contained lab systems (which we refer to as the “MDx Device”). Our diagnostics systems enable very rapid, low-cost, molecular testing for organisms and genetic diseases by automating historically complex procedures in both the development and administration of tests. Co-Dx’s technical advance involves a novel approach to Polymerase Chain Reaction (“PCR”) test design of primer and probe structure (“CoPrimers”) that eliminates one of the key vexing issues of PCR amplification, the exponential growth of primer-dimer pairs (false positives and false negatives) which adversely interferes with identification of the target DNA/RNA. We believe our proprietary molecular diagnostics technology is paving the way for innovation in disease detection and life sciences research through our enhanced detection of genetic material. Because we own our platform, we believe we will be able to accomplish this faster and more economically, allowing for significant margins while still positioning the Company to be a low-cost provider of molecular diagnostics and screening services. In addition, continued development has demonstrated the unique properties of our CoPrimer technology that make it ideally suited for a variety of applications where specificity is key to optimal results, including multiplexing several targets, enhanced Single Nucleotide Polymorphism (“SNP”) detection and enrichment for next gen sequencing. Our scientists use the complex mathematics of DNA/RNA test design, to engineer and optimize a DNA/RNA test and to automate algorithms that rapidly screen millions of possible options to pinpoint the optimum design. Dr. Satterfield, our founder, developed the Company’s intellectual property consisting of the predictive mathematical algorithms and proprietary reagents used in the testing process, which together represent a major advance in PCR testing systems. Co-Dx technologies are now protected by eight granted or pending US and foreign patents, as well as certain trade secrets and copyrights. Ownership of our proprietary platform permits us the advantage of avoiding payment of patent royalties required by other PCR test systems, which enables the sale of diagnostic tests at a lower price than competitors, while enabling us to maintain profit margins. We design our tests by identifying the optimal locations on the target gene for amplification and pair the location with the optimized primer and probe structure to achieve outputs that meet the design input requirements identified from market research. This is done by following planned and documented processes, procedures and validation protocols. In other words, the data resulting from our tests verify that we succeeded in designing what we intended at the outset. Verification is a series of testing that concludes that the product is ready to proceed to validation in an evaluation either in our lab or in an independent laboratory setting using initial production tests to confirm that the product as designed meets the user needs. In addition to testing for infectious disease, the technology lends itself to identifying any section of a DNA or RNA strand that describe any type of genetic trait, which creates a number of significant applications. We, in conjunction with our customers, are active in designing and licensing tests that identify genetic traits in plant and animal genomes. We also have three multiplexed tests developed to test mosquitos for the identification of diseases carried by the mosquitos to enable municipalities to concentrate their efforts in spraying mosquito populations on the specific areas known to be breeding the mosquitos that carry deadly viruses. Recent Developments Because we believe that testing for the COVID-19 virus is going to be a consideration for public health worldwide even after the current pandemic has subsided, we have initiated a project to facilitate frequent testing in schools, businesses, the hospitality industry, and at home. We believe this may be accomplished through the development of a low cost, easy to use by non-professionals, testing device that can provide PCR quality test results in less than an hour. This project is possible due to the fact that in 2020 we were able to successfully lyophilize our Logix Smart COVID-19 test reagents and additionally developed a saliva-based collection system that does not require the RNA/DNA extraction. While the final result is the same as if done through a lab-based IVD process, it has the advantages of increased speed and ease of handling thanks to lyophilization. We have engaged the services of a group of professionals who have the expertise and track record to develop the hardware for such a device using our CoPrimers as the reagent chemistry. The device will be available to homes, offices, event facilities, and the travel industry at a cost that will allow screening frequently to prevent spread of the COVID-19 virus and its variants in the future. The device would also be available to test for other pathogens detectable through saliva samples as we develop those tests and offer them to the marketplace. 17 RESULTS OF OPERATIONS The Three Months Ended September 30, 2021 Compared to the Three Months ended September 30, 2020 Revenues For the three months ended September 30, 2021, we generated revenues of $30,101,353, compared to revenues of $21,818,753 for the three months ended September 30, 2020. The increase in revenue of $8,282,600 was primarily due to sales of our LogixSmart COVID-19 test developed in response to the current COVID-19 pandemic. Of the total revenue in the three months ended September 30, 2021, $76,945 related to the sale of third party manufactured equipment and consumables, which we sourced and sold to customers to facilitate the sales of our COVID-19 test compared to $1,457,160 of revenue from the sales of such equipment for the three months ended September 30, 2020. Cost of Revenues We recorded cost of revenues of $3,311,255 for the three months ended September 30, 2021, compared to $5,821,281 for the three months ended September 30, 2020. This decrease is due to a reduction of product production costs, reduction in sales of third-party equipment, which have a higher cost of sales than tests, and the commission structure of certain sales of tests completed during the period. Of the total cost of sales during the three months ended September 30, 2021, $50,563 was from equipment sold to our customers compared to $1,213,434 for equipment sold to customers for the three months ended September 30, 2020. Expenses We incurred total operating expenses of $13,159,977 for the three months ended September 30, 2021, compared to total operating expenses of $3,959,270 for the three months ended September 30, 2020. The increase in operating expenses was due to the increase in business activities experienced as a result of our increase in revenue, increased third party sales commissions, reflected in sales and marketing, and increased investment in research and development. General and administrative expenses increased $716,081, from $2,203,417 for the three months ended September 30, 2020 to $2,919,498 for the three months ended September 30, 2021. The increase in general and administrative expenses was primarily due to increased activity to support the growth of our business. The primary drivers of the increased expenses related to increases in compensation including stock-based compensation, insurance expense, contributions to retirement plans and increased expenses for professional services. These increases were partially offset by a reduction of bad debt expense. Our sales and marketing expenses for the three months ended September 30, 2021 were $4,253,091, compared to $798,474 for the three months ended September 30, 2020. The increase of $3,454,617 was primarily a result of increased third-party sales commissions, personnel related expenses, including commissions paid to our sales team, and increased stock-based compensation due to the growth in revenue. Our research and development expenses increased by $4,971,461, from $921,889 for the three months ended September 30, 2020 to $5,893,350 for the three months ended September 30, 2021. The primary increase in expenses was research expenditures of greater than $4,300,000 for our point-of-care device in addition to increases in salaries and related benefits, including stock-based compensation, as we have added additional employees to our research and development team to increase our product development activities. 18 Other Income (Expense) For the three months ended September 30, 2021 we had total other expense of $53,561, compared to total other income of $778,549 for the three months ended September 30, 2020. The decrease was due primarily to a loss from our India joint venture. Net Income We realized net income for the three months ended September 30, 2021 of $11,475,966, compared with net income for the three months ended September 30, 2020 of $15,731,532. The decrease in net income of $4,255,566 was primarily the result of an increase in operating expenses, offset by an increase of product revenues and resulting margins from those sales. Additionally, we recorded income tax expense of $2,100,594 for the three months ended September 30, 2021, compared to an income tax benefit of $2,914,781 for the three months ended September 30, 2020. The Nine Months Ended September 30, 2021 Compared to the Nine Months ended September 30, 2020 Revenues For the nine months ended September 30, 2021, we generated revenues of $77,484,262 compared to revenues of $47,407,555 for the nine months ended September 30, 2020. The increase in revenue of $30,076,707 was primarily due to sales of our LogixSmart COVID-19 test developed in response to the current COVID-19 pandemic. Of the total revenue in the nine months ended September 30, 2021, $507,930 related to the sale of third party manufactured equipment and consumables, which we sourced and sold to customers to facilitate the sales of our COVID-19 test, compared to $3,239,471 of revenue from the sales of such equipment for the nine months ended September 30, 2020. Cost of Revenues We recorded cost of revenues of $9,088,175 for the nine months ended September 30, 2021, compared to $12,278,326 for the nine months ended September 30, 2020. This decrease is due to a reduction of product production costs, reduction in sales of third-party equipment, which have a higher cost of sales than tests, and the commission structure of certain sales of tests completed during the period. Of the total cost of sales during the nine months ended September 30, 2021, $384,602 was from equipment sold to our customers compared to $2,864,829 for equipment sold to customers for the nine months ended September 30, 2020. Expenses We incurred total operating expenses of $32,639,900 for the nine months ended September 30, 2021, compared to total operating expenses of $9,464,699 for the nine months ended September 30, 2020. The increase in operating expenses was due to the increase in business activities experienced as a result of our increase in revenue, increased third party sales commissions, reflected in sales and marketing, and increased investment in research and development. General and administrative expenses increased $2,469,685, from $5,853,935 for the nine months ended September 30, 2020 to $8,323,620 for the nine months ended September 30, 2021. The primary drivers of the increased expenses related to increases in compensation including stock-based compensation, insurance expense, contributions to retirement plans and increased expenses for professional services. These increases were partially offset by a reduction of bad debt expense. Our sales and marketing expenses for the nine months ended September 30, 2021 were $11,303,950, compared to $1,457,148 for the nine months ended September 30, 2020. The increase of $9,846,802 was primarily a result of increased third-party sales commissions, personnel related expenses, including commissions paid to our sales team, and increased stock-based compensation due to the growth in revenue. 19 Our research and development expenses increased by $10,707,413, from $2,072,160 for the nine months ended September 30, 2020 to $12,779,573 for the nine months ended September 30, 2021. The primary increase in expenses was research expenditures of greater than $8,800,000 for our point-of-care device in addition to increases in compensation and related benefits, including stock-based compensation, as we have added additional employees to our research and development team to increase our product development activities. Additionally, there has been an increase in lab supplies expense to further help us in our research and product development activities. Other Income (Expense) For the nine months ended September 30, 2021 we had total other expense of $364,723, compared to total other income of $1,092,037 for the nine months ended September 30, 2020. The decrease in other income was due primarily due to recording a loss of $401,288 from our India joint venture compared to income of $1,016,297 from our joint venture in the same period in 2020. Net Income We realized net income for the nine months ended September 30, 2021 of $29,160,154, compared to net income for the nine months ended September 30, 2020 of $29,671,348. The decrease in net income of $511,194 was primarily the result of sales of our LogixSmart COVID-19 test and resulting margins from those sales offset by increased operating expenses and income taxes. We recorded income tax expense of $6,231,310 for the nine months ended September 30, 2021, compared to an income tax benefit of $2,914,781 for the nine months ended September 30, 2020. Liquidity and Capital Resources At September 30, 2021, we had cash and cash equivalents of $82,658,248 and marketable investment securities of $1,251,285 that could readily be converted into cash if needed. Additionally, our total current assets of September 30, 2021, were $102,287,152 compared to total current liabilities of $4,119,897. Net cash provided by operating activities during the nine months ended September 30, 2021 was $36,202,945, compared to $8,207,340 for the nine months ended September 30, 2020. The increase in cash from operating activities was primarily due to our increased revenue. We received $3,028,192 of cash from investing activities during the nine months ended September 30, 2021 from maturity of marketable investments and repayment of advances from our India joint venture as compared to use of cash of $7,070,183 during the nine months ended September 30, 2020. Net cash provided by financing activities was $450,398 for the nine months ended September 30, 2021 realized from the exercise of options, compared to $19,200,067 for the same period in the prior year. The decrease is primarily due to net proceeds of $18,012,083 received from a series of three registered direct offerings in January and February 2020 pursuant to our shelf registration in addition to receiving $50,000 from the exercise of warrants and options for the nine months ended September 30, 2020. Since commencing sales of our Logix Smart COVID-19 test in March 2020, we have used our cash generated from those sales to fund the increase in our inventories and receivables and pay our operating expenses. We have increased our work force primarily in the area of research and development to complete development of additional tests to enable us to use our distributor network to sell other products throughout the world and remain profitable in the future. We believe that our existing capital resources and the cash generated from future sales will be sufficient to meet our projected operating requirements for the next 12 months. However, our available capital resources may be consumed more rapidly than currently expected and we may need or want to raise additional financing for strategic opportunities. If needed, we expect additional investment capital to come from (i) additional issuances of our common stock with existing and new investors or (ii) the private placement of other securities with investors similar to those that have provided funding in the past. We may not be able to secure such financing in a timely manner or on favorable terms, if at all. 20 On October 30, 2020, we filed a Registration Statement on Form S-3 (File No: 333-249651) with the Securities and Exchange Commission (the “SEC”). The SEC declared the Form S-3 effective on November 5, 2020. Pursuant to a prospectus supplement to the Form S-3, we may offer and sell up to $100 million of the following securities separately or together, in one or more series or classes and in amounts, at prices and on terms described in one or more offerings: common stock; preferred stock; warrants to purchase our securities, each of which may be convertible into equity securities; or units comprised of, or other combinations of, the foregoing securities through underwriting syndicates managed or co-managed by one or more underwriters or dealers, through agents or directly to purchasers. Each time our securities are offered, we will provide a prospectus supplement to the Form S-3 containing more specific information about the particular offering. We have not sold any securities pursuant to the Form S-3. The foregoing estimates, expectations and forward-looking statements are subject to change as we make strategic operating decisions from time to time and as our revenue and expenses fluctuate from period to period. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required under Regulation S-K for “smaller reporting companies.”