Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
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 audited financial statements, and notes thereto, included elsewhere in this report. In addition to historical information,
this Annual Report contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those
set forth under the caption “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
Business
Overview
Co-Diagnostics,
Inc., a Utah corporation (the “Company” or “CODX”), develops, manufactures and sells reagents used for
diagnostic tests that function via the detection and/or analysis of nucleic acid molecules (DNA or RNA), including robust and innovative
molecular tools for detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. 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”). We have also developed a unique, groundbreaking portable PCR device (the “YourTest PCR™
Device”) that has been designed to bring affordable, reliable gold-standard polymerase chain reaction to patients in point-of-care
and even at-home settings.
Our
diagnostics systems enable dependable, low-cost, molecular testing for organisms and genetic diseases by automating historically complex
procedures in both the development and administration of tests. CODX’s technical advance involves a novel, patented approach
to 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. For various reasons, including owning our 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.
18
In
addition, continued development has demonstrated the unique properties of our CoPrimer technology that we believe makes 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 generation sequencing.
Our
scientists use the complex mathematics of DNA/RNA test design to engineer and optimize DNA/RNA tests and to automate algorithms that
rapidly screen millions of possible options to pinpoint the optimum design. Dr. Brent Satterfield, our founder, developed the Company’s
intellectual property consisting of the predictive mathematical algorithms and patented molecular structure used in the testing process,
which together represent a major advance in PCR testing systems. CODX technologies are now protected by more than 20 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 may allow the sale of diagnostic PCR tests at a lower
price than competitors, while enabling us to maintain profit margins.
We
may either sell or lease the MDx Device to labs and diagnostic centers, through sale or lease agreements, and sell the reagents that
comprise our proprietary tests to those laboratories and testing facilities.
Our
proprietary test design process involves identifying the optimal locations on the target genes for amplification and pair the locations
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 testing. In other words, we use the data resulting from our
tests to verify whether 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 laboratory or in an independent laboratory setting
using initial production tests to confirm that the product as designed meets the user needs.
Using
our proprietary test design system and proprietary reagents, we have designed and obtained regulatory approval in the European Community
and/or in India to sell PCR diagnostic tests for the detection of COVID-19, influenza, tuberculosis, hepatitis B and C, human papillomavirus,
malaria, chikungunya, dengue, and the zika virus. In the United States, CODX has obtained Emergency Use Authorization (“EUA”)
for its Logix Smart™ COVID-19 detection test from the Food and Drug Administration, or FDA, and sells that test to qualified labs.
In addition, our COVID-19 detection test and certain of our other suite of COVID-19 products have been approved for sale in countries
such as the United Kingdom, Australia and Mexico by the regulatory bodies in those countries and have been registered for sale in many
more countries.
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 managing
mosquito populations on the specific areas known to be breeding the mosquitos that carry deadly viruses.
19
RESULTS
OF OPERATIONS
Results
of Operations for the Years Ended December 31, 2021 and 2020
The
table below provides a comparison of our operating results for the year ended December 31, 2021 as compared to the year ended December
31, 2020.
Years Ended December 31,
Year Change
2021
2020
Change
%
Revenue
$ 97,885,603
$ 74,552,758
$ 23,332,845
31 %
Cost of revenue
11,574,944
16,591,346
(5,016,402 )
-30 %
Gross profit
86,310,659
57,961,412
28,349,247
49 %
Operating expenses
Sales and marketing
13,397,813
4,665,113
8,732,700
187 %
General and administrative
11,550,615
8,278,734
3,271,881
40 %
Research and development
14,961,916
3,185,290
11,776,626
370 %
Depreciation and amortization
335,363
138,635
196,728
142 %
Total operating expenses
40,245,707
16,267,772
23,977,935
147 %
Income from operations
46,064,952
41,693,640
4,371,312
10 %
Other income (expense)
Interest income
45,631
97,215
(51,584 )
-53 %
Loss on disposition of assets
(44,355 )
(175 )
(44,180 )
25246 %
Gain (loss) on equity method investment in joint venture
(430,433 )
778,385
(1,208,818 )
-155 %
Total other income (expense)
(429,157 )
875,425
(1,304,582 )
-149 %
Income before income taxes
45,635,795
42,569,065
3,066,730
7 %
Income tax provision
8,977,231
90,536
8,886,695
9816 %
Net income
$ 36,658,564
$ 42,478,529
$ (5,819,965 )
-14 %
Revenues
For
the year ended December 31, 2021, we generated $97.9 million of revenue compared to revenue of $74.5 million in the year ended December
31, 2020. The increase in revenue of $23.3 million was primarily due to sales of our LogixSmart COVID-19 test throughout the world, which
was developed in response to the current COVID-19 pandemic. Of the total revenue in 2021 and 2020, respectively, $0.5 million and $3.7
million was from the sale of third party manufactured equipment and supplies that we sourced and sold to customers to facilitate usage
of our test.
Cost
of Revenues and Gross Profit
Cost
of revenues decreased by $5.0 million from $16.6 million for the year ended December 31, 2020 to $11.6 million for the year ended December
31, 2021. The decrease in cost of revenues was due to a reduction of production costs and the 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 sold during the year. Our gross
margin was 88.2% for the year ended December 31, 2021 compared to 77.7% for the year ended December 31, 2020. The increase in gross margin
was due to the reduction of production costs, as well as the mix of products we sold, with the majority of our 2021 revenue came from
sales of our test reagents, which has a higher profit margin than sales of equipment.
Operating
Expenses
We
incurred total operating expenses of $40.2 million for the year ended December 31, 2021 compared to total operating expenses of $16.3
million for the year ended December 31, 2020. The increase in operating expenses was primarily 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.
Sales
and marketing expenses for the year ended December 31, 2021 were $13.4 million compared to $4.7 million for the year ended December 31,
2020. The increase of $8.7 million was primarily a result of increased expenses related to stock-based compensation, and personnel related
expenses, including commissions paid to our sales team and distributors, due to the growth in revenue noted above.
20
General
and administrative expenses increased $3.3 million from $8.3 million for the year ended December 31, 2020 to $11.6 million for the year
ended December 31, 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 stock-based compensation, employee related expenses
and increased expenses for professional services.
Our
research and development expenses increased by $11.8 million from $3.2 million for the year ended December 31, 2020, to $15.0 million
for the year ended December 31, 2021. The primary increase in expenses related to expenditures of over $9.2 million for our point-of-care
device, as well as 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. Additionally, there has been an increase in professional
and lab services utilized to further help us in our research and product development activities.
Other
Income (Expense)
Other
expense was $0.4 million for the year ended December 31, 2021, compared to other income of $0.9 million for the year ended December 31,
2020. The decrease in other income of $1.3 million was primarily related to recording a loss of $0.4 million in 2021 from our India joint
venture. For the year ended December 31, 2020 we recorded a gain of $0.8 million from our India joint venture.
Net
Income
We
realized net income for the year ended December 31, 2021 of $36.7 million compared to net income of $42.5 million for the year ended
December 31, 2020. The decrease in net income of $5.8 million was primarily the result of sales of our LogixSmart COVID-19 test and resulting
margins from those sales offset by increased operating expenses as discussed above. Additionally, we recorded income tax expense of $9.0
million during the year ended December 31, 2021, compared to $0.1 million for the year ended December 31, 2020. During 2020, we released
our deferred tax asset valuation allowance and recorded a deferred tax asset since we utilized our net operating losses from prior years
during the year ended December 31, 2020.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2021, we had cash and cash equivalents of $88.6 million and marketable investment securities of $1.3 million that could
readily be converted into cash if needed. Additionally, our total current assets at December 31, 2021, were $115.1 million compared to
total current liabilities of $12.6 million.
Net
cash provided by operating activities during the year ended December 31, 2021 was $41.1 million, compared to $28.2 million for the year
ended December 31, 2020. The increase in cash from operating activities was primarily due to our increased revenue and decrease in inventory,
offset by increases in accounts receivable.
We
received $4.1 million of cash from investing activities during the year ended December 31, 2021 as compared to $5.8 million of cash used
in investing activities during the year ended December 31, 2020. The increase in cash provided by investing activities is primarily due
to net cash acquired from business acquisitions and proceeds received from maturities of marketable investment securities.
Net
cash provided by financing activities was $0.5 million for the year ended December 31, 2021, compared to $19.7 million for the year ended
December 31, 2020. The decrease is primarily due to net proceeds of $18.0 million received from a series of three registered direct offerings
in 2020 pursuant to our shelf registration in addition to receiving $1.7 million from the exercise of warrants and options for the year
ended December 31, 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 purchase of inventories and the development of our point-of-care device, and to pay our operating expenses. We have increased our
work force most significantly in research and development in order to continue development of a new device and additional tests that
will enable continued use of our distributor network to sell additional products throughout the world.
21
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.
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. To date, we have not filed a prospectus supplement to, or sold any securities under, this Form S-3.
Below
is a summary of the direct offerings done in 2020:
●
In January 2020, we sold
an aggregate of 3,448,278 shares of common stock to institutional investors for $1.45 per share for gross proceeds of approximately
$5.0 million pursuant to a shelf-registration statement on Form S-3 (File No: 333-226835) declared effective by the SEC on September
7, 2018 (the “Shelf Registration Statement”).
●
On February 10, 2020, the
Company entered into securities purchase agreements with certain institutional investors pursuant to which such investors purchased
an aggregate of 3,324,676 shares of common stock at a purchase price of $ 3.08 per share in a registered direct offering pursuant
to the Shelf Registration Statement. The aggregate gross proceeds for the sale of the shares were approximately $10.2 million. The
closing of the offering occurred on or about February 13, 2020.
●
On February 28, 2020, the
Company entered into securities purchase agreements with certain institutional investors pursuant to which such investors purchased
an aggregate of 470,000 shares of common stock at a purchase price of $9.00 per share in a registered direct offering pursuant to
the Shelf Registration Statement. The aggregate gross proceeds for the sale of the shares were approximately $4.0 million. The closing
of the offering occurred on or about February 28, 2020.
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
As
of December 31, 2021 and 2020, we had no off-balance sheet arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
22