Co-Diagnostics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 Table of Contents Report of Independent Registered Public Accounting Firm (PCAOB ID No. 457 ) 23 Balance Sheets 24 Statements of Operations 25 Statement of Changes in Stockholders’ Equity 26 Statements of Cash Flows 27 Notes to Financial Statements 28 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, 2021 and 2020, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, 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, 2021 and 2020 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, 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 24, 2022 We have served as the Company’s auditor since 2016. 23 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 88,607,234 $ 42,976,713 Marketable investment securities 1,255,266 4,335,446 Accounts receivable, net 20,839,182 12,136,833 Inventory 2,004,169 7,995,189 Prepaid expenses 2,338,444 369,028 Note receivable 75,000 - Total current assets 115,119,295 67,813,209 Property and equipment, net 1,933,216 949,639 Goodwill 14,706,818 - Intangible assets, net 27,195,000 - Investment in joint venture 1,004,953 1,927,125 Deferred tax asset - 547,224 Note receivable 75,000 - Total assets $ 160,034,282 $ 71,237,197 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 607,506 $ 598,318 Accrued expenses, current 3,859,652 2,849,503 Accrued expenses (related party), current - 120,000 Contingent consideration liabilities, current 5,767,304 - Income taxes payable 2,213,088 189,729 Deferred revenue 150,000 305,307 Total current liabilities 12,597,550 4,062,857 Long-term liabilities Income taxes payable 1,067,853 447,831 Deferred tax liability 7,228,444 - Contingent consideration liabilities 4,665,337 - Accrued expenses (related party), noncurrent - 30,000 Total long-term liabilities 12,961,634 477,831 Total liabilities 25,559,184 4,540,688 Commitments and contingencies (Note 14) - - Stockholders’ equity Convertible preferred stock, $ 0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2021 and December 31, 2020 - - Common stock, $ 0.001 par value; 100,000,000 shares authorized; 33,819,862 and 28,558,033 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 33,820 28,558 Additional paid-in capital 80,271,999 49,157,236 Accumulated earnings 54,169,279 17,510,715 Total stockholders’ equity 134,475,098 66,696,509 Total liabilities and stockholders’ equity $ 160,034,282 $ 71,237,197 See accompanying notes to consolidated financial statements. 24 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS 2021 2020 Years Ended December 31, 2021 2020 Revenue $ 97,885,603 $ 74,552,758 Cost of revenue 11,574,944 16,591,346 Gross profit 86,310,659 57,961,412 Operating expenses Sales and marketing 13,397,813 4,665,113 General and administrative 11,550,615 8,278,734 Research and development 14,961,916 3,185,290 Depreciation and amortization 335,363 138,635 Total operating expenses 40,245,707 16,267,772 Income from operations 46,064,952 41,693,640 Other income (expense) Interest income 45,631 97,215 Loss on disposition of assets ( 44,355 ) ( 175 ) Gain (loss) on equity method investment in joint venture ( 430,433 ) 778,385 Total other income (expense) ( 429,157 ) 875,425 Income before income taxes 45,635,795 42,569,065 Income tax provision 8,977,231 90,536 Net income $ 36,658,564 $ 42,478,529 Earnings per common share: Basic $ 1.27 $ 1.59 Diluted $ 1.23 $ 1.52 Weighted average shares outstanding: Basic 28,874,555 26,720,133 Diluted 29,903,686 28,000,341 See accompanying notes to consolidated financial statements. 25 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Earnings Total Stockholders’ Shares Amount Shares Amount Capital (Deficit) Equity 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 1,459,729 - 1,460,600 Stock-based compensation expense - - 110,935 111 2,737,930 - 2,738,041 Conversion of preferred stock to common ( 25,600 ) ( 26 ) 2,133,333 2,133 ( 2,107 ) - - Common stock issued for acquisitions Common stock issued for acquisitions , shares 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 Common stock issued for option exercises - - 189,225 189 450,209 - 450,398 Stock-based compensation expense - - 444,050 444 5,508,960 - 5,509,404 Common stock issued for acquisitions - - 4,628,554 4,629 25,155,594 - 25,160,223 Net income - - - - - 36,658,564 36,658,564 Balance as of December 31, 2021 - $ - 33,819,862 $ 33,820 $ 80,271,999 $ 54,169,279 $ 134,475,098 See accompanying notes to consolidated financial statements. 26 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 2021 2020 Years Ended December 31, 2021 2020 Cash flows from operating activities Net income $ 36,658,564 $ 42,478,529 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 335,363 138,635 Stock-based compensation expense 5,509,404 2,738,041 Loss (gain) from equity method investment 430,433 ( 778,385 ) Loss on disposition of assets 44,355 175 Deferred income taxes 930,081 ( 547,224 ) Bad debt expense 69,672 954,804 Changes in assets and liabilities: Accounts receivable ( 8,740,851 ) ( 12,960,255 ) Prepaid expenses ( 2,049,095 ) ( 6,462 ) Inventory 5,705,361 ( 7,915,241 ) Deferred revenue ( 155,307 ) 303,984 Income taxes payable 2,643,381 - Accounts payable and accrued expenses ( 299,937 ) 3,758,634 Net cash provided by operating activities 41,081,424 28,165,235 Cash flows from investing activities Purchases of property and equipment ( 669,463 ) ( 774,397 ) Purchases of marketable investment securities - ( 9,310,000 ) Proceeds from maturities of marketable investment securities 3,080,180 4,974,554 Investment in joint venture 491,739 ( 714,500 ) Business combinations, net of cash acquired 1,196,243 - Net cash provided by (used in) investing activities 4,098,699 ( 5,824,343 ) Cash flows from financing activities Proceeds from sale of common stock - 19,470,005 Proceeds from exercise of options and warrants 450,398 1,730,599 Payment of offering costs - ( 1,457,921 ) Net cash provided by financing activities 450,398 19,742,683 Net increase in cash and cash equivalents 45,630,521 42,083,575 Cash and cash equivalents at beginning of period 42,976,713 893,138 Cash and cash equivalents at end of period $ 88,607,234 $ 42,976,713 Supplemental disclosure of cash flow information Interest paid $ - $ - Income taxes paid $ 5,403,769 $ - Supplemental disclosure of non-cash investing and financing transactions Inventory moved to property, plant and equipment $ 285,659 $ 117,220 Fair value of common stock issued as consideration for business acquisitions $ 25,160,223 $ - Fair value of contingent common stock and warrants issued as consideration for business acquisitions $ 10,432,641 $ - See accompanying notes to consolidated financial statements. 27 CO-DIAGNOSTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2021 AND 2020 Note 1 – Overview and Basis of Presentation Description of Business Co-Diagnostics, Inc., a Utah corporation (the “Company” or “CODX”), 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 subsidiaries 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 Reclassifications Certain prior year amounts have been reclassified to conform with the current year’s presentation. These reclassifications have no impact on the previously reported results. 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, 2021 and December 31, 2020. 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 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, 2021 total accounts receivable was $ 21,508,779 with an allowance for uncollectable accounts of $ 669,597 resulting in a net amount of $ 20,839,182 . 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 . 28 Equity-Method Investments Our equity method investments are initially recorded at cost and are included in other long-term assets in the accompanying 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 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, 2021, the Company had $ 2,004,169 in inventory, of which $ 983,088 was finished goods and $ 1,021,081 was raw materials. 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. 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. Business Combinations We estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and as a result, actual results may differ from estimates. 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. 29 Research and Development Research and development costs are expensed when incurred. The Company expensed $ 14,961,916 and $ 3,185,290 of research and development costs for the years ended December 31, 2021 and 2020, 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 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 years ended December 31, 2021 and 2020. Two customers together accounted for approximately 48 % and 38 % of total revenue for the years ended December 31, 2021 and 2020, respectively. Two customers each accounted for more than 10% of accounts receivable at December 31, 2021 and 2020. These two customers together accounted for approximately 66 % and 48 % of accounts receivable at December 31, 2021 and 2020, respectively. 30 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 will use the modified retrospective transition method with the option to recognize a cumulative-effect adjustment at the date of adoption. The Company’s balance sheet will be impacted as it records right-of-use assets and lease liabilities on its consolidated balance sheets, but the Company 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. 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 but does not expect the adoption of this standard will have a material impact on its consolidated financial statements. Note 3 – Business Combinations On December 31, 2021, the Company completed its acquisition of Advanced Conceptions, Inc. (“ACI”) and Idaho Molecular Inc. (“IdMo”), which were related entities developing, with the Company, an at-home/point-of-care medical diagnostic device. Upon the completion of the acquisition, all outstanding ACI and Idaho Molecular common stock was exchanged for approximately 3.2 million shares of the Company’s common stock and contingent consideration that includes up to approximately 1.4 million shares and approximately 456,000 warrants to purchase shares of the Company’s common stock. The contingent consideration is based on the achievement of certain milestones, which include regulatory approval for identified products, as well as production and net revenue targets. The purchase consideration also includes a payable to a shareholder of ACI of $ 100,000 . In connection with the acquisition, the Company incurred transaction costs of approximately $ 151,000 , which is included in general and administrative expenses. Upon the completion of the acquisition, both ACI and IdMo became 100 % wholly-owned subsidiaries of the Company . 31 The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary area that remains preliminary relates to the evaluation of certain tax-related items and potential minor adjustments to the purchase consideration. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below: Schedule of Assets and Liabilities assumed Fair value of common shares issued $ 25,160,223 Payable to shareholder 100,000 Fair value of contingent shares 8,684,669 Fair value of contingent warrants 1,747,972 Total fair value of consideration transferred $ 35,692,864 Identifiable assets acquired and liabilities assumed Cash $ 1,196,243 Accounts receivable 31,170 Prepaid expenses and other current assets 70,321 Property and equipment 408,173 Technology - In-process research and development 26,101,000 Non-competition agreements 1,094,000 Accounts payable and accrued other expenses ( 1,069,274 ) Deferred tax liability ( 6,845,587 ) Total identifiable net assets 20,986,046 Goodwill 14,706,818 Total $ 35,692,864 The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from future technologies, sales to future customers and buyer specific synergies. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is not amortizable for tax purposes. The in-process research and development is considered an indefinite-lived intangible until the completion or abandonment of the research and development activities. The non-competition agreements are being amortized over a range of 1.5 to 3 years. As the acquisition was completed on December 31, 2021, the acquired entities did not contribute to the net revenues or to the net income of the Company during the year ended December 31, 2021. Pro forma revenue and results of operations have not been presented because the historical results of ACI and IdMo are not material to the Company’s consolidated financial statements in any period presented. Note 4 – Fair Value Measurements The Company measures and records certain financial assets and liabilities 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 following three levels of inputs are used to measure the fair value of financial assets and liabilities: 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 following table summarizes the assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020, by level within the fair value hierarchy: Schedule of Fair Value Assets and Liabilities December 31, 2021 (Level 1) (Level 2) (Level 3) Total Assets: Marketable securities (certificates of deposit) $ - $ 1,255,266 $ - $ 1,255,266 Total assets measured at fair value $ - $ 1,255,266 $ - $ 1,255,266 Liabilities: Contingent consideration - common stock $ - $ - $ 8,684,669 $ 8,684,669 Contingent consideration - warrants - - 1,747,972 1,747,972 Total liabilities measured at fair value $ - $ - $ 10,432,641 $ 10,432,641 December 31, 2020 (Level 1) (Level 2) (Level 3) Total Assets: Marketable securities (certificates of deposit) $ - $ 4,335,446 $ - $ 4,335,446 Total assets measured at fair value $ - $ 4,335,446 $ - $ 4,335,446 The Company’s financial instruments that are measured at fair value on a recurring basis consist of certificates of deposit. In connection with the acquisitions of Idaho Molecular, Inc and Advanced Conceptions, Inc. on December 31, 2021, the Company recorded a liability for contingent consideration in the form of shares of common stock and warrants to purchase common stock. The fair value of contingent consideration is calculated using a discounted probability weighted valuation model. Discount rates used in such calculation are a significant assumption that are not observed in the market, and therefore, the resulting fair value represents a Level 3 measurement. The changes for Level 3 items measured at fair value on a recurring basis are as follows: Schedule of Changes in Fair Value Measurement Fair value as of December 31, 2020 $ - Contingent considered issued for business acquisitions 10,432,641 Fair value as of December 31, 2021 $ 10,432,641 The fair value of the contingent consideration is based on the fair value of the contingent consideration-common stock and contingent consideration-warrants. The fair value of the contingent consideration-common stock is equal to the probability-adjusted value of the Company’s common stock as of December 31, 2021. The fair value of the contingent consideration-warrants is equal to the probability adjusted value of a call option with terms consistent with the terms of the warrants as of December 31, 2021. Prior to the probability adjustments, the warrants were valued based on the following inputs: Schedule of Contingent Consideration Common Stock and Warrants December 31, 2021 Stock price $ 8.93 Strike price $ 9.13 Volatility 80.00 % Risk-free rate 1.30 % Expected term 5.0 33 In order to calculate the probability-adjusted value of the contingent consideration-common stock and contingent consideration-warrants, the Company estimated the probability of achieving certain milestones, which include regulatory approval for identified products, as well as production and net revenue targets. The probability of achieving the milestone related to net revenues was estimated using a Monte Carlo simulation valuation model. The unobservable significant inputs to the valuation model were as follows: December 31, 2021 Stock price $ 8.93 Risk-free rate 1.30 % Expected term 5.0 Weighted-average cost of capital 27.00 % Revenue discount rate 9.50 % Equity volatility 80.00 % Asset volatility 80.00 % Revenue volatility 30.00 % Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, notes 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 5 – Property and Equipment Property and equipment, net consisted of the following: Schedule of Property and Equipment Estimated Useful Lives in December 31, years 2021 2020 Lab equipment 3 - 5 $ 2,476,813 $ 1,212,561 Leasehold improvements 3 3,157 3,157 Office equipment, furniture and other 2 - 5 75,401 38,344 Less accumulated depreciation and amortization ( 622,155 ) ( 304,423 ) Fixed assets, net $ 1,933,216 $ 949,639 Note 6 - Goodwill and Intangible Assets Intangible assets, net consisted of the following: Schedule of Intangible Assets Estimated Useful Lives in December 31, years 2021 2020 In-process research and development Indefinite $ 26,101,000 $ - Non-competition agreements 1.5 - 3 1,094,000 - Less accumulated amortization - - Intangible assets, net $ 27,195,000 $ - 34 The expected future annual amortization expense of the Company’s intangible assets held as of December 31, 2021 is as follows: Schedule of Future Amortization Expense Year Ending December 31, Amortization Expense 2022 $ 426,660 2023 364,668 2024 302,672 Total $ 1,094,000 The Company had goodwill of $14.7 million as of December 31, 2021. Note 7 - Accrued Expenses Accrued expenses consisted of the following: Schedule of Accrued Expenses December 31, 2021 December 31, 2020 Payroll liabilities $ 2,455,694 $ 1,627,957 Distributor commissions 509,500 1,070,000 Sales tax payable - 52,526 Other accrued liabilities 894,458 99,020 Total accrued expenses $ 3,859,652 $ 2,849,503 Note 8 – Revenue The following table sets forth revenue by geographic area: Summary of Revenue by Geographic Area Years Ended December 31, 2021 2020 United States $ 52,185,812 $ 44,862,751 Rest of World 45,699,791 29,690,007 Total $ 97,885,603 $ 74,552,758 Percentage of revenue by area: United States 53 % 60 % Rest of World 47 % 40 % Deferred Revenue Changes in the Company’s deferred revenue balance for the years ended December 31, 2021 and 2020 were as follows: Schedule of Deferred Revenue Balance as of December 31, 2019 $ 1,323 Revenue recognized 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 Revenue recognized included in deferred revenue balance at the beginning of the period ( 256,110 ) Increase due to prepayments from customers 79,213 Increase due to note receivable 150,000 Decrease due to refunds to customers and application to open balances ( 128,410 ) Balance as of December 31, 2021 $ 150,000 The Company expects to perform its performance obligation and recognize the deferred revenue as revenue during the year ended December 31, 2022. 35 Note 9 – Stockholders’ Equity Common Stock During the year ended December 31, 2021, the Company issued 189,225 shares of common stock upon the exercise of options and received $ 450,398 in proceeds from the exercises. During the year ended December 31, 2021, the Company issued 5,548 shares of common stock for services provided by third parties primarily related to investor relations services. During the year ended December 31, 2021, the Company issued 438,502 shares of common stock upon the vest and release of restricted stock units. During the year ended December 31, 2021, the Company issued 4,628,554 shares of common stock related to the acquisitions of Idaho Molecular, Inc. and Advanced Conceptions, Inc., 1,390,430 of which are subject to forfeiture in favor of the Company if certain milestones are not achieved on or before January 1, 2027. During the year ended December 31, 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 . During the year ended December 31, 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 . During the year ended December 31, 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 $ 1,460,600 . 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 investor relations services. 36 Note 10 – 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, 2021 and 2020: Schedule of Basic and Diluted Earnings Per Share 2021 2020 Years Ended December 31, 2021 2020 Numerator Net income, as reported $ 36,658,564 $ 42,478,529 Denominator Weighted average shares, basic 28,874,555 26,720,133 Dilutive effect of stock options, warrants and RSUs 1,029,131 1,280,208 Shares used to compute diluted earnings per share 29,903,686 28,000,341 Basic earnings per share $ 1.27 $ 1.59 Diluted earnings per share $ 1.23 $ 1.52 For the years ended December 31, 2021 and 2020, respectively, potentially dilutive securities of 154,644 and 50,000 were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. The computation of diluted earnings per share for the year ended December 31, 2021 also excludes the approximately 1.4 million shares of common stock and approximately 456,000 warrants to purchase shares of common stock mentioned in Note 3 that are contingent upon the achievement of certain milestones. Note 11 – 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 2,095,266 at December 31, 2021. 37 Stock Options The following table summarizes option activity during the years ended December 31, 2021 and 2020: Schedule of Option Activity 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 Granted - - - Expired - - - Forfeited/Cancelled - - - Exercised ( 189,225 ) 2.38 1.12 Outstanding at December 31, 2021 1,111,363 $ 2.12 $ 1.31 6.62 Exercisable at December 31, 2021 1,094,697 $ 2.01 $ 1.18 6.59 The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was approximately $ 1.3 million and $ 11.8 million, respectively. The aggregate intrinsic value of outstanding options at December 31, 2021 and 2020 was approximately $ 7.6 million and $ 7.1 million, respectively. As of December 31, 2021, there were 16,666 unvested options and $ 78,115 of unrecognized stock-based compensation expense related to options. The unrecognized stock-based compensation expense is expected to be recognized over 0.5 years. 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: Schedule of Fair Value of Options Weighted Average Assumptions Years Ended December 31, 2021 2020 Risk-free interest rate - 1.05 % Expected life (years) - 7.3 Expected volatility - 62.82 % Expected dividend yield - None 38 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 years ended December 31, 2021 and 2020: Schedule of Outstanding Restricted Stock Units and Related Activity Number of RSUs Weighted Average Grant Date Fair Value Unvested at December 31, 2019 - $ - Granted 549,500 10.49 Vested ( 27,000 ) 10.49 Forfeited/Cancelled - - Unvested at December 31, 2020 522,500 $ 10.49 Granted 1,217,500 9.76 Vested ( 438,502 ) 10.10 Forfeited/Cancelled ( 34,083 ) 9.91 Unvested at December 31, 2021 1,267,415 $ 9.94 As of December 31, 2021, there was $ 11.6 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 2.3 years. Warrants The Company has issued warrants related to financings, acquisitions 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. The following table summarizes warrant activity during the years ended December 31, 2021 and 2020: Schedule of Warrant Activity 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 Granted 456,281 9.13 3.83 Expired - - - Forfeited/Cancelled - - - Exercised - - - Outstanding at December 31, 2021 526,281 $ 8.15 $ 4.01 4.7 The intrinsic value of warrants exercised during the years ended December 31, 2021 and 2020 was $ 0 and approximately $ 9.7 million, respectively. The aggregate intrinsic value of outstanding warrants at December 31, 2021 was approximately $ 497,000 . 39 70,000 warrants are exercisable at December 31, 2021. As discussed in Note 3 and Note 4, approximately 456,000 warrants to purchase shares of the Company’s common stock were issued in connection with the acquisition of ACI and IdMo. The ability to exercise the warrants is contingent upon the achievement of certain development and revenue milestones on or before January 1, 2027. There was no unrecognized stock-based compensation expense related to warrants. See Note 4 for additional information regarding the fair value calculation of the warrants issued during the year ended December 31, 2021. The fair values for the warrants issued during the year ended December 31, 2020 were estimated at the date of grant using the Black Scholes model with the following weighted average assumptions: Schedule of Fair Value of Warrants Assumptions Year Ended December 31, 2020 Risk-free interest rate 0.34 % Expected life (years) 5.0 Expected volatility 61.42 % Expected dividend yield None 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 issued 5,548 and 83,935 shares of restricted stock for services during the years ended December 31, 2021 and 2020, respectively, 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: Schedule of Recognized Stock-based Compensation Expense 2021 2020 Years Ended December 31, 2021 2020 Options $ 292,754 $ 901,345 Restricted stock units 5,164,750 500,861 Warrants - 303,802 Stock 51,900 1,032,033 Total stock-based compensation expense $ 5,509,404 $ 2,738,041 40 Note 12 – Income Taxes The components of the provision for income taxes consists of the following for the years ended December 31, 2021 and 2020: Schedule of Components Income Tax Provision 2021 2020 Year Ended December 31, 2021 2020 Current: Federal $ 6,092,730 $ - State 886,173 637,760 Total current $ 6,978,903 $ 637,760 Deferred: Federal 1,394,686 ( 452,544 ) State 603,642 ( 94,680 ) Total deferred 1,998,328 ( 547,224 ) Total income tax expense $ 8,977,231 $ 90,536 A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows: Schedule of Benefit from Income Taxes and Effective Tax Rates 2021 2020 Year Ended December 31, 2021 2020 Federal income tax expense at statutory rate 21.0 % 21.0 % State income tax expense, net of federal tax benefit 3.9 3.3 Permanent differences: - Foreign derived intangible income deduction ( 3.5 ) ( 1.7 ) - Stock based compensation 0.2 ( 8.8 ) - Other permanent differences 0.3 ( 0.4 ) Research and development credits ( 2.6 ) ( 2.0 ) Change in uncertain tax positions 1.4 1.1 Change in valuation allowance 0.0 ( 12.1 ) Other ( 1.0 ) ( 0.2 ) Effective income tax rate 19.7 % 0.2 % 41 Net deferred tax assets consist of the following components as of December 31, 2021 and 2020: Schedule of Deferred Tax Assets 2021 2020 December 31, 2021 2020 Deferred tax assets: Accrued liabilities $ - $ 37,898 Reserves and allowances 166,050 200,049 Deferred compensation 393,871 241,652 Research and development credits - 423,001 Total deferred tax assets 559,921 902,600 Deferred tax liabilities: Property and equipment, net ( 477,542 ) ( 233,951 ) Intangibles, net ( 6,743,972 ) - Prepaids ( 560,093 ) ( 66,456 ) Other ( 6,758 ) ( 54,969 ) Total deferred tax liabilities ( 7,788,365 ) ( 355,376 ) Net deferred tax assets (liabilities) ( 7,228,444 ) 547,224 Less valuation allowance - - Net deferred tax assets (liabilities) $ ( 7,228,444 ) $ 547,224 At December 31, 2021, the Company had no federal or state net operating loss carryforwards and no federal or state research and development credit carryforwards. 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 that year the Company achieved three years of cumulative pre-tax income, management determined that there was sufficient positive evidence to conclude that it was more likely than not that its deferred taxes were realizable. The Company 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. Our unrecognized tax benefit balances included $ 1,067,853 at December 31, 2021 and $ 447,831 at December 31, 2020 of tax positions that, if recognized, would impact our effective tax rate. 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: Schedule of Unrecognized Tax Benefits December 31, 2021 2020 Unrecognized tax benefits at the beginning of the year $ 447,831 $ - Gross increases - current year tax positions 770,069 232,145 Gross increases - prior year tax positions - 215,686 Gross decreases - prior year tax positions ( 150,047 ) - Unrecognized tax benefits at end of year $ 1,067,853 $ 447,831 Interest and penalties in year-end balance $ - $ - 42 The Company is subject to taxation in the United States and other state jurisdictions. The tax years from December 31, 2017 through December 31, 2021 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. Note 13 – 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, 2021, the aggregate balance of this related party liability was $ 0 . Note 14 – 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 aggregate space consists of approximately 13,687 square feet at a monthly rate of $ 28,825 and expires in February 2024 . As a result of business acquisitions during the year ended December 31, 2021, the Company also leases additional laboratory and office space under two month-to-month leases. For the years ended December 31, 2021 and 2020, the Company expensed $ 346,350 and $ 311,963 , respectively, for rent. The Company’s future minimum lease payments were as follows as of December 31, 2021: Schedule of Future Minimum Lease Payments Year Ending December 31, 2022 $ 293,595 2023 303,059 2024 50,774 Total lease payments $ 647,428 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. 43 Note 15 – Subsequent Events In March 2022, the Company’s Board of Directors authorized a share repurchase program that would allow the Company to repurchase up to $ 30 million of CODX common stock. The repurchase program does not obligate the Company to acquire any particular amount of common shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The timing and amount of any share repurchases under the share repurchase program will be determined by Co-Diagnostics’ management at its discretion based on ongoing assessments of the capital needs of the business, the market price of the Company’s common stock, corporate and regulatory requirements, and general market conditions. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, in block trades, accelerated share repurchase transactions, exchange transactions, the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or any combination of such methods. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.