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, 2021, filed with the SEC on March 24, 2022, 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; ● 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 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. 17 Business Overview Co-Diagnostics, Inc., a Utah corporation (the “Company”, “Co-Dx” 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 are also developing a unique, ground-breaking portable PCR testing platform (the “Co-Dx PCR home testing platform”) designed to bring affordable, reliable gold-standard polymerase chain reaction (“PCR”) to patients in point-of-care and 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 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 CoPrimers™ 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 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. Because we believe that testing for COVID-19 is going to be a consideration for public health worldwide even after the current pandemic has subsided, we have initiated the Co-Dx PCR home testing platform to facilitate frequent testing in homes, schools, businesses, and the hospitality industry. We believe this may be accomplished through the development of a low-cost testing device, easy to use by non-professionals, that can provide PCR test results in around 30 minutes. The initial project built on this platform, an at-home and point-of-care COVID-19 PCR test, was ultimately facilitated by our development of a saliva or nasal swab-based PCR test that does not require the RNA/DNA extraction. While the final result is believed to be approximately equivalent to those processed by a high-complexity clinical laboratory, it has the advantages of increased speed and ease of handling thanks to lyophilization (or freeze-drying) of our testing reagents to allow for stability at room temperatures. On February 15, 2021, we engaged the services of a group of professionals at Idaho Molecular, Inc. (IdMo) and Advanced Conceptions, Inc (ACI) with the expertise to develop the hardware for such a device using our CoPrimers™ as the reagent chemistry. On December 31, 2021, we completed the acquisitions of IdMO and ACI, along with all existing and future assets and intellectual property related to the platform and device. It is expected that the device and test will be available to homes, schools, offices, and the travel industry among other locations at a cost that will allow frequent screening to reduce the spread of the COVID-19 virus and other contagions in the future. The device would also be available to test for other pathogens detectable through saliva or other samples as we develop those tests and offer them to the marketplace. All such tests will be subject to regulatory approval prior to commercialization. 18 RESULTS OF OPERATIONS The Three Months Ended September 30, 2022 Compared to the Three Months ended September 30, 2021 Revenues For the three months ended September 30, 2022, we generated revenues of $5,094,456, compared to revenues of $30,101,353 for the three months ended September 30, 2021. The decrease in revenue of $25,006,897 was primarily due to lower sales of our Logix Smart™ COVID-19 test developed in response to the current COVID-19 pandemic. Cost of Revenues We recorded cost of revenues of $767,936 for the three months ended September 30, 2022, compared to $3,311,255 for the three months ended September 30, 2021. The decrease in revenues combined with a larger percentage of fixed product production costs resulted in a lower cost of revenues and gross margin percentage. Expenses We incurred total operating expenses of $10,862,135 for the three months ended September 30, 2022, compared to total operating expenses of $13,159,977 for the three months ended September 30, 2021. The decrease in operating expenses was due to a decrease in business activities experienced as a result of our decrease in revenue, variable compensation, third party sales commissions reflected in sales and marketing, and a lower investment in third-party research and development. These decreases were partially offset by increased stock-compensation expense. Our sales and marketing expenses for the three months ended September 30, 2022 were $1,889,907, compared to $4,253,091 for the three months ended September 30, 2021. The decrease was primarily a result of decreased variable compensation, such as bonuses and commissions, and decreased third-party sales commissions, partially offset by increased stock-based compensation expense. General and administrative expenses increased from $2,919,498 for the three months ended September 30, 2021 to $3,622,273 for the three months ended September 30, 2022. The increase in general and administrative expenses was primarily due to increased insurance expense and professional, legal, and advisory fees, as well as increased stock-based compensation expense, partially offset by decreased variable compensation expense. Our research and development expenses decreased from $5,893,350 for the three months ended September 30, 2021 to $5,037,461 for the three months ended September 30, 2022. The primary decrease in expenses was a result of decreased expenditures to third parties related our point-of-care device development, partially offset by increases in personnel expenses related to our acquisitions of IdMo and ACI on December 31, 2021, the primary focus of which relates to the point-of-care device development, as well as increased stock-based compensation expense. 19 Other Income (Expense) For the three months ended September 30, 2022 we had total other income of $3,059,915, compared to total other expense of $53,561 for the three months ended September 30, 2021. The increase was due primarily to a change in the fair value of contingent consideration liabilities recorded in conjunction with the acquisitions of IdMo and ACI. Net Income We realized a net loss for the three months ended September 30, 2022 of $1,361,062, compared with net income for the three months ended September 30, 2021 of $11,475,966. The decrease in net income was primarily the result of a decrease in revenues, partially offset by a decrease of operating expenses, as well as changes in the fair value of acquisition contingencies. Additionally, we recorded an income tax benefit of $2,114,638 for the three months ended September 30, 2022, compared to income tax expense of $2,100,594 for the three months ended September 30, 2021. The Nine Months Ended September 30, 2022 Compared to the Nine Months ended September 30, 2021 Revenues For the nine months ended September 30, 2022, we generated revenues of $32,816,726, compared to revenues of $77,484,262 for the nine months ended September 30, 2021. The decrease in revenue of $44,667,536 was primarily due to lower sales of our Logix Smart™ COVID-19 test developed in response to the current COVID-19 pandemic. Cost of Revenues We recorded cost of revenues of $4,965,319 for the nine months ended September 30, 2022, compared to $9,088,175 for the nine months ended September 30, 2021. The decrease in revenues combined with a larger percentage of fixed product production costs resulted in a lower cost of revenues and gross margin percentage. Expenses We incurred total operating expenses of $28,709,900 for the nine months ended September 30, 2022, compared to total operating expenses of $32,639,900 for the nine months ended September 30, 2021. The decrease in operating expenses was due to a decrease in business activities experienced as a result of our decrease in revenue, variable compensation, and third party sales commissions reflected in sales and marketing, partially offset by increased stock-based compensation expense. Our sales and marketing expenses for the nine months ended September 30, 2022 were $6,014,280, compared to $11,303,950 for the nine months ended September 30, 2021. The decrease was primarily a result of decreased variable compensation, such as bonuses and commissions, and decreased third-party sales commissions, partially offset by increased stock-based compensation expense. General and administrative expenses increased from $8,323,620 for the nine months ended September 30, 2021 to $9,012,888 for the nine months ended September 30, 2022. The increase in general and administrative expenses was primarily due to increased insurance expense and professional, legal, and advisory fees, as well as increased stock-based compensation expense, partially offset by decreased variable compensation expense. Our research and development expenses decreased slightly from $12,779,573 for the nine months ended September 30, 2021 to $12,698,632 for the nine months ended September 30, 2022. The primary increase in expenses was a result of increases in personnel expenses related to our acquisitions of IdMo and ACI on December 31, 2021, the primary focus of which relates to the point-of-care device development, partially offset by a decrease in third-party research and development investment, as well as increased stock-based compensation expense. 20 Other Income (Expense) For the nine months ended September 30, 2022 we had total other income of $7,055,666, compared to total other expense of $364,723 for the nine months ended September 30, 2021. The increase was due primarily to a change in the fair value of contingent consideration liabilities recorded in conjunction with the acquisitions of IdMo and ACI. Net Income We realized net income for the nine months ended September 30, 2022 of $7,667,231, compared with net income for the nine months ended September 30, 2021 of $29,160,154. The decrease in net income was primarily the result of a decrease in revenues, partially offset by a decrease of operating expenses, as well as changes in the fair value of acquisition contingencies. Additionally, we recorded an income tax benefit of $1,470,058 for the nine months ended September 30, 2022, compared to income tax expense of $6,231,310 for the nine months ended September 30, 2021. Liquidity and Capital Resources At September 30, 2022, we had cash and cash equivalents of $81,507,983. Additionally, we had $4,982,350 of marketable securities that could readily be converted into cash if needed. Additionally, our total current assets of September 30, 2022, were $101,915,715 compared to total current liabilities of $6,012,209. Net cash provided by operating activities during the nine months ended September 30, 2022 was $10,578,544, compared to $36,202,945 for the nine months ended September 30, 2021. The decrease in cash from operating activities was primarily due to decreased revenues, increases in inventory, and the impact of non-cash items. We used $4,861,292 of cash in investing activities during the nine months ended September 30, 2022, primarily from purchases of marketable securities, offset by maturities of marketable investments and purchases of property and equipment, compared to cash provided by investing activities of $3,028,192 during the nine months ended September 30, 2021. Net cash used in financing activities was $12,816,503 for the nine months ended September 30, 2022, compared to net cash provided by financing activities of $450,398 for the same period in the prior year. This decrease is due to the repurchase of outstanding common shares during the current fiscal year. 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 develop the Co-Dx PCR home testing platform and 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. In March 2022 our board of directors authorized the repurchase of up to $30.0 million of the company’s outstanding common stock. We have no obligation to repurchase any shares under the repurchase program and may suspend or discontinue it at any time without prior notice. During the nine months ended September 30, 2022 we have repurchased 3,414,326 outstanding common shares under the repurchase program. 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. 21 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.”