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, 2022, filed with the SEC on March 16, 2023, 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. 18 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 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, groundbreaking portable PCR device and proprietary test cups (the “Co-Dx PCR Home platform”) that have been designed to bring affordable, reliable polymerase chain reaction (“PCR”) to patients in point-of-care and at-home settings. This platform is subject to U.S. Food and Drug Administration (“FDA”) review and is not available for sale at the time of this filing. There is no guarantee that our Co-Dx PCR Home platform will receive the necessary regulatory approvals for commercialization, or that, if regulatory approval is received, we will be able to successfully commercialize this platform. Our diagnostics systems enable dependable, low-cost, molecular testing for organisms and genetic diseases by automating or simplifying 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 than some competitors, allowing for significant margins while still positioning ourselves as a low-cost provider of molecular diagnostics and screening services. 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 PCR test design to engineer and optimize PCR tests and to automate algorithms that rapidly screen millions of possible options to pinpoint the optimum design. Dr. Brent Satterfield, our founder, developed the intellectual property we use in our business, 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. 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. Verification involves 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. 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. 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, we obtained Emergency Use Authorization (“EUA”) for our Logix Smart ™ COVID-19 detection test from the Food and Drug Administration, or FDA, and we sell 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 describes any type of genetic trait, which creates several 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 The Three Months Ended June 30, 2023 Compared to the Three Months ended June 30, 2022 Revenues For the three months ended June 30, 2023, we generated revenues of $197,806, compared to revenues of $5,023,226 for the three months ended June 30, 2022. The decrease in revenue of $4,825,420 was primarily due to lower sales of our Logix Smart COVID-19 test developed in response to the COVID-19 pandemic. Cost of Revenues We recorded cost of revenues of $459,095 for the three months ended June 30, 2023, compared to $915,432 for the three months ended June 30, 2022. The decrease in revenues combined with a larger percentage of fixed product production costs, as well as costs related to expired inventory, resulted in a lower cost of revenues and lower gross margin percentage. Expenses We incurred total operating expenses of $11,733,150 for the three months ended June 30, 2023, compared to total operating expenses of $8,254,832 for the three months ended June 30, 2022. The increase in operating expenses was primarily due to increased personnel expenses, including stock-compensation expense, and additional investment in research and development. These increases were partially offset by decreased expenses experienced in conjunction with our decrease in revenues, such as third-party sales commissions, reflected in sales and marketing and variable compensation. Our sales and marketing expenses for the three months ended June 30, 2023 were $1,732,966, compared to $1,472,225 for the three months ended June 30, 2022. The increase was primarily a result of increased stock-based compensation expense and tradeshow expense, partially offset by decreased variable compensation, such as bonuses and commissions, and decreased third-party sales commissions. General and administrative expenses increased from $2,468,421 for the three months ended June 30, 2022 to $3,713,895 for the three months ended June 30, 2023. The increase in general and administrative expenses was primarily due to increased insurance expense and professional, legal, and advisory fees, increased stock-based compensation expense, and increased bad debt expense, partially offset by decreased variable compensation expense. Our research and development expenses increased from $3,889,844 for the three months ended June 30, 2022 to $5,981,043 for the three months ended June 30, 2023. The primary increase in expenses was a result of increases in personnel related expenses, increases in expenses related to development and clinical trials of the Co-Dx PCR Home platform, and increased stock-based compensation expense. 20 Other Income (expense) For the three months ended June 30, 2023 we had total other income of $837,294, compared to total other income of $719,228 for the three months ended June 30, 2022. The primary components of other income include a change in the fair value of contingent consideration liabilities recorded in conjunction with the acquisitions of IdMo and ACI and interest income and realized gains from investments in marketable securities. Net Income (loss) We realized a net loss for the three months ended June 30, 2023 of $8,918,825, compared to a net loss for the three months ended June 30, 2022 of $2,686,303. The larger net loss was primarily the result of a decrease in revenues, combined with an increase of operating expenses, partially offset by changes in the fair value of acquisition contingencies and income related to investments in marketable securities. Additionally, we recorded an income tax benefit of $2,238,,320 for the three months ended June 30, 2023, compared to an income tax benefit of $741,507 for the three months ended June 30, 2022. The Six Months Ended June 30, 2023 Compared to the Six Months ended June 30, 2022 Revenues For the six months ended June 30, 2023, we generated revenues of $799,763, compared to revenues of $27,722,270 for the six months ended June 30, 2022. The decrease in revenue of $26,922,507 was primarily due to lower sales of our Logix Smart COVID-19 test developed in response to the COVID-19 pandemic. Cost of Revenues We recorded cost of revenues of $961,336 for the six months ended June 30, 2023, compared to $4,197,383 for the six months ended June 30, 2022. The decrease in revenues combined with a larger percentage of fixed product production costs, as well as costs related to expired inventory, resulted in a lower cost of revenues and lower gross margin percentage. Expenses We incurred total operating expenses of $21,783,516 for the six months ended June 30, 2023, compared to total operating expenses of $17,847,766 for the six months ended June 30, 2022. The increase in operating expenses was primarily due to increased personnel expenses, including stock-compensation expense, and additional investment in research and development. These increases were partially offset by decreased expenses experienced in conjunction with our decrease in revenues, such as third-party sales commissions reflected in sales and marketing and variable compensation. Our sales and marketing expenses for the six months ended June 30, 2023 were $3,439,297, compared to $4,124,373 for the six months ended June 30, 2022. 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 and tradeshow expense. General and administrative expenses increased from $5,390,616 for the six months ended June 30, 2022 to $6,727,860 for the six months ended June 30, 2023. The increase in general and administrative expenses was primarily due to increased insurance expense and professional, legal, and advisory fees, increased stock-based compensation expense, and increased bad debt expense, partially offset by decreased variable compensation expense. Our research and development expenses increased from $7,661,171 for the six months ended June 30, 2022 to $10,995,103 for the six months ended June 30, 2023. The primary increase in expenses was a result of increases in personnel related expenses, increases in expenses related to development and clinical trials of the Co-Dx PCR Home platform, and increased stock-based compensation expense. 21 Other Income (expense) For the six months ended June 30, 2023 we had total other income of $2,772,742, compared to total other income of $3,995,751 for the six months ended June 30, 2022. The primary components of other income include a change in the fair value of contingent consideration liabilities recorded in conjunction with the acquisitions of IdMo and ACI and interest income and realized gains from investments in marketable securities. Net Income (loss) We realized a net loss for the six months ended June 30, 2023 of $14,674,216, compared with net income for the six months ended June 30, 2022 of $9,028,292. The larger net loss was primarily the result of a decrease in revenues, combined with an increase of operating expenses, partially offset by changes in the fair value of acquisition contingencies and income related to investments in marketable securities. Additionally, we recorded an income tax benefit of $4,498,131 for the six months ended June 30, 2023, compared to income tax expense of $644,580 for the six months ended June 30, 2022. Liquidity and Capital Resources At June 30, 2023, we had cash and cash equivalents of $13,830,846. Additionally, we had $55,307,146 of marketable investment securities that could readily be converted into cash if needed. Additionally, our total current assets of June 30, 2023, were $77,385,400 compared to total current liabilities of $5,115,655. Net cash used in operating activities during the six months ended June 30, 2023 was $10,708,797, compared to cash provided by operating activities of $9,460,222 for the six months ended June 30, 2022. The decrease in cash from operating activities was primarily due to decreased revenues and the impact of non-cash items. Net cash provided by investing activities during the six months ended June 30, 2023 was $2,603,770, primarily from maturities of marketable investment securities, compared to cash used in investing activities of $9,600,444 during the six months ended June 30, 2022. Net cash used in financing activities was $1,037,930 for the six months ended June 30, 2023, compared to net cash used in financing activities of $2,421,607 for the same period in the prior year. This decrease is due to the repurchase of fewer outstanding common shares during the first six months of the year, compared to the same period of the prior year. Since commencing sales of our Logix Smart COVID-19 test in March 2020, we have used cash generated from those sales to fund the procurement and production of inventory and to 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 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. As of June 30, 2023 we have repurchased 4,559,479 outstanding common shares under the repurchase program for a total of $15.2 million. Additionally, in March 2023, we filed a shelf registration statement on Form S-3 (the “Shelf Registration Statement”) with the SEC registering the sale, from time-to-time of up to $150 million of our securities. In connection with the Shelf Registration Statement, we filed an equity distribution agreement prospectus covering the offering, issuance and sale of up to a maximum of $50 million shares of our common stock that may be issued and sold under an equity distribution agreement with Piper Sandler & Co. We are under no obligation to sell any securities under the Shelf Registration Statement or the equity distribution agreement with Piper Sandler & Co. 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. 22 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.”