Co-Diagnostics, Inc. 10-Q

Item 1. Financial Statements CO – DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 10,239,898 $ 22,973,803 Marketable investment securities 53,188,999 58,289,066 Accounts receivable, net 806,704 3,453,723 Inventory, net 4,520,430 5,310,473 Income taxes receivable 1,245,854 1,870,419 Prepaid expenses and other current assets 1,290,146 761,187 Note receivable 18,750 75,000 Total current assets 71,310,781 92,733,671 Property and equipment, net 2,808,339 2,539,483 Deferred tax asset 4,272,002 - Operating lease right-of-use asset 3,032,337 372,115 Intangible assets, net 26,479,333 26,768,333 Investment in joint venture 778,943 672,679 Total assets $ 108,681,735 $ 123,086,281 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 1,416,435 $ 952,296 Accrued expenses, current 1,826,639 934,447 Operating lease liability, current 794,516 297,209 Contingent consideration liabilities, current 710,651 1,689,471 Deferred revenue 349,499 - Total current liabilities 5,097,740 3,873,423 Long-term liabilities Income taxes payable 1,359,725 1,181,284 Deferred tax liability - 2,417,987 Operating lease liability 2,250,393 50,708 Contingent consideration liabilities 484,332 1,042,885 Total long-term liabilities 4,094,450 4,692,864 Total liabilities 9,192,190 8,566,287 Commitments and contingencies (Note 10) Stockholders’ equity - - Convertible preferred stock, $ 0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively - - Common stock, $ 0.001 par value; 100,000,000 shares authorized; 35,367,100 shares issued and 30,658,580 shares outstanding as of September 30, 2023 and 34,754,265 shares issued and 30,872,607 shares outstanding as of December 31, 2022 35,367 34,754 Treasury stock, at cost; 4,708,520 and 3,881,658 shares held as of September 30, 2023 and December 31, 2022, respectively ( 15,416,122 ) ( 14,211,866 ) Additional paid-in capital 94,983,030 88,472,935 Accumulated other comprehensive income 612,649 293,140 Accumulated earnings 19,274,621 39,931,031 Total stockholders’ equity 99,489,545 114,519,994 Total liabilities and stockholders’ equity $ 108,681,735 $ 123,086,281 See accompanying notes to unaudited condensed consolidated financial statements 3 CO – DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Product revenue $ 136,533 $ 5,094,456 $ 936,296 $ 32,816,726 Grant revenue 2,320,565 - 2,320,565 - Total revenue 2,457,098 5,094,456 3,256,861 32,816,726 Cost of revenue 255,772 767,936 1,217,108 4,965,319 Gross profit 2,201,326 4,326,520 2,039,753 27,851,407 Operating expenses Sales and marketing 1,904,395 1,889,907 5,343,692 6,014,280 General and administrative 3,147,753 3,622,273 9,875,613 9,012,888 Research and development 5,788,789 5,037,461 16,783,892 12,698,632 Depreciation and amortization 296,340 312,494 917,596 984,100 Total operating expenses 11,137,277 10,862,135 32,920,793 28,709,900 (Loss) from operations ( 8,935,951 ) ( 6,535,615 ) ( 30,881,040 ) ( 858,493 ) Other income, net Interest income 322,877 298,184 717,141 371,248 Realized gain on investments 425,446 - 1,254,718 - Gain (loss) on disposition of assets ( 2,578 ) 4,044 ( 2,578 ) ( 138,117 ) Gain on remeasurement of acquisition contingencies 140,296 2,886,734 1,537,373 7,079,446 Gain (loss) on equity method investment in joint venture ( 45,865 ) ( 129,047 ) 106,264 ( 256,911 ) Total other income, net 840,176 3,059,915 3,612,918 7,055,666 Income (loss) before income taxes ( 8,095,775 ) ( 3,475,700 ) ( 27,268,122 ) 6,197,173 Income tax (benefit) ( 2,113,581 ) ( 2,114,638 ) ( 6,611,712 ) ( 1,470,058 ) Net income (loss) $ ( 5,982,194 ) $ ( 1,361,062 ) $ ( 20,656,410 ) $ 7,667,231 Other comprehensive income (loss) Change in net unrealized gains on marketable securities, net of tax $ 33,522 $ - $ 319,509 $ - Total other comprehensive income $ 33,522 $ - $ 319,509 $ - Comprehensive income (loss) $ ( 5,948,672 ) $ ( 1,361,062 ) $ ( 20,336,901 ) $ 7,667,231 Earnings (loss) per common share: Basic $ ( 0.20 ) $ ( 0.04 ) $ ( 0.70 ) $ 0.24 Diluted $ ( 0.20 ) $ ( 0.04 ) $ ( 0.70 ) $ 0.23 Weighted average shares outstanding: Basic 29,361,300 31,321,368 29,306,572 32,109,213 Diluted 29,361,300 31,321,368 29,306,572 33,002,539 See accompanying notes to unaudited condensed consolidated financial statements 4 CO – DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2023 2022 Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net (loss) income $ ( 20,656,410 ) $ 7,667,231 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 917,596 984,100 Stock-based compensation expense 6,510,708 5,138,815 Change in fair value of acquisition contingencies ( 1,537,373 ) ( 7,079,446 ) Non-cash lease expense 36,770 17,193 Realized gain on investments ( 1,254,718 ) - (Gain) loss from equity method investment ( 106,264 ) 256,911 Loss on disposition of assets 2,578 138,117 Deferred income taxes ( 6,689,989 ) ( 3,431,286 ) Bad debt expense 326,647 338,057 Changes in assets and liabilities: Accounts receivable 2,320,372 12,539,461 Prepaid expenses and other assets 151,858 441,786 Inventory 790,716 ( 3,656,463 ) Deferred revenue 349,499 ( 150,000 ) Income taxes payable 178,441 ( 1,822,977 ) Accounts payable, accrued expenses and other liabilities 1,356,330 ( 802,955 ) Net cash (used in) provided by operating activities ( 17,303,239 ) 10,578,544 Cash flows from investing activities Purchases of property and equipment ( 900,704 ) ( 1,134,208 ) Proceeds from maturities of marketable investment securities 90,279,227 6,223,740 Purchases of marketable securities ( 83,604,933 ) ( 9,950,824 ) Net cash (used in) provided by investing activities 5,773,590 ( 4,861,292 ) Cash flows from financing activities Proceeds from exercise of options and warrants - 177,870 Repurchases of common stock ( 1,204,256 ) ( 12,994,373 ) Net cash (used in) financing activities ( 1,204,256 ) ( 12,816,503 ) Net (decrease) in cash and cash equivalents ( 12,733,905 ) ( 7,099,251 ) Cash and cash equivalents at beginning of period 22,973,803 88,607,234 Cash and cash equivalents at end of period $ 10,239,898 $ 81,507,983 Supplemental disclosure of cash flow information Interest paid $ - $ - Income taxes paid $ 49,197 $ 4,496,239 Supplemental disclosure of non-cash investing and financing transactions Inventory moved to property, plant and equipment $ 673 $ 218,906 Right-of-use assets obtained in exchange for new operating lease liabilities $ 3,063,782 $ 681,327 Business acquisition measurement period adjustments $ - $ 681,728 See accompanying notes to unaudited condensed consolidated financial statements 5 CO – DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Shares Amount Shares Amount Stock Capital Income Earnings Equity Convertible Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Stock Capital Income Earnings Equity Balance as of December 31, 2022 - $ - 34,754,265 $ 34,754 $ ( 14,211,866 ) $ 88,472,935 $ 293,140 $ 39,931,031 $ 114,519,994 Stock-based compensation - - 68,750 69 - 2,168,673 - - 2,168,742 Repurchases of common stock - - - - ( 482,196 ) - - - ( 482,196 ) Other comprehensive income, net of tax - - - - - - 178,621 - 178,621 Net loss - - - - - - - ( 5,755,391 ) ( 5,755,391 ) Balance as of March 31, 2023 - - 34,823,015 34,823 ( 14,694,062 ) 90,641,608 471,761 34,175,640 110,629,770 Stock-based compensation - - 525,335 525 - 2,169,276 - - 2,169,801 Repurchases of common stock - - - - ( 555,734 ) - - - ( 555,734 ) Other comprehensive income, net of tax - - - - - - 107,366 - 107,366 Net loss - - - - - - - ( 8,918,825 ) ( 8,918,825 ) Balance as of June 30, 2023 - - 35,348,350 35,348 ( 15,249,796 ) 92,810,884 579,127 25,256,815 103,432,378 Balance - - 35,348,350 35,348 ( 15,249,796 ) 92,810,884 579,127 25,256,815 103,432,378 Stock-based compensation - - 18,750 19 - 2,172,146 - - 2,172,165 Repurchases of common stock - - - - ( 166,326 ) - - - ( 166,326 ) Other comprehensive income, net of tax - - - - - - 33,522 - 33,522 Net loss - - - - - - - ( 5,982,194 ) ( 5,982,194 ) Net loss - - - - - - - ( 5,982,194 ) ( 5,982,194 ) Balance as of September 30, 2023 - $ - 35,367,100 $ 35,367 $ ( 15,416,122 ) $ 94,983,030 $ 612,649 $ 19,274,621 $ 99,489,545 Balance - $ - 35,367,100 $ 35,367 $ ( 15,416,122 ) $ 94,983,030 $ 612,649 $ 19,274,621 $ 99,489,545 Convertible Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Stock Capital Income Earnings Equity Balance as of December 31, 2021 - $ - 33,819,862 $ 33,820 $ - $ 80,271,999 $ - $ 54,169,279 $ 134,475,100 Common stock issued for option exercises - - 45,456 45 - 49,956 - - 50,001 Common stock issued for warrant exercises - - 50,000 50 - 99,950 - 100,000 Stock-based compensation - - 68,750 69 - 1,375,028 - - 1,375,097 Net income - - - - - - - 11,714,595 11,714,595 Balance as of March 31, 2022 - - 33,984,068 33,984 - 81,796,933 - 65,883,874 147,714,793 Common stock issued for option exercises - - 25,335 25 - 27,844 - - 27,869 Stock-based compensation - - 215,583 215 - 1,533,069 - - 1,533,284 Common stock issued for acquisitions - - 88,446 89 - 480,687 - - 480,776 Repurchases of common stock - - - - ( 2,599,478 ) - - - ( 2,599,478 ) Net loss - - - - - - - ( 2,686,304 ) ( 2,686,304 ) Balance as of June 30, 2022 - - 34,313,432 34,313 ( 2,599,478 ) 83,838,533 - 63,197,570 144,470,940 Balance - - 34,313,432 34,313 ( 2,599,478 ) 83,838,533 - 63,197,570 144,470,940 Stock-based compensation - - 18,750 19 - 2,230,415 - - 2,230,434 Repurchases of common stock - - - - ( 10,394,895 ) - - - ( 10,394,895 ) Net loss - - - - - - - ( 1,361,062 ) ( 1,361,062 ) Net loss - - - - - - - ( 1,361,062 ) ( 1,361,062 ) Balance as of September 30, 2022 - $ - 34,332,182 $ 34,332 $ ( 12,994,373 ) $ 86,068,948 $ - $ 61,836,508 $ 134,945,417 Balance - $ - 34,332,182 $ 34,332 $ ( 12,994,373 ) $ 86,068,948 $ - $ 61,836,508 $ 134,945,417 See accompanying notes to unaudited condensed consolidated financial statements 6 CO – DIAGNOSTICS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Overview and Basis of Presentation Description of Business 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 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 the Co-Dx PCR 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. Unaudited Condensed Consolidated Financial Statements The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These statements should be read in conjunction with the Company’s audited financial statements and related notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2023. 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 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. 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 September 30, 2023 and December 31, 2022. The Company has its cash and cash equivalents with large creditworthy financial institutions 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 and U.S. Treasury bills and notes. The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable investment securities, within current assets on the condensed consolidated balance sheets. The Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable investment securities are determined using the average cost method on a first-in, first-out basis and recorded in total other income (expense), net in the condensed consolidated statements of operations and comprehensive income (loss). The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. For investments not likely to be sold before recovery of the amortized cost basis, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions, and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses up to the amount of the unrealized loss when appropriate. Allowances for credit losses and write-downs are recognized in total other income (expense), net, and unrealized losses not related to credit losses are recognized in accumulated other comprehensive income (loss). There are no allowances for credit losses recorded for the periods presented. 7 Accounts Receivable Trade accounts receivable are recorded at the invoiced amount less estimates for credit losses. Management determines the allowance for credit losses by specifically identifying troubled accounts and by using historical write off experience, adjusted for current market conditions, customers’ financial condition and payment patterns, and reasonable supportable forecasts of future economic conditions, applied to an aging of all other accounts. 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 September 30, 2023, total accounts receivable was $ 4,231,877 with an allowance for credit losses of $ 3,425,173 resulting in a net amount of $ 806,704 . At December 31, 2022, total accounts receivable was $ 6,552,249 with an allowance for credit losses of $ 3,098,526 resulting in a net amount of $ 3,453,723 . Equity-Method Investments The Company’s equity method investments are initially recorded at cost and are included in other long-term assets in the accompanying condensed consolidated balance sheet. The Company adjusts the carrying value of its 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 condensed 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 September 30, 2023, the Company had $ 4,520,430 in inventory, comprised of $ 788,104 of finished goods, and $ 3,732,326 of raw materials. At December 31, 2022, the Company had $ 5,310,473 in inventory, of which $ 1,327,264 was finished goods and $ 3,983,209 was raw materials. The Company establishes reserves to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values. Intangible Assets Indefinite-lived intangible assets are not amortized, but rather tested for impairment at least annually on December 31, or more often if and when circumstances indicate that the carrying value may not be recoverable. Finite-lived intangible assets are amortized over their useful lives. Long-lived Assets Long-lived assets, such as 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, finite-lived intangible assets, and right-of-use (ROU) assets, 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 The Company estimates 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. Leases The Company adopted ASC 842, Leases (“ASC 842”) effective January 1, 2022. Under ASC 842, the Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in the Company’s leases is generally unknown, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company considers its credit risk, term of the lease, total lease payments and adjusts for the impacts of collateral, as necessary, when calculating its incremental borrowing rates. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses and cost of revenue over the reasonably assured lease term. The Company has elected to not separate lease and non-lease components for leases of office space and, as a result, accounts for any lease and non-lease components for office space as a single lease component, to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments. The Company’s office leases typically include non-lease components such as common-area maintenance costs. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less. Revenue Recognition The Company generates revenue from customers from product and license sales. The Company recognizes revenue from customers 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. 8 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. Grant Funding The Company may submit applications to receive grant funding from governmental and non-governmental entities. The Company accounts for grants by analogizing to the contribution accounting model under ASC 958-605, Not-for-Profit Entities (“ASC 958”). Revenues from grants, contracts, and awards provided by governmental and non-governmental agencies are recorded based upon the terms of the specific agreements. The Company recognizes grant funding without conditions or continuing performance obligations as revenue in the condensed consolidated statements of operations and comprehensive income (loss). The Company recognizes grant funding with conditions or continuing performance obligations as deferred revenue in the condensed consolidated balance sheets if the conditions or performance obligations have not yet been met. The Company recognized grant funding revenue of $ 2.3 million during the three and nine months ended September 30, 2023. At September 30, 2023, the Company has also recorded $ 0.3 million of deferred revenue related to grant funding for which the underlying conditions or performance obligations have not yet been met. Cash received from federal grants, contracts, and awards can be subject to audit by the grantor and, if the examination results in a disallowance of any expenditure, repayment could be required. Deferred Revenue Deferred revenue primarily consists of payments received from customers related to product sales or from granting agencies for services to be rendered under research and development grants, prior to the Company fulfilling its performance obligation of providing the product or performing research and development activities under the grant agreement. 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. Research and Development Research and development costs are expensed when incurred. For the three and nine months ended September 30, 2023, the Company expensed $ 5,788,789 and $ 16,783,892 of research and development costs, respectively. For the three and nine months ended September 30, 2022, the Company expensed $ 5,037,461 and $ 12,698,632 , 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. The Company has uncertain income tax positions in the condensed consolidated financial statements, and adverse determinations by these taxing authorities could have a material adverse effect on the condensed consolidated financial positions, result of operations, or cash flows. Net Income (Loss) 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. Comprehensive Income (Loss) Comprehensive income is comprised of unrealized gains and losses on marketable investment securities, net of income taxes. Concentrations Risk and Significant Customers The Company had certain customers which were each responsible for generating 10 % or more of the total revenue for the three and nine months ended September 30, 2023. Three customers accounted for approximately 47 % of product revenue for the three months ended September 30, 2023, and two customers accounted for approximately 28 % of product revenue for the nine months ended September 30, 2023. One granting agency accounted for approximately 94 % of grant revenue for the three and nine months ended September 30, 2023. One customer accounted for approximately 52 % of product revenue for the three months ended September 30, 2022, and two customers accounted for approximately 47 % of product revenue for the nine months ended September 30, 2022. Two customers accounted for more than 10 % of accounts receivable at September 30, 2023 and three customers accounted for more than 10 % of accounts receivable at December 31, 2022. These customers together accounted for approximately 71 % and 37 % of accounts receivable at September 30, 2023 and December 31, 2022, respectively. 9 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. Note 3 - Cash, Cash Equivalents, and Financial Instruments The following table shows the Company’s cash, cash equivalents, and marketable investment securities by significant investment category: Schedule of Cash, Cash Equivalents and Marketable Investment Securities September 30, 2023 Adjusted Cost Allowance for Credit Losses Total Unrealized Gains / (Losses) Fair Value Cash and Cash Equivalents Marketable Investment Securities Cash and cash equivalents $ ( 222,480 ) $ - $ - $ ( 222,480 ) $ ( 222,480 ) $ - Level 1: Money market funds 10,462,378 - - 10,462,378 10,462,378 - Subtotal 10,462,378 - - 10,462,378 10,462,378 - Level 2: U.S. treasury securities 52,375,675 - 813,324 53,188,999 - 53,188,999 Subtotal 52,375,675 - 813,324 53,188,999 - 53,188,999 Total $ 62,615,573 $ - $ 813,324 $ 63,428,897 $ 10,239,898 $ 53,188,999 December 31, 2022 Adjusted Cost Allowance for Credit Losses Total Unrealized Gains / (Losses) Fair Value Cash and Cash Equivalents Marketable Investment Securities Cash and cash equivalents $ 12,834,444 $ - $ - $ 12,834,444 $ 12,834,444 $ - Level 1: Money market funds 146,359 - - 146,359 146,359 - Subtotal 146,359 - - 146,359 146,359 - Level 2: U.S. treasury securities 67,892,825 - 389,241 68,282,066 9,993,000 58,289,066 Subtotal 67,892,825 - 389,241 68,282,066 9,993,000 58,289,066 Total $ 80,873,628 $ - $ 389,241 $ 81,262,869 $ 22,973,803 $ 58,289,066 Marketable investment securities held as of September 30, 2023 mature over the next 12 months. 10 Note 4 – Intangible Assets, Net Intangible assets, net consisted of the following: Schedule of Intangible Assets, Net September 30, 2023 Weighted-Average Useful Life (1) (in Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount In-process research and development Indefinite $ 26,101,000 $ - $ 26,101,000 Non-competition agreements 2.7 1,094,000 ( 715,667 ) 378,333 Total intangible assets $ 27,195,000 $ ( 715,667 ) $ 26,479,333 December 31, 2022 Weighted-Average Gross Net Useful Life (1) Carrying Accumulated Carrying (in Years) Amount Amortization Amount In-process research and development Indefinite $ 26,101,000 $ - $ 26,101,000 Non-competition agreements 2.7 1,094,000 ( 426,667 ) 667,333 Total intangible assets $ 27,195,000 $ ( 426,667 ) $ 26,768,333 (1) Based on weighted-average useful life established as of the acquisition date. The expected future annual amortization expense of the Company’s intangible assets held as of September 30, 2023 is as follows: Schedule of Future Amortization Expense Year Ending December 31, Amortization Expense 2023 (remainder) 75,665 2024 302,668 Total $ 378,333 Note 5 – 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. 11 The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, by level within the fair value hierarchy: Schedule of Fair Value Assets and Liabilities (Level 1) (Level 2) (Level 3) Total September 30, 2023 (Level 1) (Level 2) (Level 3) Total Assets: Cash equivalents $ 9,722,890 $ - $ - $ 9,722,890 Marketable securities (U.S. treasury bills and notes) - 53,188,999 - 53,188,999 Total assets measured at fair value $ 9,722,890 $ 53,188,999 $ - $ 62,911,889 Liabilities: Contingent consideration - common stock $ - $ - $ 1,051,229 $ 1,051,229 Contingent consideration - warrants - - 143,754 143,754 Total liabilities measured at fair value $ - $ - $ 1,194,983 $ 1,194,983 (Level 1) (Level 2) (Level 3) Total December 31, 2022 (Level 1) (Level 2) (Level 3) Total Assets: Cash equivalents $ 186,667 $ 9,993,000 $ - $ 10,179,667 Marketable securities (U.S. treasury bills and notes) - 58,289,066 - 58,289,066 Total assets measured at fair value $ 186,667 $ 68,282,066 $ - $ 68,468,733 Liabilities: Contingent consideration - common stock $ - $ - $ 2,499,147 $ 2,499,147 Contingent consideration - warrants - - 233,209 233,209 Total liabilities measured at fair value $ - $ - $ 2,732,356 $ 2,732,356 The Company’s financial instruments that are measured at fair value on a recurring basis consist of U.S. treasury bills and notes as of September 30, 2023 and December 31, 2022. In connection with the acquisitions of Idaho Molecular, Inc. (IdMo) and Advanced Conceptions, Inc. (ACI) 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 calculations 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 the Fair Value Measurement Fair value as of December 31, 2022 $ 2,732,356 Change in fair value of contingent consideration issued for business acquisitions ( 1,537,373 ) Fair value as of September 30, 2023 $ 1,194,983 12 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 the valuation date. 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 the valuation date. Prior to the probability adjustments, the warrants were valued based on the following inputs: Schedule of Contingent Consideration Common Stock and Warrants September 30, 2023 December 31, 2022 Stock price $ 1.06 $ 2.52 Strike price $ 9.13 $ 9.13 Volatility 125.00 % 75.00 % Risk-free rate 4.70 % 4.10 % Expected term (years) 3.3 4.0 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 6 – Revenue The following table sets forth revenue by geographic area: Summary of Revenue by Geographic Area 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 United States Product revenue $ 88,107 $ 4,699,444 $ 618,491 $ 23,425,186 Grant revenue 2,320,565 - 2,320,565 - Total United States 2,408,672 4,699,444 2,939,056 23,425,186 Rest of World Product revenue 48,426 395,012 317,805 9,391,540 Grant revenue - - - - Total Rest of World 48,426 395,012 317,805 9,391,540 Total $ 2,457,098 $ 5,094,456 $ 3,256,861 $ 32,816,726 Revenue geographic area $ 2,457,098 $ 5,094,456 $ 3,256,861 $ 32,816,726 Percentage of revenue by area: United States 98 % 92 % 90 % 71 % Rest of World 2 % 8 % 10 % 29 % Deferred Revenue Changes in the Company’s deferred revenue balance for the nine months ended September 30, 2023 were as follows: Schedule of Deferred Revenue Balance as of December 31, 2022 $ - Increase due to prepayments from customers 19,620 Increase due to grant funding awarded 329,879 Balance as of September 30, 2023 $ 349,499 13 Note 7 – Earnings (Loss) Per Share The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings (loss) per share for three and nine months ended September 30, 2023 and 2022, respectively: Schedule of Basis and Diluted Earnings Per Share 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerator Net income (loss), as reported $ ( 5,982,194 ) $ ( 1,361,062 ) $ ( 20,656,410 ) $ 7,667,231 Denominator Weighted average shares, basic 29,361,300 31,321,368 29,306,572 32,109,213 Dilutive effect of stock options, warrants and RSUs - - - 893,326 Shares used to compute diluted earnings per share 29,361,300 31,321,368 29,306,572 33,002,539 Basic earnings (loss) per share $ ( 0.20 ) $ ( 0.04 ) $ ( 0.70 ) $ 0.24 Diluted earnings (loss) per share $ ( 0.20 ) $ ( 0.04 ) $ ( 0.70 ) $ 0.23 For the three and nine months ended September 30, 2022, potentially dilutive securities of 2,631,642 and 1,385,869 were excluded from the calculation because their effect would have been anti-dilutive. The computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022, respectively, also excludes the approximately 1,400,000 shares of common stock and approximately 465,000 warrants to purchase shares of common stock that are contingent upon the achievement of certain milestones. As a result of incurring a net loss for the three and nine months ended September 30, 2023, no potentially dilutive securities are included in the calculation of diluted earnings (loss) per share because such effect would be anti-dilutive. The Company had potentially dilutive securities as of September 30, 2023, consisting of: (i) 2,750,302 restricted stock units and (ii) 512,112 options. Note 8 – Stock-Based Compensation Stock Incentive Plans The Company’s board of directors adopted, and shareholders approved, the Co-Diagnostics, Inc. Amended and Restated 2015 Long Term Incentive Plan (the “Incentive Plan”) providing for the issuance of stock-based incentive awards to employees, officers, consultants, directors and independent contractors. On August 31, 2022, the shareholders approved an increase in the number of awards available for issuance under the Incentive Plan to an aggregate of 12,000,000 shares of common stock. The number of awards available for issuance under the Incentive Plan was 4,361,861 at September 30, 2023. Stock Options The following table summarizes option activity during the nine months ended September 30, 2023: 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, 2022 1,040,572 $ 2.19 $ 1.37 5.88 Granted - - - Expired - - - Forfeited/Cancelled - - - Exercised - - - Outstanding at September 30, 2023 1,040,572 $ 2.19 $ 1.37 5.13 Exercisable at September 30, 2023 1,040,572 $ 2.19 $ 1.37 5.13 The aggregate intrinsic value of outstanding options at September 30, 2023 was approximately $ 0.1 million. 14 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. As of September 30, 2023, there were no unvested options and no unrecognized stock-based compensation expense related to options. 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 nine months ended September 30, 2023: Schedule of Outstanding Restricted Stock Units and Related Party Number of RSUs Weighted Average Grant Date Fair Value Unvested at December 31, 2022 2,426,725 $ 6.95 Granted 1,918,750 1.93 Vested ( 612,835 ) 7.24 Forfeited/Cancelled ( 69,821 ) 6.20 Unvested at September 30, 2023 3,662,819 $ 4.29 As of September 30, 2023, there was approximately $ 11.5 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 1.9 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 nine months ended September 30, 2023: 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, 2022 485,000 $ 8.81 $ 2.43 4.0 Granted - - - Expired - - - Forfeited/Cancelled - - - Exercised - - - Outstanding at September 30, 2023 485,000 $ 8.81 $ 0.92 3.2 15 There were no warrants exercised during the nine months ended September 30, 2023. The intrinsic value of warrants exercised during the nine months ended September 30, 2022 was approximately $ 0.3 million. The aggregate intrinsic value of outstanding warrants at September 30, 2023 was approximately $ 0 . The total number of warrants exercisable at September 30, 2023 is 20,000 . The ability to exercise the approximately 465,000 warrants issued in connection with acquisitions in prior years 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. Stock-Based Compensation Expense The Company recognized stock-based compensation expense as follows: Schedule of Recognized Stock-based Compensation Expense 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of revenue $ 12,075 $ 18,836 $ 36,140 $ 45,290 Sales and marketing 564,962 526,159 1,666,868 1,340,716 General and administrative 1,278,674 1,218,211 3,732,398 2,831,371 Research and development 316,454 467,228 1,075,302 921,438 Total stock-based compensation expense $ 2,172,165 $ 2,230,434 $ 6,510,708 $ 5,138,815 Note 9 – Income Taxes For the three months ended September 30, 2023, the Company recognized a benefit from income taxes of $ 2,113,581 , representing an effective tax rate of 26.1 %. For the nine months ended September 30, 2023, the Company recognized a benefit from income taxes of $ 6,611,712 , representing an effective tax rate of 24.2 %. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21.0 % due to state taxes, permanent items, and discrete items. For the three months ended September 30, 2022, the Company recognized a benefit from income taxes of $ 2,114,638 . For the nine months ended September 30, 2022, the Company recognized a benefit from income taxes of $ 1,470,058 . Note 10 – Commitments and Contingencies Lease Obligations The Company leases office space under non-cancellable operating leases and leases cancellable with one month notice. The Company expenses the cancellable leases in the period incurred in accordance with the practical expedient elected. During the nine months ended September 30, 2023, the Company amended two operating leases to extend the lease term and entered into one new operating lease. As a result, the Company recognized additional operating lease liabilities and corresponding operating right-of-use assets of $ 3,063,782 . For the three and nine months ended September 30, 2023, components of lease expense are summarized as follows: Schedule of Lease Expense Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Operating lease costs $ 244,941 $ 529,089 Short-term lease costs 38,110 192,261 Total lease costs $ 283,051 $ 721,350 As of September 30, 2023, the maturities of the Company’s lease liabilities are as follows: Schedule of Maturities on Company Lease Liabilities Year Ending December 31, 2023 (remainder) $ 233,826 2024 966,451 2025 987,252 2026 682,806 Thereafter 542,512 Total lease payments 3,412,847 Less: imputed interest 367,938 Present value of operating lease liabilities 3,044,909 Less: current portion 794,516 Long-term portion $ 2,250,393 16 Other information related to operating leases was as follows: Schedule of Other Information Related to Operating Lease Nine Months Ended September 30, 2023 Cash paid for operating leases included in operating cash flows $ 680,580 Remaining lease term of operating leases 4 years Discount rate of operating leases 6.2 % 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. The Company is a defendant in two class action claims and three derivative actions 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 is also a party to two commercial litigation lawsuits in which plaintiffs are claiming they are owned certain remuneration based on alleged agreements with the Company. 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. Note 11 – Share Repurchase Program In March 2022, the Company’s Board of Directors authorized a share repurchase program that would allow the Company to repurchase up to $ 30.0 million of CODX common stock. The repurchase program does not obligate the Company to acquire any particular number 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. For accounting purposes, common stock repurchased under the stock repurchase program is recorded based upon the transaction date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. These shares are not retired and are considered issued but not outstanding. The following table shows the changes in treasury stock (in shares) for the periods presented: Schedule of Treasury Stock Nine Months Ended September 30, 2023 Balance, beginning of period 3,881,658 Repurchases of common stock 826,862 Balance, end of period 4,708,520 Note 12 – Subsequent Events In October 2023, the Company was awarded additional grant funding of approximately $ 9.0 million from one of the granting entities from whom the Company had previously been awarded grant funding during the three months ended September 30, 2023. The first $ 3.5 million of funding under this grant was received by the Company in October 2023. 17