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. 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 under the heading “Risk Factors” in other documents we file with the SEC, including our Annual Report on form 10-K for the year ended December 31, 2022. 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. 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. ” 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 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 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 (“Co-Primers™”) 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 Co-Primer 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. Our flagship CoPrimers technology is covered by U.S. patents titled “Cooperative primers, probes, and applications thereof” as well as by granted and pending foreign counterparts. We have other U.S. patents directed to our earlier work in primer and assay designs. For more recent works, we have filed international and U.S. patent applications directed to “Methods and Compositions for Next Generation Sequencing (NGS) Library Preparation,” “Allele-Specific Design of Cooperative Primers for Improved Nucleic Acid Variant Genotyping,” “Methods and Compositions Related to Cooperative Primers and Reverse Transcription,” and “Systems, Methods, and Apparatus for Automated Self-Contained Biological Analysis” which is the basis of our Co-Dx Platform. We intend to continue building our patent portfolio as development continues and resources are available. 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 United States, the European Community and/or in India. In the United States, we are regulated by the FDA and our products must be approved, cleared, or authorized by the FDA before we are allowed to sell our tests in the United States as in vitro diagnostics. The FDA granted us an EUA to manufacture and sell our Logix Smart COVID-19 test to CLIA labs in the United States. We are ISO 13485:2016 certified, relating to the design and manufacture of our medical device products. Being ISO certified greatly facilitates our applications for CE-Marking, which allows us to sell any CE Marked test in most countries in Europe, South America and Asia, depending on the country and following that country’s registration process. We currently have CE Markings issued for our Logix Smart COVID-19 test, tuberculosis test, our Zika virus test, a triplex test that tests for Zika, dengue, and chikungunya simultaneously, a triplex “ABC” test that identifies and distinguishes between Flu A, Flu B and Covid-19, our SARS-CoV-2 2-gene multiplex test, and our DS (Direct Saliva, extraction-free) COVID-19 test. In addition, our Logix Smart COVID-19 has received the required license to manufacture and sell in India from India’s CDSCO, and The National Epidemiology Institute in Mexico evaluated our Logix Smart COVID-19 and ABC tests and approved them for sale in Mexico. We have also received approval to sell our Logix Smart COVID-19 test in Australia. We are in the process of registering for sale our Logix Smart COVID-19 and other tests in a number of major countries around the world. 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 September 30, 2023 Compared to the Three Months ended September 30, 2022 Revenues For the three months ended September 30, 2023, we generated revenues of $2,457,098, compared to revenues of $5,094,456 for the three months ended September 30, 2022. Grant funding awarded to the Company accounted for $2,320,565 of revenue for the three months ended September 30, 2023. The decrease in total revenue of $2,637,358 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 $255,772 for the three months ended September 30, 2023, compared to $767,936 for the three months ended September 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, after adjusting for the effect of the grant revenue awarded. Expenses We incurred total operating expenses of $11,137,277 for the three months ended September 30, 2023, compared to total operating expenses of $10,862,135 for the three months ended September 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 September 30, 2023 were $1,904,395, compared to $1,889,907 for the three months ended September 30, 2022. The increase was primarily a result of increased stock-based compensation expense and professional services expense, partially offset by decreased variable compensation, such as bonuses and commissions, decreased third-party sales commissions, and tradeshow and travel expenses. General and administrative expenses decreased from $3,622,273 for the three months ended September 30, 2022 to $3,147,753 for the three months ended September 30, 2023. The decrease in general and administrative expenses was primarily due to decreased bad debt expense, insurance expense, variable compensation expense, and professional services expenses, partially offset by increased stock-based compensation expense. Our research and development expenses increased from $5,037,461 for the three months ended September 30, 2022 to $5,788,789 for the three months ended September 30, 2023. The primary increase in expenses was a result of increases in personnel related expenses and increases in expenses related to development and clinical trials of the Co-Dx PCR platform. 20 Other Income (expense) For the three months ended September 30, 2023 we had total other income of $840,176, compared to total other income of $3,059,915 for the three months ended September 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 September 30, 2023 of $5,982,194, compared to a net loss for the three months ended September 30, 2022 of $1,361,062. 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 $2,113,581 for the three months ended September 30, 2023, compared to an income tax benefit of $2,114,638 for the three months ended September 30, 2022. The Nine Months Ended September 30, 2023 Compared to the Nine Months ended September 30, 2022 Revenues For the nine months ended September 30, 2023, we generated revenues of $3,256,861, compared to revenues of $32,816,726 for the nine months ended September 30, 2022. The decrease in revenue of $29,559,865 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 $1,217,108 for the nine months ended September 30, 2023, compared to $4,965,319 for the nine months ended September 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 $32,920,793 for the nine months ended September 30, 2023, compared to total operating expenses of $28,709,900 for the nine months ended September 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 nine months ended September 30, 2023 were $5,343,692, compared to $6,014,280 for the nine months ended September 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, tradeshow and travel expenses, and professional services expense. General and administrative expenses increased from $9,012,888 for the nine months ended September 30, 2022 to $9,875,613 for the nine months ended September 30, 2023. The increase in general and administrative expenses was primarily due to increased professional, legal, and advisory fees expenses, increased stock-based compensation expense, and increased bad debt expense, partially offset by decreased variable compensation expense and decreased insurance expense. Our research and development expenses increased from $12,698,632 for the nine months ended September 30, 2022 to $16,783,892 for the nine months ended September 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 platform, and increased stock-based compensation expense. 21 Other Income (expense) For the nine months ended September 30, 2023 we had total other income of $3,612,918, compared to total other income of $7,055,666 for the nine months ended September 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 nine months ended September 30, 2023 of $20,656,410, compared with net income for the nine months ended September 30, 2022 of $7,667,231. The shift from net income to 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 $6,611,712 for the nine months ended September 30, 2023, compared to an income tax benefit of $1,470,058 for the nine months ended September 30, 2022. Liquidity and Capital Resources At September 30, 2023, we had cash and cash equivalents of $10,239,898. Additionally, we had $53,188,999 of marketable investment securities that could readily be converted into cash if needed. Additionally, our total current assets of September 30, 2023, were $71,310,781 compared to total current liabilities of $5,097,740. Net cash used in operating activities during the nine months ended September 30, 2023 was $17,303,239, compared to cash provided by operating activities of $10,578,544 for the nine months ended September 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 nine months ended September 30, 2023 was $5,773,590, primarily from maturities of marketable investment securities, compared to cash used in investing activities of $4,861,292 during the nine months ended September 30, 2022. Net cash used in financing activities was $1,204,256 for the nine months ended September 30, 2023, compared to net cash used in financing activities of $12,816,503 for the same period in the prior year. This decrease is due to the repurchase of fewer outstanding common shares during the first nine 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 platform and complete development of additional tests to enable us to use our distributor network to sell other products throughout the world and become 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 September 30, 2023 we have repurchased 4,708,520 outstanding common shares under the repurchase program for a total of $15.4 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 have not sold any shares under 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.”