Co-Diagnostics, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS 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 audited financial statements, and notes thereto, included elsewhere in this report. In addition to historical information, this Annual Report contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Item 1A. Risk Factors” in this Annual Report on Form 10-K. 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, liquid biopsy for cancer screening, and agricultural applications. 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. Using our proprietary test design system and proprietary reagents, we have designed and obtained regulatory approval 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. These initial diagnostic tests were cleared for use in clinical labs only and not for point-of-care or at-home use. We are currently developing a unique, groundbreaking portable diagnostic device and test system designed for point-of-care and at-home use. The system is comprised of our PCR instrument that we refer to as the Co-Dx™ PCR Pro™ instrument, our proprietary diagnostic test cup system and a mobile application to be installed on the user’s mobile device. We refer to the system as the “Co-Dx™ PCR platform that is being designed to bring affordable, reliable polymerase chain reaction (“PCR”) testing to patients in point-of-care and at-home settings. The Co-Dx PCR platform is subject to U.S. Food and Drug Administration (“FDA”) review and is not available for sale at the time of this filing. In December 2023, we submitted the Co-Dx PCR platform for review by the U.S. Food and Drug Administration (FDA) for Emergency Use Authorization (EUA). The submission included the PCR Pro instrument, Co-Dx PCR COVID-19 detection test cups, and mobile app, all designed for use in point-of-care and at-home settings. 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. Technology 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. For example, we were the first US-based company to receive a CE-marking for a COVID-19 test in early 2020, as we worked to help slow the spread of the pandemic through our global network of distributors covering clinical labs in more than 50 countries. Our Logix Smart COVID-19 test was designed, developed, submitted for regulatory approval and ready to be used as an in vitro diagnostic or IVD in countries that accept a CE Mark as approval for use of the test in a period of just over 30 days. This is a real-world example of how the CODX technology can be used in an evolving epidemic or pandemic to get diagnostic tools in the hands of medical professionals in a timely manner. It can be similarly used to design a test for mutated strains of the virus should they not be detectable using currently available tests. 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. 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 represents 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. 28 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. Using our proprietary test design system and proprietary reagents, we have designed and obtained regulatory approval in the European Community and in India to sell PCR diagnostic tests for the detection of COVID-19, influenza, tuberculosis, hepatitis B and C, human papillomavirus, malaria, chikungunya, dengue, and the Zika virus. In the United States, 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 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”). 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, have designed and licensed 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. RESULTS OF OPERATIONS Results of Operations for the Years Ended December 31, 2023 and 2022 The table below provides a comparison of our operating results for the year ended December 31, 2023 as compared to the year ended December 31, 2022. Years Ended December 31, Year Change 2023 2022 Change % Product revenue $ 991,473 $ 34,218,209 $ (33,226,736 ) -97 % Grant revenue 5,820,565 - 5,820,565 - Total revenue 6,812,038 34,218,209 (27,406,171 ) -80 % Cost of revenue 4,184,949 5,481,093 (1,296,144 ) -24 % Gross profit 2,627,089 28,737,116 (26,110,027 ) -91 % Operating expenses Sales and marketing 6,860,815 7,344,628 (483,813 ) -7 % General and administrative 14,279,441 14,262,963 16,478 0 % Research and development 22,962,593 17,438,098 5,524,495 32 % Depreciation and amortization 1,230,474 1,282,718 (52,244 ) -4 % Goodwill impairment charges - 15,388,546 (15,388,546 ) - Total operating expenses 45,333,323 55,716,953 (10,383,630 ) -19 % Loss from operations (42,706,234 ) (26,979,837 ) (15,726,397 ) 58 % Other income Interest income 1,161,913 704,045 457,868 65 % Realized gain on investments 2,243,059 - 2,243,059 - Loss on disposition of assets (2,578 ) (138,117 ) 135,539 -98 % Gain on remeasurement of acquisition contingencies 1,092,581 7,899,644 (6,807,063 ) -86 % Gain (loss) on equity method investment in joint venture 100,703 (332,969 ) 433,672 -130 % Total other income 4,595,678 8,132,603 (3,536,925 ) -43 % Loss before income taxes (38,110,556 ) (18,847,234 ) (19,263,322 ) 102 % Income tax benefit (2,777,691 ) (4,608,985 ) 1,831,294 -40 % Net loss $ (35,332,865 ) $ (14,238,249 ) $ (21,094,616 ) 148 % 29 Revenues For the year ended December 31, 2023, we generated $6.8 million of revenue compared to revenue of $34.2 million in the year ended December 31, 2022. The decrease in revenue of $27.4 million was primarily due to lower sales of our Logix Smart COVID-19 test throughout the world. As global attention and regulatory responses to the COVID-19 pandemic have eased, we have experienced significantly decreased demand for our COVID-19 test. This decrease was partially offset by the generation of $5.8 million of grant revenue during the year ended December 31, 2023. Cost of Revenues and Gross Profit Cost of revenues decreased by $1.3 million from $5.5 million for the year ended December 31, 2022 to $4.2 million for the year ended December 31, 2023. Included within cost of revenues for the year ended December 31, 2023 is an increase of approximately $2.8 million related to reserves against certain raw materials and finished goods inventories. The decrease in revenues combined with a larger percentage of fixed product manufacturing costs and reserves for obsolete inventory resulted in a lower gross margin percentage. Operating Expenses We incurred total operating expenses of $45.3 million for the year ended December 31, 2023 compared to total operating expenses of $55.7 million for the year ended December 31, 2022. The decrease in operating expenses was primarily due to the decreases related to the impairment of goodwill, bad debt expense, and third party sales commissions, partially offset by increased expenses related to personnel, including stock-based compensation, increased legal and professional services expenses, and increased investment in research and development. Sales and marketing expenses for the year ended December 31, 2023 were $6.9 million compared to $7.3 million for the year ended December 31, 2022. The decrease of $0.4 million was primarily a result of decreased variable compensation, such as bonuses and commissions, and decreased third-party sales commissions, partially offset by increased professional services and stock-based compensation expense. General and administrative expenses were flat at $14.3 million for the years ended December 31, 2023 and 2022, respectively. Increases in professional, legal, and advisory fees, personnel related expenses, and stock-based compensation expense were offset by decreases in bad debt expense and insurance expense. Our research and development expenses increased by $5.6 million from $17.4 million for the year ended December 31, 2022, to $23.0 million for the year ended December 31, 2023. The primary increase in expenses related to increased personnel expenses, as well as increases in supplies expenses and professional and lab services utilized to further help us in our research and product development activities. During the year ended December 31, 2022, the Company recognized charges of $15.4 million related to goodwill impairment. Other Income Other income was $4.6 million for the year ended December 31, 2023, compared to other income of $8.1 million for the year ended December 31, 2022. The decrease in other income of $3.5 million was primarily due to a change in the fair value of contingent consideration liabilities, driven by changes in the Company’s stock price, and partially offset by increased interest income and realized investment gains due to the Company’s investing activities. 30 Net Loss We realized a net loss for the year ended December 31, 2023 of $35.3 million compared to $14.2 million for the year ended December 31, 2022. The decrease of $21.1 million was primarily the result of reduced sales of our Logix Smart COVID-19 test, increased operating expenses as discussed above, and a decrease in the gain related to the fair value of acquisition related contingent consideration liabilities, partially offset by a decrease in impairment charges related to the impairment of goodwill recorded in the prior year and increased interest income and realized investment gains. Additionally, we recorded an income tax benefit of $2.8 million during the year ended December 31, 2023, compared to an income tax benefit of $4.6 million for the year ended December 31, 2022. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2023, we had cash and cash equivalents of $14.9 million and marketable investment securities of $43.6 million. We consider our marketable investment securities an important part of our liquidity and focus such investments in securities that can readily be converted into cash if needed. Additionally, our total current assets at December 31, 2023, were $62.1 million compared to total current liabilities of $5.7 million. Net cash used in operating activities during the year ended December 31, 2023 was $22.1 million, compared to cash provided by operating activities of $6.6 million for the year ended December 31, 2022. The decrease in cash from operating activities was primarily due to decreases in revenue and increases in operating expenses. Net cash provided by investing activities was $15.4 million for the year ended December 31, 2023, compared to net cash used in investing activities of $58.2 million during the year ended December 31, 2022. The increase in cash provided by investing activities is primarily due to interest and realized gains related to marketable investment securities, as well as the redemption of certain investments as they matured. Net cash used in financing activities was $1.4 million for the year ended December 31, 2023, compared to $14.0 million of cash used in financing activities for the year ended December 31, 2022. The decrease in cash used in financing activities is primarily due to fewer repurchases of outstanding common shares during 2023 as compared to 2022. Since commencing sales of our Logix Smart COVID-19 test in March 2020, we have used our cash generated from those sales to fund the purchase of inventories and the development of our Co-Dx PCR Platform, and to pay our operating expenses. We have increased our work force most significantly in research and development in order to continue development of the Co-Dx PCR platform and additional tests that will enable continued use of our distributor network to sell additional products throughout the world. 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. It is anticipated that the Company will continue to generate operating losses and use cash in operations in the near term. If needed, we expect additional investment capital to come from additional issuances of our common stock or other equity based securities with existing and new investors similar to those that have provided funding in the past. On March 16, 2023, the Company entered into an Equity Distribution Agreement with Piper Sandler & Co. (“Piper”), pursuant to which we may sell from time to time, shares of our common stock, having an aggregate offering price of up to $50.0 million through Piper, as agent. No shares have been sold under the distribution agreement as of December 31, 2023. We may not be able to secure such financing in a timely manner or on favorable terms, if at all. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in Item 8 of this Annual Report on Form 10-K, within Note 2 of our consolidated financial statements in the section titled “Summary of Significant Accounting Policies”, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Accounts Receivable Trade accounts receivable are recorded at the invoiced amount, net of any allowance. The Company maintains an allowance for doubtful accounts for amounts the Company does not expect to collect. In establishing the required allowance, management considers historical losses, current market condition, customers’ financial condition, the age of receivables, and current payment patterns. Account balances are written off against the allowance once the receivable is deemed uncollectible. If actual accounts receivable collections are less favorable than those projected by management at the time of the assessment, however, additional accounts receivable write-downs may be required, which could reduce our earnings. 31 Goodwill and Intangible Assets The useful lives of intangible assets with definite lives are based on the expected number of years the asset will generate revenue or otherwise be used by us and the related amortization is based on the straight-line method. Goodwill, which has an indefinite life, is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include: ● the asset’s ability to continue to generate income from operations and positive cash flow in future periods; ● any volatility or significant decline in our stock price and market capitalization compared to our net book value; ● loss of legal ownership or title to an asset; ● significant changes in our strategic business objectives and utilization of our assets; and ● the impact of significant negative industry or economic trends. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. For goodwill, the entity has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The quantitative impairment test compares the fair value of a reporting unit with the carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is recorded. Upon the completion of our annual evaluation for impairment of goodwill as of December 31, 2022, we recorded a goodwill impairment charge of $15.4 million. Inventories We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and the net realizable value. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our earnings. Income Taxes Significant judgment is required in determining our provision for income taxes, current tax assets and liabilities, deferred tax assets and liabilities, and our future taxable income, both as a whole and in various tax jurisdictions, for purposes of assessing our ability to realize future benefit from our deferred tax assets. We recognize in the financial statements the impact of a tax position if that position is more likely than not to be sustained during an audit, including resolution of related appeals or litigation processes, if any. While we believe that we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcome of examinations by tax authorities in determining the adequacy of our provision for income taxes. See Note 11 to our Consolidated Financial Statements for more information on income taxes. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required. 32