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, 2023. The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 14, 2024, 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. ” 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 (“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. 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 are 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 June 2024, we completed our first U.S. Food and Drug Administration (FDA) application for 510(k) clearance for the Co-Dx™ PCR Pro™ instrument, and the Co-Dx PCR COVID-19 Test for over-the-counter (OTC) use. We have received acknowledgement from the FDA that the 510(k) application was received and is under review. Additionally, 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). 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. 18 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. 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 The Three Months Ended June 30, 2024 Compared to the Three Months ended June 30, 2023 Revenues For the three months ended June 30, 2024, we generated revenues of $2,656,840, compared to revenues of $197,806 for the three months ended June 30, 2023. Grant revenue accounted for $2,495,738 of revenue for the three months ended June 30, 2024, compared to $0 for the three months ended June 30, 2023. The increase in grant revenue was primarily due to the achievement of certain milestones under various grants the Company was awarded. 19 Cost of Revenues We recorded cost of revenues of $212,148 for the three months ended June 30, 2024, compared to $459,095 for the three months ended June 30, 2023. The decrease in cost of revenues of $246,947 is primarily due to lower inventory obsolescence reserves recorded in the current quarter. Expenses We incurred total operating expenses of $10,124,654 for the three months ended June 30, 2024, compared to total operating expenses of $11,733,150 for the three months ended June 30, 2023. The decrease in operating expenses was primarily due to decreased stock-based compensation expense, bad debt expense, and expense related to clinical trials for the Co-Dx PCR platform. These decreases were partially offset by increased legal expenses. Our sales and marketing expenses for the three months ended June 30, 2024 were $1,041,243, compared to $1,732,966 for the three months ended June 30, 2023. The decrease was primarily a result of decreased stock-based compensation expense, tradeshow and travel expenses, and website development expenses. General and administrative expenses were $3,132,385 for the three months ended June 30, 2024, compared to $3,713,895 for the three months ended June 30, 2023. The decrease in general and administrative expenses was primarily due to decreases in stock-based compensation expense, bad debt expense, and insurance expense, partially offset by increased legal and professional services expenses. Our research and development expenses were $5,612,691 for the three months ended June 30, 2024, compared to $5,981,043 for the three months ended June 30, 2023. The decrease was primarily a result of decreased expenses related to clinical trials for the Co-Dx PCR platform and stock-based compensation expense, partially offset by increases in personnel related expenses. Other Income For the three months ended June 30, 2024 we had total other income of $101,234, compared to total other income of $837,294 for the three months ended June 30, 2023. The decrease in other income is primarily due to a change in the fair value of contingent consideration liabilities and decreased realized gains from investments in marketable securities, partially offset by increased interest income. Net Loss We realized a net loss for the three months ended June 30, 2024 of $7,599,318, compared to a net loss for the three months ended June 30, 2023 of $8,918,825. The smaller net loss was primarily the result of an increase in grant revenue, combined with a decrease in operating expenses, as well as changes in the fair value of acquisition contingencies and income related to investments in marketable securities. Additionally, we recorded income tax expense of $20,590 for the three months ended June 30, 2024, compared to an income tax benefit of $2,238,320 for the three months ended June 30, 2023. The primary reason for the change in the provision for income taxes is a result of the Company now being in a full valuation allowance. The Six Months Ended June 30, 2024 Compared to the Six Months ended June 30, 2023 Revenues For the six months ended June 30, 2024, we generated revenues of $3,124,694, compared to revenues of $799,763 for the six months ended June 30, 2023. Grant revenue accounted for $2,710,847 of revenue for the six months ended June 30, 2024, compared to $0 for the six months ended June 30, 2023. The decrease in product revenue of $385,916 was primarily due to lower sales of our Logix Smart COVID-19 throughout the world. The increase in grant revenue was primarily due to the achievement of certain milestones under various grants the Company was awarded. 20 Cost of Revenues We recorded cost of revenues of $446,653 for the six months ended June 30, 2024, compared to $961,336 for the six months ended June 30, 2023. The decrease in cost of revenues of $514,683 is primarily due to lower inventory obsolescence reserves being recorded in the current year. Expenses We incurred total operating expenses of $20,617,390 for the six months ended June 30, 2024, compared to total operating expenses of $21,783,516 for the six months ended June 30, 2023. The decrease in operating expenses was primarily due to decreased stock-based compensation expense, bad debt expense and expense related to clinical trials for the Co-Dx PCR platform. These decreases were partially offset by increased personnel related expenses and legal expenses. Our sales and marketing expenses for the six months ended June 30, 2024 were $2,604,925, compared to $3,439,297 for the six months ended June 30, 2023. The decrease was primarily a result of decreased stock-based compensation expense, tradeshow and travel expenses, and website development expenses. General and administrative expenses were $6,051,188 for the six months ended June 30, 2024, compared to $6,727,860 for the six months ended June 30, 2023. The decrease in general and administrative expenses was primarily due to decreases in stock-based compensation expense, bad debt expense, and insurance expense, partially offset by increased legal and professional services expenses. Our research and development expenses were $11,292,369 for the six months ended June 30, 2024, compared to $10,995,103 for the six months ended June 30, 2023. The primary increase in expenses was a result of increased personnel related expenses, partially offset by decreased expenses related to clinical trials for the Co-Dx PCR platform and stock-based compensation expense. Other Income For the six months ended June 30, 2024 we had total other income of $1,071,342, compared to total other income of $2,772,742 for the six months ended June 30, 2023. The decrease in other income is primarily due to a change in the fair value of contingent consideration liabilities, an increased loss related to the Company’s joint venture investment, and decreased realized gains from investments in marketable securities, partially offset by increased interest income. Net Loss We realized a net loss for the six months ended June 30, 2024 of $16,911,361, compared to a net loss for the six months ended June 30, 2023 of $14,674,216. The larger net loss was primarily the result of changes in the fair value of acquisition contingencies and income taxes, partially offset by an increase in grant revenue combined with a decrease in operating expenses. We recorded income tax expense of $43,354 for the six months ended June 30, 2024, compared to an income tax benefit of $4,498,131 for the six months ended June 30, 2023. The primary reason for the change in the provision for income taxes is a result of the Company now recording a full valuation allowance. Liquidity and Capital Resources At June 30, 2024, we had cash and cash equivalents of $13,858,866. Additionally, we had $31,020,811 of marketable investment securities that could readily be converted into cash if needed. Additionally, our total current assets of June 30, 2024, were $48,219,239 compared to total current liabilities of $5,305,385. Net cash used in operating activities during the six months ended June 30, 2024 was $13,694,532, compared to $11,538,068 for the six months ended June 30, 2023. The increase in cash used in operating activities was primarily due to increased operating expenses and the impact of non-cash items. Net cash provided by investing activities during the six months ended June 30, 2024 was $12,636,520, primarily from maturities of marketable investment securities, compared to $3,433,041 during the six months ended June 30, 2023. Net cash used in financing activities was $0 for the six months ended June 30, 2024, compared to $1,037,930 for the same period in the prior year. This is due to the repurchase of outstanding common shares during the prior period, compared to no such repurchases in the current period. 21 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 June 30, 2024. We may not be able to secure financing in a timely manner or on favorable terms, if at all. 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.”