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. 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, proprietary approach to PCR test design of primer and probe structure (“Co-Primers ® ”) that dramatically reduces one of the key vexing issues of PCR amplification: the exponential growth of primer-dimer amplification (false positives) which adversely interferes with identification of the target DNA/RNA. Using our proprietary test design system and 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 patent-pending 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 which has been 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, the Co-Dx PCR COVID-19 Test, and the Co-Dx PCR mobile app for over-the-counter (OTC) use. Following productive engagement with the FDA related to the regulatory submission, the Company withdrew its 510(k) application. The decision to withdraw the submission was based on discussions with the FDA regarding the ability to detect a potential deterioration of one component of the test, related to shelf-life stability. Following dialogue with the FDA and exploring the various courses of action available, we determined that the best long-term solution would be to submit a version of the test that has been enhanced to address the matter raised in the 510(k) review process. The Company plans to submit the next iteration of the Co-Dx PCR COVID-19 test for 510(k) OTC clearance, following the collection of clinical evaluation data to support the new test’s performance. A new submission also allows the Company to incorporate more recent Co-Dx PCR platform developments into the COVID-19 test, which the Company believes will also help create greater operational and manufacturing efficiencies, such as consolidating manufacturing processes to utilize the next generation of test kits and instruments across all tests on the at-home and point-of-care Co-Dx PCR platform. 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 and patented 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 CE marking for regulatory clearance in a period of just over 30 days. This is a real-world example of how 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 SARS-CoV-2 or other viruses should they not be detectable using currently available tests. 30 In addition, continued development has demonstrated the unique properties of our Co-Primers 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 consists of the predictive mathematical algorithms and patented molecular structure used in the testing process, which together represent a major advance in PCR testing systems. CODX technologies are now protected by more than 20 granted or pending US and foreign patents, as well as certain trade secrets and copyrights. Ownership of our proprietary platform permits us the advantage of avoiding payment of patent royalties required by other PCR test systems, which may allow the sale of diagnostic PCR tests at a lower price than competitors, while enabling us to maintain profit margins. Our proprietary test design process involves identifying the optimal locations on the target genes for amplification and pairing 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 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 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 cleared for sale in countries such as the United Kingdom, Australia, India, 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, including an OEM’s PCR instrument which we refer to here as the “Co-Dx Box”. In addition to testing for infectious disease, Co-Primers 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 commercialized three multiplexed tests to test mosquitos for the presence of diseases they carry, which enables municipalities to concentrate their efforts in managing mosquito populations in specific areas where mosquitos carrying deadly viruses are known to breed. RESULTS OF OPERATIONS Results of Operations for the Years Ended December 31, 2024 and 2023 The table below provides a comparison of our operating results for the year ended December 31, 2024 as compared to the year ended December 31, 2023. Years Ended December 31, Year Change 2024 2023 Change % Product revenue $ 770,048 $ 991,473 $ (221,425 ) -22 % Grant revenue 3,145,112 5,820,565 (2,675,453 ) -46 % Total revenue 3,915,160 6,812,038 (2,896,878 ) -43 % Cost of revenue 999,124 4,184,949 (3,185,825 ) -76 % Gross profit 2,916,036 2,627,089 288,947 11 % Operating expenses Sales and marketing 4,483,339 6,860,815 (2,377,476 ) -35 % General and administrative 16,157,152 14,279,441 1,877,711 13 % Research and development 20,979,589 22,962,593 (1,983,004 ) -9 % Depreciation and amortization 1,377,266 1,230,474 146,792 12 % Total operating expenses 42,997,346 45,333,323 (2,335,977 ) -5 % Loss from operations (40,081,310 ) (42,706,234 ) 2,624,924 -6 % Other income Interest income, net 1,091,825 1,161,913 (70,088 ) -6 % Realized gain on investments 870,745 2,243,059 (1,372,314 ) -61 % Gain (loss) on disposition of assets 8,291 (2,578 ) 10,869 -422 % Gain on remeasurement of acquisition contingencies 714,876 1,092,581 (377,705 ) -35 % Gain (loss) on equity method investment in joint venture (186,067 ) 100,703 (286,770 ) -285 % Total other income, net 2,499,670 4,595,678 (2,096,008 ) -46 % Loss before income taxes (37,581,640 ) (38,110,556 ) 528,916 -1 % Income tax provision (benefit) 57,368 (2,777,691 ) 2,835,059 -102 % Net loss $ (37,639,008 ) $ (35,332,865 ) $ (2,306,143 ) 7 % 31 Revenues For the year ended December 31, 2024, we generated $3.9 million of revenue compared to revenue of $6.8 million in the year ended December 31, 2023. The decrease in revenue of $2.9 million was primarily due to lower grant revenues, as the majority of revenue for grants previously awarded was recognized in the prior year. Cost of Revenues and Gross Profit Cost of revenues decreased by $3.2 million from $4.2 million for the year ended December 31, 2023 to $1.0 million for the year ended December 31, 2024. Included within cost of revenues is a decrease of approximately $0.1 million for the year ended December 31, 2024, and an increase of approximately $2.8 million for the year ended December 31, 2023, related to reserves against certain raw materials and finished goods inventories. The initial recording of the reserves for obsolete inventory in the prior year, partially offset by the decrease in revenues in the current year, resulted in a higher gross margin percentage. Operating Expenses Total operating expenses were $43.0 million for the year ended December 31, 2024 compared to total operating expenses of $45.3 million for the year ended December 31, 2023. The decrease in operating expenses was primarily due to decreased stock-based compensation expense, bad debt expense and expense related to development of and clinical trials for the Co-Dx PCR platform. These decreases were partially offset by increased personnel related and legal expenses. Sales and marketing expenses for the year ended December 31, 2024 were $4.5 million compared to $6.9 million for the year ended December 31, 2023. The decrease of $2.4 million was primarily a result of decreased stock-based compensation expense, tradeshow and travel expenses, consulting and professional services expenses, and personnel related expenses. General and administrative expenses for the year ended December 31, 2024 were $16.2 million compared to $14.3 million for the year ended December 31, 2023. The increase of $1.9 million was primarily due to increased legal expenses, partially offset by decreases in stock-based compensation expense, bad debt expense, consulting and professional services expense, and insurance expense. Research and development expenses for the year ended December 31, 2024 were $21.0 million compared to $23.0 million for the year ended December 31, 2023. The decrease of $2.0 million was primarily a result of decreased expenses related to development of and clinical trials for the Co-Dx PCR platform and stock-based compensation expense, partially offset by increases in personnel expense and professional services expense. Other Income Other income was $2.5 million for the year ended December 31, 2024, compared to other income of $4.6 million for the year ended December 31, 2023. The decrease in other income of $2.1 million was 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. 32 Net Loss We realized a net loss for the year ended December 31, 2024 of $37.6 million compared to $35.3 million for the year ended December 31, 2023. The larger net loss of $2.3 million was primarily the result of decreases in grant revenue, changes in the fair value of acquisition contingencies, and decreases in realized gains from investments in marketable securities, partially offset by a decrease in operating expenses. Additionally, we recorded income tax expense of $0.1 million during the year ended December 31, 2024, compared to an income tax benefit of $2.8 million for the year ended December 31, 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 December 31, 2024, we had cash and cash equivalents of $2.9 million and marketable investment securities of $26.8 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, 2024, were $32.3 million compared to total current liabilities of $7.3 million. Net cash used in operating activities during the year ended December 31, 2024 was $29.2 million, compared to net cash used in operating activities of $22.1 million for the year ended December 31, 2023. The increase in cash used in operating activities was primarily due to decreases in revenue, grant funding, and realized gains on investments, and increases in cash-payable operating expenses. Net cash provided by investing activities was $17.1 million for the year ended December 31, 2024, compared to net cash provided by investing activities of $15.4 million during the year ended December 31, 2023. 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 provided by financing activities was $0.1 million for the year ended December 31, 2024, compared to $1.4 million of cash used in financing activities for the year ended December 31, 2023. The cash provided by financing activities during 2024 relates to issuances of common stock, compared to cash used in financing activities for repurchases of outstanding common shares during 2023. 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. 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. We have entered into an Equity Distribution Agreement (the “ATM Agreement”) with Piper Sandler & Co. (“Piper Sandler”), pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $17,111,650 from time to time through Piper Sandler acting as our agent, under our prospectus supplement dated October 18, 2024. As of December 31, 2024, we have sold 314,707 shares of common stock under the ATM Agreement resulting in net proceeds to the Company of $0.2 million. Although we are seeking to obtain additional equity and/or debt financing, such funding is not assured and may not be available to us on favorable or acceptable terms and may involve significant restrictive covenants. Any additional equity financing is also not assured and, if available to us, will most likely be dilutive to our current stockholders. If we are not able to obtain additional debt or equity financing on a timely basis, the impact on us will be material and adverse. These uncertainties create substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 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. 33 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 assets’ 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. 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. 34