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.
We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business
strategy, short term and long-term business operations, and financial needs.
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 in this Quarterly
Report, and in particular, the risks discussed below and under the heading "Risk
Factors" in other documents we file with the SEC. The following discussion
should be read in conjunction with the Annual Report on Form 10-K for the fiscal
year ended December 31, 2021, filed with the SEC on March 24, 2022, and the
audited financial statements and notes included therein.
You should not place undue reliance on any forward-looking statement, each of
which applies only as of the date of this Quarterly Report. Except as required
by law, we undertake no obligation to update or revise publicly any of the
forward-looking statements after the date of this Quarterly Report to conform
our statements to actual results or changed expectations.
You are advised, however, to consult any further disclosures we make on related
subjects in our periodic and current reports filed with the SEC. You should
understand that it is not possible to predict or identify all risk factors.
Consequently, you should not consider this list to be a complete set of all
potential risks or uncertainties.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, without limitation:
? the results of clinical trials and the regulatory approval process;
? market acceptance of any products that may be approved for commercialization;
? our ability to protect our intellectual property rights;
? the impact of any infringement actions or other litigation brought against
us;
? competition from other providers and products;
? our ability to develop and commercialize new and improved products and
services;
? changes in government regulation;
? and other factors (including the risks contained in the section entitled
"Risk Factors" in other documents we file with the SEC) relating to our
industry, our operations and results of operations.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from
time to time, and it is not possible for us to predict all of them. We cannot
guarantee future results, levels of activity, performance or achievements.
Except as required by applicable law, including the securities laws of the
United States, we do not intend to update any of the forward-looking statements
to conform these statements to actual results.
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" for a summary of
the risks and uncertainties associated with an investment in our securities.
17
Business Overview
Co-Diagnostics, Inc., a Utah corporation (the "Company", "Co-Dx" 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. 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, ground-breaking
portable PCR testing platform (the "Co-Dx PCR home testing platform") designed
to bring affordable, reliable gold-standard polymerase chain reaction ("PCR") to
patients in point-of-care and even at-home settings.
Our diagnostics systems enable dependable, low-cost, molecular testing for
organisms and genetic diseases by automating 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.
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, allowing for significant margins while still positioning the
Company to be a low-cost provider of molecular diagnostics and screening
services.
In addition, continued development has demonstrated the unique properties of our
CoPrimers™ 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 test design to engineer
and optimize DNA/RNA tests and to automate algorithms that rapidly screen
millions of possible options to pinpoint the optimum design. Dr. Brent
Satterfield, our founder, developed the Company's intellectual property
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. 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.
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.
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 at the outset. Verification is 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, CODX has obtained Emergency
Use Authorization ("EUA") for its Logix Smart™ COVID-19 detection test from the
Food and Drug Administration, or FDA, and sells 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 addition to testing for infectious disease, the technology lends itself to
identifying any section of a DNA or RNA strand that describe any type of genetic
trait, which creates a number of 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.
Because we believe that testing for COVID-19 is going to be a consideration for
public health worldwide even after the current pandemic has subsided, we have
initiated the Co-Dx PCR home testing platform to facilitate frequent testing in
homes, schools, businesses, and the hospitality industry. We believe this may be
accomplished through the development of a low-cost testing device, easy to use
by non-professionals, that can provide PCR test results in around 30 minutes.
The initial project built on this platform, an at-home and point-of-care
COVID-19 PCR test, was ultimately facilitated by our development of a saliva or
nasal swab-based PCR test that does not require the RNA/DNA extraction. While
the final result is believed to be approximately equivalent to those processed
by a high-complexity clinical laboratory, it has the advantages of increased
speed and ease of handling thanks to lyophilization (or freeze-drying) of our
testing reagents to allow for stability at room temperatures.
On February 15, 2021, we engaged the services of a group of professionals at
Idaho Molecular, Inc. (IdMo) and Advanced Conceptions, Inc (ACI) with the
expertise to develop the hardware for such a device using our CoPrimers™ as the
reagent chemistry. On December 31, 2021, we completed the acquisitions of IdMO
and ACI, along with all existing and future assets and intellectual property
related to the platform and device. It is expected that the device and test will
be available to homes, schools, offices, and the travel industry among other
locations at a cost that will allow frequent screening to reduce the spread of
the COVID-19 virus and other contagions in the future. The device would also be
available to test for other pathogens detectable through saliva or other samples
as we develop those tests and offer them to the marketplace. All such tests will
be subject to regulatory approval prior to commercialization.
18
RESULTS OF OPERATIONS
The Three Months Ended June 30, 2022 Compared to the Three Months ended June 30,
2021
Revenues
For the three months ended June 30, 2022, we generated revenues of $5,023,226,
compared to revenues of $27,358,140 for the three months ended June 30, 2021.
The decrease in revenue of $22,334,914 was primarily due to lower sales of our
Logix Smart™ COVID-19 test developed in response to the current COVID-19
pandemic. Of the total revenue in the three months ended June 30, 2022, $74,989
related to the sale of third party manufactured equipment and consumables, which
we sourced and sold to customers to facilitate the sales of our COVID-19 test
compared to $164,470 of revenue from the sales of such equipment for the three
months ended June 30, 2021.
Cost of Revenues
We recorded cost of revenues of $915,432 for the three months ended June 30,
2022, compared to $2,504,355 for the three months ended June 30, 2021. The
decrease in revenues combined with a larger percentage of fixed product
production costs resulted in a lower cost of revenues and gross margin
percentage. Of the total cost of sales during the three months ended June 30,
2022, $88,636 was from equipment sold to our customers compared to $131,403 for
equipment sold to customers for the three months ended June 30, 2021.
Expenses
We incurred total operating expenses of $8,254,832 for the three months ended
June 30, 2022, compared to total operating expenses of $13,062,620 for the three
months ended June 30, 2021. The decrease in operating expenses was due to a
decrease in business activities experienced as a result of our decrease in
revenue, variable compensation, third party sales commissions reflected in sales
and marketing, and a lower investment in third-party research and development.
Our sales and marketing expenses for the three months ended June 30, 2022 were
$1,472,225, compared to $5,853,313 for the three months ended June 30, 2021. 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.
General and administrative expenses decreased from $2,468,433 for the three
months ended June 30, 2021 to $2,468,421 for the three months ended June 30,
2022. The slight decrease in general and administrative expenses was primarily
due to decreased variable compensation expense, partially offset by increased
activity to support the growth of our business, including increased insurance
expense and professional and advisory fees related to our recent acquisitions,
as well as increased stock-based compensation expense.
Our research and development expenses decreased from $4,669,160 for the three
months ended June 30, 2021 to $3,889,844 for the three months ended June 30,
2022. The primary decrease in expenses was a result of decreased expenditures to
third parties related our point-of-care device development, partially offset by
increases in personnel expenses related to our acquisitions of IdMo and ACI on
December 31, 2021.
19
Other Income (Expense)
For the three months ended June 30, 2022 we had total other income of $719,228,
compared to total other income of $139,124 for the three months ended June 30,
2021. The increase was due primarily to a change in the fair value of contingent
consideration liabilities recorded in conjunction with the acquisitions of IdMo
and ACI, partially offset by a loss from our India joint venture.
Net Income
We realized a net loss for the three months ended June 30, 2022 of $2,686,303,
compared with net income for the three months ended June 30, 2021 of $9,785,213.
The decrease in net income was primarily the result of a decrease in revenues,
partially offset by a decrease of operating expenses, as well as changes in the
fair value of acquisition contingencies. Additionally, we recorded an income tax
benefit of $741,507 for the three months ended June 30, 2022, compared to income
tax expense of $2,145,076 for the three months ended June 30, 2021.
The Six Months Ended June 30, 2022 Compared to the Six Months ended June 30,
2021
Revenues
For the six months ended June 30, 2022, we generated revenues of $27,722,270,
compared to revenues of $47,382,909 for the six months ended June 30, 2021. The
decrease in revenue of $19,660,639 was primarily due to lower sales of our Logix
Smart™ COVID-19 test developed in response to the current COVID-19 pandemic. Of
the total revenue in the six months ended June 30, 2022, $438,939 related to the
sale of third party manufactured equipment and consumables, which we sourced and
sold to customers to facilitate the sales of our COVID-19 test compared to
$430,985 of revenue from the sales of such equipment for the six months ended
June 30, 2021.
Cost of Revenues
We recorded cost of revenues of $4,197,383 for the six months ended June 30,
2022, compared to $5,776,920 for the six months ended June 30, 2021. The
decrease in revenues combined with a larger percentage of fixed product
production costs resulted in a lower cost of revenues and gross margin
percentage. Of the total cost of sales during the six months ended June 30,
2022, $463,318 was from equipment sold to our customers compared to $334,039 for
equipment sold to customers for the six months ended June 30, 2021.
Expenses
We incurred total operating expenses of $17,847,766 for the six months ended
June 30, 2022, compared to total operating expenses of $19,479,923 for the six
months ended June 30, 2021. The decrease in operating expenses was due to a
decrease in business activities experienced as a result of our decrease in
revenue, variable compensation, third party sales commissions reflected in sales
and marketing, and a lower investment in third-party research and development.
Our sales and marketing expenses for the six months ended June 30, 2022 were
$4,124,373, compared to $7,050,859 for the six months ended June 30, 2021. 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.
General and administrative expenses decreased from $5,404,122 for the six months
ended June 30, 2021 to $5,390,616 for the six months ended June 30, 2022. The
slight decrease in general and administrative expenses was primarily due to
decreased variable compensation expense, partially offset by increased activity
to support the growth of our business, including increased insurance expense and
professional and advisory fees related to our recent acquisitions, as well as
increased stock-based compensation expense.
Our research and development expenses increased from $6,886,223 for the six
months ended June 30, 2021 to $7,661,171 for the six months ended June 30, 2022.
The primary increase in expenses was a result of increases in personnel expenses
related to our acquisitions of IdMo and ACI on December 31, 2021, partially
offset by a decrease in third-party research and development investment.
20
Other Income (Expense)
For the six months ended June 30, 2022 we had total other income of $3,995,751,
compared to total other expense of $311,162 for the six months ended June 30,
2021. The increase was due primarily to a change in the fair value of contingent
consideration liabilities recorded in conjunction with the acquisitions of IdMo
and ACI, partially offset by a loss from our India joint venture.
Net Income
We realized net income for the six months ended June 30, 2022 of $9,028,292,
compared with net income for the six months ended June 30, 2021 of $17,684,188.
The decrease in net income was primarily the result of a decrease in revenues,
partially offset by a decrease of operating expenses, as well as changes in the
fair value of acquisition contingencies. Additionally, we recorded income tax
expense of $644,580 for the six months ended June 30, 2022, compared to
$4,130,716 for the six months ended June 30, 2021.
Liquidity and Capital Resources
At June 30, 2022, we had cash and cash equivalents of $86,045,405 that could
readily be converted into cash if needed. Additionally, our total current assets
of June 30, 2022, were $114,567,459 compared to total current liabilities of
$6,716,136.
Net cash provided by operating activities during the six months ended June 30,
2022 was $9,460,222, compared to $24,694,101 for the six months ended June 30,
2021. The decrease in cash from operating activities was primarily due to
decreased revenues, increases in inventory, and the impact of non-cash items.
We used $9,600,444 of cash in investing activities during the six months ended
June 30, 2022, primarily from purchases of marketable securities, offset by
maturities of marketable investments and purchases of property and equipment,
compared to cash from investing activities of $2,158,365 during the six months
ended June 30, 2021.
Net cash used in financing activities was $2,421,607 for the six months ended
June 30, 2022, compared to net cash provided by financing activities of $444,899
for the same period in the prior year. This decrease is due to the repurchase of
outstanding common shares during the current period.
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 increase in our inventories
and receivables and pay our operating expenses. We have increased our work force
primarily in the area of research and development to complete development of
additional tests to enable us to use our distributor network to sell other
products throughout the world and remain 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. During the six months ended June 30, 2022 we have
repurchased 532,440 outstanding common shares under the repurchase program.
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.
21
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.
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CO-DIAGNOSTICS, INC. 
