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, 2019 filed with the SEC on March 30, 2020 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.
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Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires
that we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our assumptions and
estimates, including those related to recognition of revenue, valuation of
investments, valuation of inventory, measurement of stock-based compensation
expense and litigation. We base our estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
As an emerging growth company, we have elected to opt-in to the extended
transition period for new or revised accounting standards. As a result, our
financial statements may not be comparable to those of companies that comply
with public company effective dates.
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.
Overview
Co-Diagnostics, Inc., a Utah corporation (the "Company" or "CDI"), is developing
robust and innovative molecular tools for detection of infectious diseases,
liquid biopsy for cancer screening, and agricultural applications. We develop,
manufacture and sell reagents used for diagnostic tests that function via the
detection and/or analysis of nucleic acid molecules (DNA or RNA). 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").
Our diagnostics systems enable very rapid, low-cost, molecular testing for
organisms and genetic diseases by automating historically complex procedures in
both the development and administration of tests. CDI's technical advance
involves a novel approach to Polymerase Chain Reaction ("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. Because we own our 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
CoPrimer technology that make it ideally suited to 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 gen sequencing.
Our scientists use the complex mathematics of DNA/RNA test design, to engineer
and optimize a DNA/RNA test and to automate algorithms that rapidly screen
millions of possible options to pinpoint the optimum design. Dr. Satterfield,
our Chief Technology Officer, developed the Company's intellectual property
consisting of the predictive mathematical algorithms and proprietary reagents
used in the testing process, which together represent a major advance in PCR
testing systems. CDI technologies are now protected by seven 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 enables
the sale of diagnostic tests at a lower price than competitors, while enabling
us to maintain profit margins.
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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.
We design our tests by identifying the optimal locations on the target gene for
amplification and pair the location 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, the data resulting from our
tests verify that 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 lab 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 COVID-19, tuberculosis, hepatitis B and C,
human papilloma virus, malaria, chikungunya, dengue, and the zika virus. In the
United States, CDI has obtained Emergency Use Authorization ("EUA") for its
COVID-19 test from the FDA and sells that test to qualified labs. In addition,
our LogixSmart COVID-19 test has been approved for sale in Australia and Mexico
by the regulatory bodies in those countries and has 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 spraying
mosquito populations on the specific areas known to be breeding the mosquitos
that carry deadly viruses.
2020 Developments
On January 23, 2020, we announced the completion of the principle design work
for a PCR screening test for new coronavirus, COVID-19, intended to address the
potential need for detection of the virus. An outbreak of respiratory illness
caused by the pneumonia-like COVID-19 has spread rapidly throughout the world
since first being discovered in the Chinese city of Wuhan on December 31, 2019.
China confirmed human-to-human transmission of the virus and the United States
announced the first infection in this country, detected in a traveler returning
from Wuhan. Our COVID-19 test features the Company's patented CoPrimer™
technology, and was designed using our proprietary software system, following
the guidelines published by the World Health Organization (WHO) and Centers for
Disease Control (CDC).
On February 20, 2020, we announced that our Logix Smart™ COVID-19 Test technical
file had been submitted for registration with the European Union, and that it
was expected to be available late February as an in vitro diagnostic ("IVD") for
markets that accept a CE marking as valid regulatory approval. Subsequently, on
February 24, 2020, we announced that our test obtained regulatory clearance to
be sold as an IVD for the diagnosis of COVID-19 in markets that accept
CE-marking as valid regulatory approval, and became available for purchase from
the Company's Utah-based ISO-13485:2016 certified facility. The Declaration of
Conformity for the Logix Smart COVID-19 test confirms that it meets the
Essential Requirements of the European Community's In-Vitro Diagnostic Medical
Device Directive (IVDD 98/79/EC), permitting export and sales of the product as
an IVD to commence immediately in the European Community. We shipped samples of
the Research Use Only version of our test to distributors in various countries,
which allowed future customers to confirm the quality and sensitivity of the
product, and for us to accelerate the sales efforts of the COVID-19 test.
We commenced sales of the COVID-19 tests in February and March of 2020 to
international customers and sold the tests in numerous countries around the
world through an expanding distributor network.
On April 6, 2020, we announced that we had received an Emergency Use
Authorization from the FDA allowing us to commence sales of our Logix Smart
COVID-19 test to laboratories certified by the Center for Medicare and Medicaid
Services under the Clinical Laboratories Improvements Act ("CLIA") to accept
human samples for diagnostics testing throughout the United States and we have
been actively marketing to such CLIA labs since that time.
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Infectious Disease Product Offering
Using its proprietary test design system and proprietary reagents, CDI designs
and sells PCR diagnostic tests for diseases and pathogens such as COVID-19,
tuberculosis, hepatitis B and C, malaria, dengue, human papilloma virus,
chikungunya, and zika virus, all of which tests have been designed and verified
in CDI's laboratory. Our tuberculosis test and zika test received a CE Mark in
2018, and a triplex test for zika, dengue and chikungunya received a CE Mark in
2019, qualifying the tests to be sold throughout the European community and in
most countries in central and South America. In December, 2019, our Indian joint
venture received a license to manufacture and sell tuberculosis, hepatitis B,
hepatitis C, human papilloma virus 16/18 and malaria tests in India from the
Central Drugs Standard Control Organization ("CDSCO"). In February 2020, we
received a CE Mark for our Logix Smart COVID-19 test and in April 2020, our
COVID-19 test was approved for manufacture and sale in India by the CDSCO and in
Mexico by the INDRE, Mexico's equivalent to the United States Center for Disease
Control. In August 2020, we received approval from the Australian Department of
Health Therapeutic Goods Division to sell our COVID-19 in Australia.
As explained above, the development of our Logix Smart COVID-19 test was
designed, developed, submitted for regulatory approved and ready to be used both
as a Research Use Only ("RUO") and as an IVD in countries that accept a CE Mark
as approval for use of the test in a period of just over thirty days. This is a
real-world example of how in an evolving epidemic that the CDI technology can be
used to get diagnostics tools in the hands of medical professionals without
delay. It can be similarly used to design a test for mutations of the virus
should they occur.
Caribbean and Central and South America
Our initial sales were to entities located in South and Central America.
In some of those countries, there are limited regulatory hurdles so we started
offering our tests immediately. We have applied for registration of our tests in
those countries that require registration and our distributors in those
countries have provided us with in country assistance in completing such
registrations.
We first offered our zika test in this region because of the demand for such
test, followed quickly by tests for tuberculosis, our triplex test for zika,
chikungunya, and dengue, hepatitis B and C, and dengue. Sales of those tests
have not been material, but with the granting of a CE mark for our Logix Smart
COVID-19, we began significant sales in this region. Products are manufactured
for sale upon receipt of purchase orders from distributors, labs and hospitals.
India
In January, 2017, the Company entered into an agreement to manufacture
diagnostics tests for seven infectious diseases with a pharmaceutical
manufacturing company in India and formed an Indian joint venture organized as
CoSara Diagnostics, Pvt. The agreement provided for the construction of a
manufacturing plant and the manufacture of the tests named above and the joint
sales and marketing of those tests in India. We have received a license for the
plant in Ranoli, India to manufacture approved tests and it will be used for
testing and manufacturing for the Indian market.
As mentioned above, the CDSCO has given us the approval for manufacture and sale
of the five tests referred above and the Company has begun manufacture and sale
of those tests. Sales of those tests has not been material to date. The Company
has commenced a reagent rental program in India with a thermocycler purchased
from a third-party vendor and which we refer to as our MDx Device. We have
placed thirty-nine thermocyclers, twenty-one of which are our MDx Devices, with
labs in India. Each of the reagent rental placements requires the purchase of a
minimum number of tests per month. The placement of thermocyclers in India has
facilitated the sale of the SaraGene COVID-19 tests in India, which has made
CoSara profitable in the last two quarters. The World Health Organization
("WHO") 2019 Global Tuberculosis Report indicates that India is the country with
the highest number of cases of tuberculosis in the world and has recently
exceeded all countries in the world for cases of COVID-19. WHO tuberculosis
statistics for India for 2018 give an estimated incidence figure of 2.69 million
cases of tuberculosis for India out of a global incidence of approximately 10.0
million. The tuberculosis incidence for India is the number of new cases of
active tuberculosis disease in India during a certain time period (usually a
year). We believe that we will be able to sell our tuberculosis test in India
through our sales distribution network that we are building currently.
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On March 19, 2020, we announced that CoSara Diagnostics, Pvt., our Indian joint
venture ("CoSara"), received authorization to begin manufacture and sale of
COVID-19 tests in India. Those tests in India are branded as SaraGene COVID-19
tests and are sold exclusively by CoSara. Because any commercial activity in
India was severely restricted until May 2020, CoSara was not able to commence
the manufacturing and sale of the SaraGene COVID-19 tests until late in the
second quarter, but sales efforts have resulted in CoSara being profitable since
the commencement of sales of the COVID-19 tests.
Although the efforts of CoSara are currently concentrated in providing the
SaraGene COVID-19 test to the Indian market, we are preparing to submit
technical files to the CDSCO requesting approval tests for the human
immunodeficiency virus (HIV) and dengue as well as a blood bank panel to
increase the number of tests to be sold in that market.
Europe
Molecular diagnostics, such as our tests, are governed in Europe by the
framework for in vitro diagnostics (IVDs), which encompasses diagnostic products
such as reagents, instruments and systems intended for use in diagnosis of
disease. The regulatory system for IVDs is built largely on a self-certification
procedure, placing heavy responsibility on manufacturers. Non self-certified
products are subject to the same standards as self-certified products but are
subject to audit and review by a notified body prior to receiving approval to be
CE-marked. A CE-marking is a manufacturer's declaration that a product meets the
requirements of the applicable European Commission directive. Examples of
current obligations include having in place a qualitative manufacturing process,
user instructions that are clear and fit for purpose, ensuring that the
'physical' features of devices and diagnostics do not pose any danger. If a
product fulfils these and other related control requirements, it may be
CE-marked as an indication that the product is compliant with EU legislation and
sold in the European Union. We have received CE Marks for four of our tests
including COVID-19, tuberculosis, Zika, and our zika, dengue, chikungunya
triplex tests.
We have received ISO 13485 and ISO 9001 certifications relating to the design
and manufacture of our medical device products. The ISO certification indicates
that we meet the standards required to self-certify certain of our products and
affix a CE-marking for sales of our products in countries accepting the CE
marking (not in the United States) with only minimal further governmental
approvals and registrations in most countries.
United States
The U.S. Food and Drug Administration (FDA) has granted permission for us to
export all of our IVD our products. The FDA's permission to export was granted
under Section 801(e) of the Federal Food, Drug, and Cosmetic Act, as amended
(the "FDC Act"). Section 801(e) of the FDA Act covers certain medical devices
that have not yet received an approved Premarket Approval in the United States
by the FDA, such as our products. We have not commenced any Premarket Approval
steps with the FDA. Section 801(e) of the FDA Act applies to medical devices
that are acceptable to the importing country and that are manufactured under the
FDA's Good Manufacturing Practices. We have received Emergency Use Authorization
(EUA) for our COVID-19 test, which allows sales to qualified labs in the United
States.
Under our EUA we are actively marketing our LogixSmart COVID-19 test to CLIA
certified laboratories in the United States and the CLIA labs are able to
qualify our LogixSmart test as a Laboratory Developed Test (LDT), a diagnostic
test that has been validated for use in the CLIA lab. These tests may be used by
the lab only in that laboratory. CLIA laboratories develop the performance
characteristics, perform the analytical validation for their LDT's and obtain
licenses to offer them as diagnostic services. The FDA has publicly announced
its intention to regulate certain LDTs in a phased-in approach, but draft
guidance that was published a couple of years ago was withdrawn at the end of
the Obama administration and replaced by an informal non-enforceable discussion
paper reflecting some of the feedback that it received on LDT regulation. We are
currently marketing to CLIA laboratories throughout the US.
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Market Opportunity
The market opportunity for our tests changed radically with the emergence of the
COVID-19 pandemic. Because we were able to respond rapidly and produce a quality
product, we have been able to build a distribution network that extends to more
than 80 countries with over 50 active distributors, most of which have been the
sales network that has allowed us to export products throughout the world. We
believe that after the pandemic is brought under control, the network of
distributors that we have built in these extra-ordinary times will serve us well
in sales of other diagnostic tests.
The molecular diagnostics market is a fast-growing portion of the in vitro (test
tube-based, controlled environment) diagnostics market. Using estimates of the
incidence of disease by the Centers for Disease Control (CDC), the World Health
Organization (WHO) and other international health agencies and sources, the
Company estimates that the global annual demand for diagnostic tests are:
Tuberculosis 10,400,000
Multi-drug resistant Tuberculosis 580,000
Zika 324,000,000
Hepatitis B 240,000,000
Hepatitis C 130,000,000
HIV 36,700,000
Malaria 214,000,000
Sexually Transmitted Illnesses 357,000,000
Human papilloma virus 291,000,000
Dengue 390,000,000
Total Annual Tests 1,993,680,000
There are several advantages of molecular tests, such as the ones we market and
sell, over other forms of diagnostic testing. These advantages include higher
specificity sensitivities, the ability to perform multiplex tests and the
ability to test for drug resistance or individual genes.
Mosquito Vector Control Services
In response to market demand, we introduced our first diagnostics tests to be
used exclusively to test for mosquito borne pathogens in June 2019.
Municipalities in the US and many other countries in the world are concerned
about the diseases carried by mosquitos and which infect the human population.
To prevent outbreaks of potentially harmful viruses, such as zika or west nile,
from infecting the public the municipalities conduct spraying operations to
eliminate the mosquito populations carrying the diseases. Because it is too
expensive and potentially harmful to the environment to spray all mosquito
breeding areas, the problem is to identify which particular area has mosquitos
that are carrying the harmful viruses. To know where the host mosquitos with the
harmful viruses are located, traps are set, mosquitos collected and then tested
to find the areas that most needed spraying. There are over three thousand
mosquito abatement districts throughout the United States and almost all of them
conduct testing to help make the spraying more effective.
Our first vector related test was a triplex test that tests for west nile,
western equine and St. Louis encephalitis. We began shipping the tests in June
2019. We added a second test that tests mosquitos for zika, chikungunya and
dengue in a triplex test. Finally, in November 2019, we completed a test for
west nile, eastern equine and St. Louis encephalitis, specifically for use in
the eastern United States. As a result, mosquito abatement districts can test
for three target viruses in one test as compared to needing to perform three
different tests using other market available PCR tests, which saves our
customers money. Additionally, the districts are more effective because they can
get test results in a matter of hours using our product instead of weeks when
they have to wait for a central lab to process the mosquito tests.
We have sold our Vector Smart test products and/or related lab equipment to
testing districts in different sections of the country and are marketing our
products through trade shows, electronic and regular mail solicitations and have
hired additional sales personnel in the eastern US to more economically and
efficiently market to the east coast areas.
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Competitive Advantages of Co-Diagnostics
We believe that we have the following competitive advantages:
? Affordability: Lower-cost test kits and low-cost MDx Device.
? Flexibility: Our tests have been designed to run on many vendors' DNA
diagnostic testing machines. These tests are particularly well suited to the
new generation of "lab-on-a-chip" and "point-of-care" ("LOC" and "POC"),
highly portable analysis machinery for field, clinic and office applications.
? Speed: We believe our rapid assay design system software provides shorter time
to product release. This has been demonstrated with the conception, design,
product manufacture, clinical verification and submission for a CE Mark for
our Logix Smart coronavirus disease (COVID-19) test being approximately 30
days.
? Accuracy: We believe our tests are more sensitive and specific than
competitors' and can detect more strains of viruses.
? Exclusivity: We own all patents and all intellectual property used in
preparation of our tests.
? Personalized Medicine: We project that rising health care costs in
developed and developing nations will increasingly require that health
care systems be patient specific to eliminate waste, misdiagnoses, and
ineffectiveness. We believe a critical component will be accurate, more
affordable DNA/RNA-based diagnostics, which we plan to offer.
? Low-cost Provider: We plan to keep our overhead low. Our platform
technology obviates the need to pay patent royalties typically required
of our competitors which use patented test platforms to design their
tests.
? Worldwide Footprint: With a dynamic technology that encompasses markets
worldwide, we anticipate that we can identify the best target markets,
not only in highly burden developing countries (HBDC's) but also in
developed nations.
? Growth Industry Category: We believe that DNA/RNA testing is the
fastest-growing segment of in-vitro diagnostic testing.
? Combination Product Offering: Our ultra-sensitive tests can be a
well-designed match for a new generation of handheld and other small
point-of-care (POC) devices now entering the market. Used together,
these affordable tests and devices may revolutionize the molecular
diagnostics industry in cost, speed of test results and simplification.
? Multi-plexing: Our existing multiplexed tests demonstrate that our
CoPrimer designed tests are able to test for multiple targets in the
same sample without the distortion caused by false negatives and false
positives that generally occur in multiplexed tests.
Liquid Biopsy for Cancer Screening
The development of liquid biopsy tests is expected to spur low cost testing in
many countries. We believe that our liquid biopsy cancer screening may be ready
for testing in the foreseeable future. Medical applications of our SNP detection
technology can determine the presence of cancer cells or cell-free genetic
material in a liquid or tissue biopsy, and to determine the distinct type of
cancer involved. A real-life example of this includes being able to identify
specific mutation(s) in genes linked to breast cancer in order to determine a
patient's prognosis, initiate the most effective and affordable treatment and to
determine whether chemotherapy is necessary. After diagnosis the relative cost
of our technology would allow for frequent testing to measure the effectiveness
of the treatment and thus could be a companion diagnostic for a range of
treatments.
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Our technology has for all practical purposes essentially eliminated,
primer-dimers, which opens up some very unique applications for liquid biopsy
for cancer detection. Our ability to multiplex the reaction in testing for
several DNA targets allows technicians to detect multiple cancers as
free-circulating DNA fragments or whole cells in a blood sample at the same time
Agricultural Applications
SNP detection is also used in the agricultural industry to identify variations
in crop genomes to achieve improved seed viability and other desired
characteristics, including drought resistance, disease resistance, pest
resistance and higher yield.
In mid-2017, the Company was first approached by a large agribusiness to
evaluate our ability to multiplex certain target genomes. The results of the
development project have successfully demonstrated our ability to not only
multiplex the target genomes, but targeted SNP's as well. The project was
undertaken in conjunction with the manufacturer of our CoPrimer tests. The
results of the project encouraged the parent of our manufacturer to seek a
world-wide licensing arrangement for our CoPrimers in the agricultural industry,
which was completed in October 2018. Pursuant to the exclusive license for the
agronomics industry, the licensee pays us a royalty for all CoPrimers sold to
the licensee's customers. In January 2019, the licensee formally introduced the
product at a large agricultural conference and has branded the product under the
name "BHQ CoPrimers".
Additional Licensing and Assay Development
In addition, the unique properties of our CoPrimer technology make them ideally
suited to a variety of applications where sensitivity is key to optimal results,
including multiplexing several targets, enhanced SNP detection and enrichment
for next generation sequencing. Our licensee for our agricultural testing
requested an expansion of our license agreement to include test design services
for their customers and potential customers, both in the infectious disease
arena as well as for agricultural customers. The license was amended in July
2019 and we expect to derive a license fee from our licensee for its design
services. If any of its customers desire to commercialize the tests designed,
they will need to seek a commercial license directly from us. Because of these
unique characteristics of CoPrimers, research companies and institutions have
requested that we design diagnostics to locate and identify uncommon gene
sequences and SNPs and create tests for the target sequences in a multiplexed
reaction. This application of our technology is in its beginning stages, but we
believe that the results from our initial research indicate a significant step
forward in defining the capabilities of our technology, which we believe can be
translated to revenue producing licensing arrangements.
Intellectual Property Protection
Because much of our future success and value depends on our proprietary
technology, our patent and intellectual property strategy is of critical
importance. Five of our initial U.S. patents related to our technology have been
granted by the U.S. Patent and Trademark Office (PTO), including the patent for
our CoPrimer technology, which we consider our most important patent. One of our
patents has been issued in Great Britain, but is still pending in the United
States. As of October 2020, we had two additional patents pending in the U.S.
and foreign counterpart applications. Two of our issued patents expire in 2034,
one in 2036 and one in 2038.
We have identified additional applications of the technology, which represent
potential patents that further define specific applications of the processes
that are covered by the original patents. We intend to continue building our
intellectual property portfolio as development continues and resources are
available.
We have copyrighted our development software that is used by us to develop
diagnostic tests based on our technology. We have allowed one potential customer
access to our development software and intend to sell customized reagents
through that customer to labs serviced by that customer throughout the world. To
date we have not sold any products to that customer.
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Major Customers
The Company had certain customers which are each responsible for generating 10%
or more of the Company's total revenue for the three and nine months ended
September 30, 2020. Three customers together accounted for approximately 64% of
total revenue for the three months ended September 30, 2020 and two customers
together accounted for 42% of total revenue for the nine months ended September
30, 2020. These customers may not account for the same percentage of sales in
future periods. If we were to sell nothing to those customers in the future, it
would have a material adverse effect on our financial condition unless we were
able to replace those customers with others.
Competition
The molecular diagnostics industry is extremely competitive. There are many
firms that provide some or all of the products we provide and provide many
diagnostic tests that we have yet to develop. Many of these competitors are
larger than us and have significantly greater financial resources. Because we
are not established, many of our competitors have a competitive advantage in the
diagnostic testing industry because they also have other lines of business in
the pharmaceutical industry from which they derive revenues and for which they
are well known and respected in the medical profession. We will need to overcome
the disadvantage of being a start up with no history of success and no
significant respect from the medical and testing professionals, although this is
changing as we continue to market our LogixSmart COVID-19 tests and other tests
in the United States to well-known and successful laboratories. In the
diagnostic testing industry, we compete with such companies as BioMerieux,
Siemens, Qiagen, and Cepheid and with such pharmaceutical companies as Abbott
Laboratories, Becton Dickinson and Johnson and Johnson.
Many of these competitors already have an established customer base with
industry standard technology, which we must overcome to be successful.
Competition is, and will likely continue to be, particularly intense in the
market for COVID-19 diagnostic tests. Numerous companies in the United States
and internationally have announced their intention to offer new products,
services and technologies that could be used in substitution for our LogixSmart
COVID-19 tests. Many of those competitors are significantly larger, and have
substantially greater financial, engineering and other resources, than our
company. Existing and potential competitors in the market for COVID-19
diagnostic tests include developers of both serological and molecular tests.
We expect competition to continue to increase as other established and emerging
companies enter the market, as customer requirements evolve, and as new
products, services and technologies are introduced. The entrance of new
competitors is being encouraged by governmental authorities, who are offering
funding to support development of testing solutions for COVID-19. For example,
on April 29, 2020, the U.S. National Institutes of Health announced it would be
using a portion of its $1.5 billion in federal stimulus funding to fund a $500
million national challenge designed to help the agency identify the best
candidates for an at-home or point-of-care test for COVID-19. Some of our
existing or new competitors may have strong relationships with current and
potential customers, including governmental authorities, and, as a result, may
be able to respond more quickly to new or changing regulatory requirements, new
or emerging technologies, and changes in customer requirements.
Employees
We currently employ 37 full-time personnel at our executive offices and lab
facilities in Salt Lake City, Utah, and two employees outside of Utah. We have
engaged independent contractors in India to promote the use of our products and
develop outlets for products and employ the services of independent sales
representatives on an "as needed" basis.
Government Regulation
In the United States, we will be regulated by the U.S. Federal Drug
Administration (FDA) and our products must be approved by the FDA before we will
be allowed to sell our tests in the United States. However, the FDA granted us
an Emergency Use Authorization (EUA) to manufacture and sell our Logix Smart
COVID-19 test to CLIA labs in the United States. Because our lab is ISO
certified, we are allowed to apply for CE-Marking, which will allow us to sell
any CE Marked test in most countries in Europe, South America and Asia. We
currently have CE Marks issued for our Logix Smart COVID-19 test, tuberculosis
test, our zika virus test, and a triplex test that tests for zika, dengue, and
chikungunya simultaneously. In addition, our Logix Smart COVID-19 has received
the license to manufacture and sell in India from India's CDSCO and the National
Epidemiology Institute in Mexico evaluated our Logix Smart COVID-19 test and
approved it for sale in Mexico. We have also received approval to sell in
Australia. We are in the process of registering for sale our Logix Smart
COVID-19 test in a number of major countries around the world.
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Organizational History and Corporate Information
We were incorporated as Co-Diagnostics, Inc. in Utah on April 18, 2013. Our
principal executive office is located at 2401 S. Foothill Drive, Suite D, Salt
Lake City, Utah 84109. Our telephone number is (801) 438-1036. Our website
address is http://codiagnostics.com. The contents of our website are not
incorporated by reference in this Quarterly Report.
RESULTS OF OPERATIONS
The Nine Months Ended September 30, 2020 Compared to the Nine Months Ended
September 30, 2019
Revenue
For the nine months ended September 30, 2020, we generated $47,407,555 of
revenue compared to revenue of $106,408 in the nine months ended September 30,
2019. The increase in revenue of $47,301,147 was primarily due to sales of our
LogixSmart COVID-19 test developed in response to the current COVID-19 pandemic.
Of the total revenue, $3,239,471 was from the sale of third party manufactured
equipment and supplies that we sourced and sold to customers to facilitate usage
of our test. $63,800 of the revenue in 2019 was the result of sales of equipment
and tests to mosquito abatement districts and the remainder was sales of our
test reagents.
Cost of Revenues
For the nine months ended September 30, 2020, cost of revenues increased by
$12,218,700 from $59,626 to $12,278326. The increase in cost of revenues was due
to the significant increase in revenue discussed above. Of the total costs of
revenues for the nine months ended September 30, 2020, $9,413,497 was for the
cost of test reagents sold and $2,864,829 was the cost of equipment sold. For
the nine months ended September 30, 2019, we recorded cost of revenues of
$59,626, $49,173 of which was for the cost of equipment included in the sales to
mosquito abatement districts.
Operating Expenses
We incurred total operating expenses of $9,464,699 for the nine months ended
September 30, 2020 compared to total operating expenses of $4,317,125 for the
nine months ended September 30, 2019. The increase in operating expenses was
primarily due to the increase in business activities experienced as a result of
our increase in revenue.
General and administrative expenses increased $3,345,040 from $2,508,895 for the
nine months ended September 30, 2019 to $5,853,935 for the nine months ended
September 30, 2020. The increase in general and administrative expenses was
primarily due to increased activity to support the growth of our business. The
primary drivers of the increased expenses related to increases in stock-based
compensation, employee related expenses and increased expenses for professional
services.
Our sales and marketing expenses for the nine months ended September 30, 2020
were $1,457,148 compared to sales and marketing expenses of $770,539 for the
nine months ended September 30, 2019. The increase of $686,609 was primarily a
result of increased personnel related expenses, including commissions paid to
our sales team, due to the growth in revenue noted above.
Our research and development expenses increased by $1,081,237 from $990,923 for
the nine months ended September 30, 2019, to $2,072,160 for the nine months
ended September 30, 2020. The increase was primarily due to an increase in
salaries and related benefits, including stock-based compensation, as we have
added additional employees to our research and development team to increase our
product development activities. Additionally, there has been an increase in
professional and lab services utilized to further help us in our research and
product development activities.
25
Other Income (Expense)
For the nine months ended September 30, 2020, Other income was $1,092,037 for
the nine months ended September 30, 2020 compared to other expense of $190,208
for the nine months ended September 30, 2019. The increase in other income of
$1,282,245 was primarily related to recording a gain of $1,016,297 from our
India joint venture and incurring no interest expense during 2020 as we have had
no debt during the current year. For the nine months ended September 30, 2019 we
had recorded a loss $116,876 from our India joint venture and incurred interest
expense of $106,437.
Net Income
We realized net income for the nine months ended September 30, 2020 of
$29,671,348 compared with a net loss for the nine months ended September 30,
2019 of $4,460,551. The increase in net income of $34,131,899 was primarily the
result of sales of our LogixSmart COVID-19 test and resulting margins from those
sales offset by increased operating expenses as discussed above. Additionally,
we recorded an income tax benefit of $2,914,781 during the nine months ended
September 30, 2020, as a result of releasing our deferred tax asset valuation
allowance and recording a deferred tax asset since we have determined that our
net operating losses will be realizable.
The Three Months Ended September 30, 2020 Compared to the Three Months ended
September 30, 2019
Revenue
For the three months ended September 30, 2020 we generated revenue of
$21,818,753 compared to revenue of $41,434 for the three months ended September
30, 2019. The increase in revenue of $21,777,310 was primarily due to sales of
our LogixSmart COVID-19 test developed in response to the current COVID-19
pandemic. Of the total revenue in the three months ended September 30, 2020,
$1,457,160 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.
Cost of Revenues
We recorded cost of revenues of $5,821,281 for the three months ended September
30, 2020, compared to $20,365 for the three months ended September 30, 2019.
This increase is due to the increase in revenue in 2020 due to the sale of our
LogixSmart COVID-19 test. Of the total cost of sales during the three months
ended September 30, 2020, $1,213,434 was from equipment sold to our customers.
Expenses
We incurred total operating expenses of $3,959,270 for the three months ended
September 30, 2020, compared to total operating expenses of $1,671,156 for the
three months ended September 30, 2019. The increase in operating expenses was
primarily due to the increase in business activities experienced as a result of
our increase in revenue.
General and administrative expenses increased $1,142,654, from $1,060,763 for
the three months ended September 30, 2019 to $2,203,417 for the three months
ended September 30, 2020. The increase in general and administrative expenses
was primarily due to increased activity to support the growth of our business.
The primary drivers of the increased expenses related to increases in
stock-based compensation, employee related expenses and increased expenses for
professional services.
Our sales and marketing expenses for the three months ended September 30, 2020
were $798,474, compared to sales and marketing expenses of $262,360 for the
three months ended September 30, 2019. The increase of $536,114 was primarily a
result of increased personnel related expenses, including commissions paid to
our sales team, due to the growth in revenue noted above.
Our research and development expenses increased by $590,862, from $331,027 for
the three months ended September 30, 2019 to $921,889 for the three months ended
September 30, 2020. The increase in expenses was primarily due to an increase in
salaries and related benefits, including stock-based compensation, as we have
added additional employees to our research and development team to increase our
product development activities. Additionally, there has been an increase in
professional and lab services utilized to further help us in our research and
product development activities.
26
Other Income (Expense)
For the three months ended September 30, 2020 we had total other income of
$778,549, compared to total other expenses of $97,679 for the three months ended
September 30, 2019. The increase of $876,228 was due primarily to recording a
gain of $748,557 from our India joint venture compared to a loss of $109,876
from our joint venture in the same period in 2019.
Net Income
We realized net income for the three months ended September 30, 2020 of
$15,731,532, compared with a net loss for the three months ended September 30,
2019 of $1,747,766. The increase in net income of $17,479,298 was primarily the
result of sales of our LogixSmart COVID-19 test and resulting margins from those
sales offset by increased operating expenses as discussed above. Additionally,
we recorded an income tax benefit of $2,914,781 during the three months ended
September 30, 2020, as a result of releasing our deferred tax asset valuation
allowance and recording a deferred tax asset since we have determined that our
net operating losses will be realizable.
Liquidity and Capital Resources
At September 30, 2020, we had cash and cash equivalents of $21,230,362 and
marketable investment securities of $6,050,000 that could readily be converted
into cash if needed. Additionally, our total current assets of September 30,
2020, were $51,947,184 compared to total current liabilities of $1,814,453.
Net cash provided by operating activities during the nine months ended September
30, 2020 was $8,207,340, compared to cash used in operating activities of
$3,912,850 for the nine months ended September 30, 2019. The increase in cash
from operating activities was primarily due to our increased revenue offset by
increases in accounts receivable and inventory.
We used $7,070,183 of our cash for investing activities during the nine months
ended September 30, 2020 as compared to $396,466 during the three months ended
September 30, 2019. The increase in cash used for investing activities is
primarily due to purchasing marketable investment securities, increased
purchases of property and equipment needed to support our increased revenue and
additional investment in our India joint venture.
Net cash provided by financing activities was $19,200,067 for the nine months
ended September 30, 2020, compared to $5,903,328 for the same period in the
prior year. The increase is primarily due to net proceeds of $18,062,083
received from a series of three registered direct offerings in January and
February 2020 pursuant to our shelf registration in addition to receiving
$1,187,984 from the exercise of warrants and options for the nine months ended
September 30, 2020. Net proceeds of $5,903,238 was received during the nine
months ended September 30, 2019 from the sale of common stock and preferred
stock.
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.
27
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.
On October 30, 2020, we filed a Registration Statement on Form S-3 (File No:
333-249651) with the Securities and Exchange Commission (the "SEC"). The SEC
declared the Form S-3 effective on November 5, 2020. Pursuant to a prospectus
supplement to the Form S-3, we may offer and sell up to $100 million of the
following securities separately or together, in one or more series or classes
and in amounts, at prices and on terms described in one or more offerings:
common stock; preferred stock; warrants to purchase our securities, each of
which may be convertible into equity securities; or units comprised of, or other
combinations of, the foregoing securities through underwriting syndicates
managed or co-managed by one or more underwriters or dealers, through agents or
directly to purchasers. Each time our securities are offered, we will provide a
prospectus supplement to the Form S-3 containing more specific information about
the particular offering.
Below is a summary of the direct offerings done in 2020:
? In January 2020, we sold an aggregate of 3,448,278 shares of common stock to
institutional investors for $1.45 per share for gross proceeds of
approximately $5 million pursuant to a shelf-registration statement on Form
S-3 (File No: 333-226835) declared effective by the SEC on September 7, 2018
(the "Shelf Registration Statement").
? On February 10, 2020, the Company entered into securities purchase agreements
with certain institutional investors pursuant to which such investors
purchased an aggregate of 3,324,676 shares of common stock at a purchase price
of $ 3.08 per share in a registered direct offering pursuant to the Shelf
Registration Statement. The aggregate gross proceeds for the sale of the
shares were approximately $10.2 million. The closing of the offering occurred
on or about February 13, 2020.
? On February 28, 2020, the Company entered into securities purchase agreements
with certain institutional investors pursuant to which such investors
purchased an aggregate of 470,000 shares of common stock at a purchase price
of $9.00 per share in a registered direct offering pursuant to the Shelf
Registration Statement. The aggregate gross proceeds for the sale of the
shares were approximately $4 million. The closing of the offering occurred on
or about February 28, 2020.
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. 
