Item
1. Financial Statements
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,369,323
|
|
|
$
|
893,138
|
|
Accounts receivables, net
|
|
|
1,055,738
|
|
|
|
131,382
|
|
Inventory
|
|
|
686,078
|
|
|
|
197,168
|
|
Prepaid expenses
|
|
|
499,327
|
|
|
|
362,566
|
|
Total current assets
|
|
|
19,610,466
|
|
|
|
1,584,254
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
276,454
|
|
|
|
186,832
|
|
Investment in joint venture
|
|
|
593,421
|
|
|
|
434,240
|
|
Total other assets
|
|
|
869,875
|
|
|
|
631,072
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,480,341
|
|
|
$
|
2,215,326
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
132,516
|
|
|
$
|
5,959
|
|
Accrued expenses
|
|
|
496,524
|
|
|
|
200,788
|
|
Accrued expenses (related party)
|
|
|
120,000
|
|
|
|
120,000
|
|
Deferred revenue
|
|
|
444,332
|
|
|
|
1,323
|
|
Total current liabilities
|
|
|
1,193,372
|
|
|
|
328,070
|
|
Long-term Liabilities, net of current portion
|
|
|
|
|
|
|
|
|
Accrued expenses-long-term (related party)
|
|
|
120,000
|
|
|
|
150,000
|
|
Total long-term liabilities, net of current portion
|
|
|
120,000
|
|
|
|
150,000
|
|
Total liabilities
|
|
|
1,313,372
|
|
|
|
478,070
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 and 25,600 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
|
|
|
—
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized; 27,451,064 and 17,342,922 shares issued and outstanding, as of March 31, 2020 and December 31, 2019, respectively.
|
|
|
27,451
|
|
|
|
17,343
|
|
Additional paid-in capital
|
|
|
45,172,525
|
|
|
|
26,687,701
|
|
Accumulated deficit
|
|
|
(26,033,007
|
)
|
|
|
(24,967,814
|
)
|
Total stockholders’ equity
|
|
|
19,166,969
|
|
|
|
1,737,256
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
20,480,341
|
|
|
$
|
2,215,326
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
1,548,528
|
|
|
$
|
3,400
|
|
Cost of sales
|
|
|
481,740
|
|
|
|
452
|
|
Gross profit
|
|
|
1,066,788
|
|
|
|
2,948
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
268,483
|
|
|
|
256,103
|
|
Administrative and general
|
|
|
1,459,484
|
|
|
|
640,363
|
|
Research and development
|
|
|
400,022
|
|
|
|
347,306
|
|
Depreciation and amortization
|
|
|
20,748
|
|
|
|
13,668
|
|
Total operating expenses
|
|
|
2,148,737
|
|
|
|
1,257,440
|
|
Loss from operations
|
|
|
(1,081,949
|
)
|
|
|
(1,254,492
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
7,575
|
|
|
|
408
|
|
Interest expense
|
|
|
—
|
|
|
|
(106,427
|
)
|
Gain on disposition of assets
|
|
|
—
|
|
|
|
850
|
|
Gain (loss) on equity method investment in joint venture
|
|
|
9,181
|
|
|
|
(8,728
|
)
|
Total other expense
|
|
|
16,756
|
|
|
|
(113,897
|
)
|
Loss before income taxes
|
|
|
(1,065,193
|
)
|
|
|
(1,368,389
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(1,065,193
|
)
|
|
$
|
(1,368,389
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
22,820,450
|
|
|
|
16,066,633
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,065,193
|
)
|
|
$
|
(1,368,389
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,748
|
|
|
|
13,668
|
|
Stock based compensation
|
|
|
432,823
|
|
|
|
87,794
|
|
Accretion of notes payable discount
|
|
|
—
|
|
|
|
91,428
|
|
Gain on disposition of assets
|
|
|
—
|
|
|
|
(850
|
)
|
Loss (gain) of equity method investment
|
|
|
(9,181
|
)
|
|
|
8,728
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) in accounts and other receivables
|
|
|
(924,356
|
)
|
|
|
(21,637
|
)
|
(Increase) in prepaid and other assets
|
|
|
(136,761
|
)
|
|
|
(33,724
|
)
|
(Increase) in inventory
|
|
|
(488,910
|
)
|
|
|
—
|
|
Increase in deferred revenue
|
|
|
443,009
|
|
|
|
—
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
392,293
|
|
|
|
(145,900
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,335,528
|
)
|
|
|
(1,368,882
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(100,370
|
)
|
|
|
—
|
|
Investment in joint venture
|
|
|
(150,000
|
)
|
|
|
(72,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(250,370
|
)
|
|
|
(72,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
19,520,005
|
|
|
|
5,496,002
|
|
Proceeds from sale of preferred stock
|
|
|
—
|
|
|
|
1,000,000
|
|
Payment of offering costs
|
|
|
(1,457,922
|
)
|
|
|
(592,764
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
18,062,083
|
|
|
|
5,903,238
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
16,476,185
|
|
|
|
4,462,356
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
893,138
|
|
|
|
950,237
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
17,369,323
|
|
|
$
|
5,412,593
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
15,000
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For
the Three Months ending March 31, 2020 and 2019
(Unaudited)
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Additional Paid-In-
|
|
|
Accumulated
|
|
|
Total Stockholders’ Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance as of December 31, 2019
|
|
|
25,600
|
|
|
$
|
26
|
|
|
|
17,342,922
|
|
|
$
|
17,343
|
|
|
$
|
26,687,701
|
|
|
$
|
(24,967,814
|
)
|
|
$
|
1,737,256
|
|
Public offering, net of offering costs of $1,457,922
|
|
|
—
|
|
|
|
—
|
|
|
|
7,242,954
|
|
|
|
7,243
|
|
|
|
18,004,840
|
|
|
|
—
|
|
|
|
18,012,083
|
|
Issuance of Common Stock for warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
719,492
|
|
|
|
720
|
|
|
|
49,280
|
|
|
|
—
|
|
|
|
50,000
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
12,363
|
|
|
|
12
|
|
|
|
432,811
|
|
|
|
—
|
|
|
|
432,823
|
|
Conversion of Preferred Stock to Common
|
|
|
(25,600
|
)
|
|
|
(26
|
)
|
|
|
2,133,333
|
|
|
|
2,133
|
|
|
|
(2,107
|
)
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,065,193
|
)
|
|
|
(1,065,193
|
)
|
Balance as of March 31, 2020
|
|
|
—
|
|
|
$
|
—
|
|
|
|
27,451,064
|
|
|
$
|
27,451
|
|
|
$
|
45,172,525
|
|
|
$
|
(26,033,007
|
)
|
|
$
|
19,166,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
12,923,383
|
|
|
$
|
12,923
|
|
|
$
|
17,622,433
|
|
|
|
(18,694,167
|
)
|
|
|
(1,058,811
|
)
|
Public offering, net of offering costs of $592,764
|
|
|
—
|
|
|
|
—
|
|
|
|
3,925,716
|
|
|
|
3,926
|
|
|
|
4,899,312
|
|
|
|
—
|
|
|
|
4,903,238
|
|
Issuance of Preferred Stock
|
|
|
30,000
|
|
|
|
30
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,999,970
|
|
|
|
—
|
|
|
|
3,000,000
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,794
|
|
|
|
—
|
|
|
|
87,794
|
|
Conversion of Preferred Stock to Common
|
|
|
(2,000
|
)
|
|
|
(2
|
)
|
|
|
166,667
|
|
|
|
167
|
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,368,389
|
)
|
|
|
(1,368,389
|
)
|
Balance as of March 31, 2019
|
|
|
28,000
|
|
|
$
|
28
|
|
|
|
170,015,766
|
|
|
$
|
17,016
|
|
|
$
|
25,609,344
|
|
|
$
|
(20,062,556
|
)
|
|
$
|
5,563,832
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(Unaudited)
NOTE
1 – OVERVIEW AND BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and with the instructions to Form
10-Q as they are prescribed for smaller reporting companies. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements
not misleading have been included. Operating results for the three-month periods ended March 31, 2020 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2020. These statements should be read in conjunction with
the Company’s audited financial statements and related notes for the year ended December 31, 2019, included in the Company’s
Annual Report on Form 10-K filed on March 30, 2020.
Certain
2019 financial statement amounts have been reclassified to conform to 2020 presentations.
Description
of Business
Co-Diagnostics,
Inc., a Utah corporation (“Company,” or “CDI,”) is developing robust and innovative molecular tools for
detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. We have developed and we
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 newest technical advance involves a novel
approach to Polymerase Chain Reaction (“PCR”) test design (“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.
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 are confident we will be able to accomplish this faster and more economically,
allowing for wider margins while still positioning Co-Diagnostics 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 them 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 and RNA test design, to “engineer” a DNA 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 generating a profit margin.
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
designed our tests by identifying the optimal locations on the target gene for amplification and paired 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 a clinical evaluation setting using initial production tests to confirm
that the product as designed meets the user needs.
CDI’s
diagnostics systems enable very rapid, low-cost, sophisticated molecular testing for organisms and genetic diseases by greatly
automating historically complex procedures in both the development and administration of tests.
Using
its proprietary test design system and proprietary reagents, CDI has 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 may sell that test to qualified labs.
In
addition to testing for infectious disease, the technology lends itself to identifying any section of a DNA strand that describe
any type of genetic trait, which creates a number of significant applications. We are active in designing and licensing tests
that identify genetic traits in plant and animal genomes. We also have a number of 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.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Such estimates include
receivables and other long-lived assets, legal and regulatory contingencies, income taxes, share based arrangements, and others.
These estimates and assumptions are based on management’s best estimates and judgments. Actual amounts and results could
differ from those estimates.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Accounts
Receivable
Trade
accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of
all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled
accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when collected. At March 31, 2020, total accounts receivable
was $1,097,738 with an allowance for uncollectable accounts of $42,000 resulting in a net amount of $1,055,738.
Equity-Method
Investments
Our
equity method investments are initially recorded at costs and are included in other long-term assets in the accompanying condensed
consolidated balance sheet. We adjust the carrying value of our investment based on our share of the earnings or losses in the
periods which they are reported by the investee until the carrying amount is zero. The earnings or losses are included in other
expense in the accompanying condensed consolidated statements of operations.
Inventory
Inventory
is stated at the lower of cost or net-realizable value. Inventory cost is determined on a first-in first-out basis that
approximates average cost in accordance with ASC 330-10-30-12. At March 31, 2020 we had $686,078 in inventory of which
$251,872 was finished goods, $182,085 was raw materials and $252,121 was work-in-process. Provisions are made to reduce
slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values. The Company establishes reserves
for this purpose.
Revenue
Recognition
The
Company generates revenue from product sales and license sales. The Company recognizes revenue when all of the following criteria
are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised
goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement
of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the
performance obligations; and (v) recognition of revenue when, or as the Company satisfies each performance obligation.
The
Company constrains revenue by giving consideration to factors that could otherwise lead to a probable reversal of revenue. The
Company records any payments received from customers prior to the Company fulfilling its performance obligation(s) as deferred
revenue.
Earnings
(Loss) per Share
Basic
earnings or loss per common share is computed by dividing net income or loss applicable to common shareholders by the weighted
average number of shares outstanding during each period. As the Company experienced net losses during the three months ended March
31, 2020, and 2019, respectively, no common stock equivalents have been included in the diluted earnings per common share calculations
as the effect of such common stock equivalents would be anti-dilutive. For the three months ended March 31, 2020, there were 2,320,907
potentially dilutive shares consisting of 2,121,817 for outstanding options and 199,090 for outstanding warrants. For the three
months ended March 31, 2019, there were 1,679,575 potentially dilutive shares consisting of: (i) 1,172,707 for outstanding options,
(ii) 483,535 for outstanding warrants and (iii) 23,333 for issued and outstanding shares of convertible preferred stock.
Research
and Development
Research
and development costs are expensed when incurred. The Company expensed $400,022 and $347,306 of research and development costs
for the three months ended March 31, 2020 and 2019, respectively.
Recent
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are
adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued
standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
As
an emerging growth company (“EGC”), the Company has elected to take advantage of the benefits of the extended transition
period provided for in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting
standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply
to private companies.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires recognition of leased assets and liabilities
on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual periods and
interim periods with those periods beginning after December 15, 2020, for public EGC companies like us. The Company expects to
use the modified retrospective transition method with the option to recognize a cumulative-effect adjustment at the date of adoption.
The Company expects its balance sheet will be impacted as it records right-of-use assets and lease liabilities on its consolidated
balance sheet, but does not expect the adoption of this standard will have a material impact on its consolidated statements of
operations and cash flows.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the measurement and
recognition of expected credit losses for certain financial instruments, which includes the Company’s accounts receivable.
ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more
timely recognition of credit losses. The update is effective for annual periods and interim periods with those periods beginning
after December 15, 2021, for public EGC companies like us, but the Company may adopt it on January 1, 2021. The standard requires
a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is
effective. The Company is evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
NOTE
3 – EQUITY
2020
On January 28, 2020, we completed the
sale of 3,448,278 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.45 per share
in a registered direct offering. The aggregate gross proceeds for the sale of the shares was $5,000,003 and we received
net proceeds of $4,517,102 after deducting offering costs of $482,901.
On February 13, 2020, we completed the
sale of 3,324,676 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $3.08 per share
in a registered direct offering. The aggregate gross proceeds for the sale of the shares was $10,240,002 and we received
net proceeds of $9,612,561 after deducting offering costs of $627,441.
On March 2, 2020, we completed the sale
of 470,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $9.00 per share in a
registered direct offering. The aggregate gross proceeds for the sale of the shares was $4,230,000 and we received net
proceeds of $3,882,420 after deducting offering costs of $347,580.
On March 5, 2020 we received $50,000 from
the exercise of 25,000 unregistered warrants at an exercise price of $2.00 per share and issued 25,000 shares of our common
stock.
During
the three months ended March 31 2020, we issued an aggregate of 2,133,333 shares of our common stock in conversion of 2,560,000
shares of our Series A Preferred Stock at a conversion price calculated by multiplying the number of preferred shares being converted
by $100 and dividing the result by $1.20.
During
the three months ended March 31 2020, we issued an aggregate of 694,492 shares of our common stock in relation to the cashless
exercise of 759,445 previously issued unregistered warrants.
During
the three months ended March 31, 2020 we issued 12,363 shares valued at $31,193 to 2 companies for investment relations
services rendered.
2019
On
January 30, 2019, we entered into a securities purchase agreement with accredited investors pursuant to which such investors purchased
from an aggregate of 30,000 shares of Series A Convertible Preferred Stock of the Company for an aggregate purchase price of $3,000,000.
The purchase price was paid by the investors with $1.0 million in cash and the conversion of a $2.0 million promissory note of
the Company issued to the investors. The investors may not convert the Series A Preferred Stock to the extent that such conversion
would result in beneficial ownership by the investors and their affiliates of more than 4.99% of the issued and outstanding common
stock of the Company.
On
February 4, 2019, we completed the sale of an aggregate of 3,925,716 shares of the Company’s common stock, par value
$0.001 per share, at a purchase price of $1.40 per share in a registered direct offering. The aggregate gross proceeds for the
sale of the shares of common stock was $5,496,002 and we received net proceeds of $4,903,238 after offering costs of $592,764.
On
March 7, 2019, we issued an aggregate of 166,667 shares of our common stock in relation to 2,000 shares of our Series A Preferred
Stock being converted to common stock at a conversion price calculated by multiplying the number of preferred shares being converted
by $100 and dividing the result by $1.20.
NOTE
4 – STOCK-BASED COMPENSATION
Stock
Incentive Plans
The Co-Diagnostics, Inc. 2015 Long Term Incentive
Plan reserves an aggregate of 6,000,000 shares of common stock issuable upon the grant of awards under the plan. The number
of unissued stock options authorized under the plan at March 31, 2020 was 3,878,183.
Stock
Options
The
Company uses a Black-Scholes model to value granted stock options which requires various judgmental assumptions including the
estimated volatility, risk-free interest rate and expected option term. In determining the expected volatility our computation
is based the stock prices of 3 comparable companies and is based on a combination of historical and market-based implied volatility.
The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the option was granted
with a maturity equal to the expected term of the option. The fair values for the options granted were estimated at the date of
grant using the Black Scholes option-pricing model with the following weighted average assumptions:
|
|
Three Months Ended
March 31, 2020
|
|
Risk free interest rate
|
|
|
1.56
|
%
|
Expected life (in years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
63.27
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Stock price
|
|
$
|
3.96
|
|
We
recognized $401,630 and $87,794 of stock-based compensation expense, related to stock options for the three months ended March
31, 2020 and 2019, respectively, which is included in administrative and general expenses.
The
following table summarizes option activity during the year ended December 31, 2019 and the three months ended March 31, 2020,
respectively.
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Outstanding at January 1, 2019
|
|
|
1,172,707
|
|
|
$
|
2.23
|
|
|
$
|
1.09
|
|
|
|
8.72
|
|
Options granted
|
|
|
890,000
|
|
|
|
1.07
|
|
|
|
0.52
|
|
|
|
9.66
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited options
|
|
|
(40,890
|
)
|
|
|
(3.85
|
)
|
|
|
(1.59
|
)
|
|
|
(8.04
|
)
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2019
|
|
|
2,021,817
|
|
|
$
|
1.69
|
|
|
$
|
0.83
|
|
|
|
8.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
100,000
|
|
|
|
3.96
|
|
|
|
2.80
|
|
|
|
9.87
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
2,121,817
|
|
|
$
|
1.79
|
|
|
$
|
0.92
|
|
|
|
8.54
|
|
The
intrinsic value of options outstanding at March 31, 2020 and 2019 was $7,516,828 and $133,300, respectively. There were 810,000
and 566,667 of unvested option included the table above as of March 31, 2020 and 2019, respectively.
Warrants
The
Company estimates the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model.
The Company amortizes the fair value of issued warrants using a vesting schedule based on the terms and conditions of each warrant.
The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest
rate and expected warrant term. In determining the expected volatility, our computation is based on the stock prices of three
comparable companies and on a combination of historical and market-based implied volatility. The risk-free interest rate is based
on the yield curve of a zero-coupon U.S. Treasury bond on the date the warrant was issued with a maturity equal to the expected
term of the warrant.
The
following table summarizes warrant activity during the year ended December 31, 2019 and the three months ended March 31, 2020,
respectively.
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Outstanding at January 1, 2019
|
|
|
483,535
|
|
|
|
4.92
|
|
|
|
1.99
|
|
|
|
3.29
|
|
Warrants issued
|
|
|
500,000
|
|
|
|
1.53
|
|
|
|
1.46
|
|
|
|
5.00
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2019
|
|
|
983,535
|
|
|
$
|
1.44
|
|
|
$
|
1.03
|
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(784,445
|
)
|
|
|
(1.28
|
)
|
|
|
(1.19
|
)
|
|
|
(2.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
199,090
|
|
|
$
|
2.09
|
|
|
$
|
0.38
|
|
|
|
3.85
|
|
The
intrinsic value of options exercised in the three months ended March 31, 2020 was $4,973,058.
Total unrecognized stock-based compensation was $337,953 at March 31, 2020 for options granted. The Company expects to recognize
the aggregate amount of this compensation expense over the next years in accordance with contractual provisions and vesting as
follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
247,772
|
|
2021
|
|
|
90,181
|
|
Total
|
|
$
|
337,953
|
|
NOTE
5 – RELATED PARTY TRANSACTIONS
The
Company acquired the exclusive rights to the CoPrimer technology pursuant to an exclusive license agreement, dated April 2014
(the “Exclusive License Agreement”), between the Company and DNA Logix, Inc., which was assigned to Dr. Brent Satterfield,
one of our current executive officers, prior to our acquisition of DNA Logix, Inc. On March 1, 2017, the Company entered into
an amendment to its Exclusive License Agreement for its Cooperative Primers (“License”) technology with Dr. Satterfield.
The amendment provides in part that all accrued royalties under the License cease as of January 1, 2017, and we began in January
2017 to pay to Dr. Satterfield $700,000 of accrued royalties at the rate of $10,000 per month. At March 31, 2020, the aggregate
balance of this related party liability was $240,000.
NOTE
6 – LEASE OBLIGATIONS
Our
offices are located at 2401 S. Foothill Dr., Suite D, Salt Lake City, Utah 84109-1479. In February 2020, the Company entered into
a 4-year lease agreement for its office space and in March 2020, the Company entered into an addendum with our landlord for additional
space. The new aggregate space consists of approximately 13,687 square feet and expires in February 2024. For the three months
ended March 31, 2020 and 2019, the Company expensed $51,818 and $45,582, respectively, for rent. The Company’s ongoing lease
obligation as of March 31, 2020 is as follows:
Year
|
|
Amount
|
|
Remainder of 2020
|
|
$
|
233,415
|
|
2021
|
|
|
311,220
|
|
2022
|
|
|
331,220
|
|
2023
|
|
|
311,220
|
|
2024
|
|
|
51,870
|
|
Total
|
|
$
|
1,218,945
|
|
NOTE
7 – SUBSEQUENT EVENTS
On
April 8, 2020, we issued 6,069 shares of our common stock for services rendered pursuant to a consulting agreement.
The
Company evaluated subsequent events pursuant to ASC Topic 855 and has determined that there are no other events that need to be
reported.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties. All statements
other than statements of historical fact contained in this Quarterly Report and the documents incorporated by reference herein,
including statements regarding future events, our future financial performance, business strategy, and plans and objectives of
management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by
terminology including “anticipates,” “believes,” “can,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “should,” or “will” or the negative of these terms or other comparable terminology.
Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee
their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors and
the documents incorporated by reference herein, which may affect our or our industry’s actual results, levels of activity,
performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a highly regulated,
very competitive, and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict
all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.
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 years ended December 31, 2019 and
2018 and notes incorporated by reference therein. We undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements, except as required by law. In light of these risks, uncertainties and assumptions,
the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ
materially and adversely from those anticipated or implied in the forward-looking statement.
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.
|
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, valuation of intangible assets, 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 have developed and
we 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 (“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.
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 are confident we will be able to accomplish this faster and more economically,
allowing for wider margins while still positioning Co-Diagnostics 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 them 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 test design, to “engineer” a DNA 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 generating a profit margin.
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
designed our tests by identifying the optimal locations on the target gene for amplification and paired 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 a clinical evaluation setting using initial production tests to confirm
that the product as designed meets the user needs.
Using
its proprietary test design system and proprietary reagents, CDI has 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 may sell that test to qualified labs.
In
addition to testing for infectious disease, the technology lends itself to identifying any section of a DNA strand that describe
any type of genetic trait, which creates a number of significant applications. We are active in designing and licensing tests
that identify genetic traits in plant and animal genomes. We also have a number of 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.
Recent
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 potential need for detection of the virus. An outbreak of respiratory illness caused by the pneumonia-like
COVID-19 has spread rapidly over the past few months, after 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 and
Centers for Disease Control.
On
February 20, 2020, we announced that our Logix Smart™ COVID-19 Test technical file had been submitted for registration with
the European Community, 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 in vitro diagnostic for the diagnosis of SARS-CoV-2 (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 and have sold the tests in numerous countries around the world as well as sales to labs in the United States pursuant
to the EUA received from the FDA.
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 our test 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.
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 within the Caribbean Public Health Agency Members States (Anguilla, Antigua and Barbuda, Aruba,
Bahamas, Barbados, Belize, Bermuda, BES Islands, British Virgin Islands, Cayman Islands, Curacao, Dominica, Grenada, Haiti, Guyana,
Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, St Maarten, Saint Vincent and the Grenadines, Suriname, Trinidad and
Tobago, Turks and Caicos Islands).
In
some of these countries, there are no regulatory hurdles and we can start 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. With the granting of a CE mark for our Logix Smart
COVID-19, we began sales in this region of that test as well. Products are manufactured for sale upon receipt of purchase orders
from labs and hospitals.
India
The
Company has 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 which is CoSara Diagnostics, Pvt. The agreement provides 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 completed licensing of the plant in Rinoli, India, that will be used for testing and manufacturing for the Indian market.
Since the tests will be conducted in India
on Indian citizens, no FDA approval or inspection will be required. 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 to take orders for our tests. 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 five of our MDx Devices with labs in India and have purchased an additional fifteen MDx
Devices in the first quarter of 2020. Each of the reagent rental placements requires the purchase of a minimum of 250 tests
per month. We have received authorization to begin manufacture and sale of COVID-19 tests in India. We intend to submit technical
files to the CDSCO requesting approval tests for HIV and Dengue as well as a blood bank panel before the end of the third quarter
of 2020.
India
is the country with the highest burden of tuberculosis. World Health Organization (WHO) tuberculosis statistics for India for
2015 give an estimated incidence figure of 2.2 million cases of tuberculosis for India out of a global incidence of 9.6 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).
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 in each country.
United
States
The
U.S. Food and Drug Administration (FDA) has granted permission for us to export many of 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 applied to the FDA for Emergency Use Authorization (EUA) for our COVID-19 test, which would
allow sales to qualified labs in the United States.
We
do not anticipate offering our tests in the United States in the near future. We believe; however, our tests may be able to qualify
as Laboratory Developed Tests (LDT’s), diagnostic tests that are developed and manufactured by CLIA certified laboratories.
These tests are developed by the lab for use 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.
Market
Opportunity
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
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10,400,000
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HIV
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36,700,000
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Multi-drug resistant Tuberculosis
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580,000
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Malaria
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214,000,000
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Zika
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324,000,000
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Sexually Transmitted Illnesses
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357,000,000
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Hepatitis B
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240,000,000
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Human papilloma virus
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291,000,000
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Hepatitis C
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130,000,000
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Dengue
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390,000,000
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Total Annual Tests
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1,993,680,000
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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 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 mosquito DNA 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 test is a triplex test that tests for West Nile, Western Equine and St. Louis encephalitis. We began shipping the tests
in June 2019. We have since 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 for the same cost as one
test would cost ($10-$15) using other market available PCR tests. 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 seven different testing districts 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.
Competitive
Advantages of Co-Diagnostics
We
believe that we have the following competitive advantages:
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Affordability:
Lower-cost test kits and low-cost MDx Device.
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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.
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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.
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Accuracy:
We believe our tests are more sensitive and specific than competitors’ and can detect more strains of viruses.
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Exclusivity:
We own all patents and all intellectual property used in preparation of our tests.
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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. A critical component will be
accurate, more affordable DNA-based diagnostics, which we plan to offer.
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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.
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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.
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Growth
Industry Category: We believe that DNA testing is the fastest-growing segment of in-vitro diagnostic testing.
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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.
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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.
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Liquid
Biopsy for Cancer Screening
The
development of the liquid biopsy test will spur low cost testing in many developing countries. We believe that our liquid biopsy
cancer screening may be ready for testing in the second quarter of 2021 if we have sufficient development resources to dedicate
to the project. 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.
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 will
pay 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 to sell as “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 gen 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 will 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. Four 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 March 15, 2020, we had three 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 can be used by any lab or developer 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.
Major
Customers
Of
the approximately 34 customers to which we sold products in the first quarter of 2020, approximately 62% was sold to two customers.
Those two customers will not account for the same percentage of sales in the next quarter and if we were to sell nothing to those
customers in the future, it would not have a material effect on the future sales.
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 respect of the medical and testing professionals. 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.
Employees
We
currently employ 27 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
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 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.
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
three months ended March 31, 2020 compared to the three months ended March 31, 2019
Revenues
For
the three months ended March 31, 2020 we generated $1,548,528 of revenues compared to revenues of $3,400 in the three months ended
March 31, 2019. The revenue in 2020 primarily represented sales of our Logix Smart COVID-19 test, which primarily commenced
in March 2020. Of the total revenue, $105,491 related to the sale of equipment and was also primarily related to sales of our
COVID-19 test.
Cost
of Revenues
For
the three months ended March 31, 2020 we recorded costs of revenues of $481,740 and for the three months ended March 31, 2019,
we recorded costs of revenues of $452. This increase is due to the increase in revenue in 2020.
Expenses
We
incurred total operating expenses of $2,148,737 for the three months ended March 31, 2020, compared to total operating expenses
of $1,257,440 for the three months ended March 31, 2019. The increase of $891,297 was due primarily to increased general and administrative
costs of $819,121. There was also an increase of $52,716 in our research and development expenses.
General
and administrative expenses increased $819,121, from $640,363 for the three months ended March 31, 2019 to $1,459,484 for the
three months ended March 31, 2020. The increase was primarily the result of an increase of $376,965 in other professional services
expense and an increase of $313,835 in option and warrant expense. In addition, salaries and other benefits increase $46,742,
bad debt expense increased $31,000 and attorney fees increased $18,144. The increase in other professional services was primarily
the result of paying $195,820 for services rendered coincident to our fund-raising efforts in structuring and advising on our
registered direct offerings. In addition, we expensed $159,981 related to issuance of warrants for consulting services during
the three months ended March 31, 2020. The increase in option expense was primarily related, $280,023 related to the granting
of options to our directors which vested immediately resulting in stock-based compensation of $280,023 with the remainder related
to vesting of options granted in the third quarter of 2019, which had not been outstanding in the first quarter of 2019.
Our
sales and marketing expenses for the three months ended March 31, 2020 were $268,483, compared to sales and marketing expenses
of $256,103 for the three months ended March 31, 2019. The increase of $12,380 is due primarily to an increase of $17,509 in salary
and related benefits expense and an increase of $11,142 in trade show expense partially offset by a decrease of $13,457 in travel
and lodging. The reduction of travel related expenses was directly related to a ban on travel due to the coronavirus.
Our
research and development expenses increased by $52,716, from $347,306 for the three months ended March 31, 2019 to $400,022 for
the three months ended March 31, 2020. The increase of $52,716 was primarily due to an increase of $32,490 in lab supplies used
and an increase of $13,591 in payroll and employee related expenses.
Other
Income/Expense
For
the three months ended March 31, 2020 we had total other income of $16,756 compared to a total other loss of $113,897 for the
three months ended March 31, 2019. The total difference of $130,653 resulted from a number of factors. For the three months ended
March 31, 2019, we incurred interest expense of $106,427 compared to no interest expense for the three months ended March 31,
2020. The decrease was the result of having a $2,000,000 loan outstanding during the month of January 2019 and then being retired.
In the three months ended March 31, 2020 we had a $9,181 gain from operations in our joint venture compared to a $8,728 loss in
the same period in 2019. The total difference in other expenses was also affected by interest income earned in the quarter ended
March 31, 2020 of $7,575 compared to $408 we had in 2019.
Net
Loss
We
realized a net loss for the three months ended March 31, 2020 of $1,065,193, compared with a net loss for the three months ended
March 31, 2019 of $1,368,389. Of the decrease in net loss of $303,196, $1,063,840 was due to the increase in gross profit realized
from sales of our COVID-19 test commencing in March 2020 and a net difference from decreases in other expenses of $130,653, which
was partially offset by an increase in operating expenses of $819,121 as explained above.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital expenditures.
At
March 31, 2020, we had cash and cash equivalents of $17,369,323, total current assets of $19,616,466, total current liabilities
of $1,193,372 and total stockholders’ equity of $19,166,969. We believe that we have sufficient capital to sustain our operations
for the next 12 months.
We experienced negative cash flow used in
operations during the three months ended March 31, 2020 of $1,335,528, compared to negative cash flow used in operations for the
three months ended March 31, 2019 of $1,368,882. In addition, we used $1,457,922 of our cash in financing transactions,
$150,000 in contributions to our joint venture in India and $100,370 for the purchase of equipment. The negative operating
cash flow in the quarter ended March 31, 2020 was met by cash reserves received from the completion of a series of three registered
direct offerings in January and February 2020 pursuant to our shelf registration. We received net proceeds of $18,062,083 from
those offerings. Since we have commenced significant sales of our Logix Smart COVID-19 test in March 2020, we have increased the
amount of our available cash as we have required advance payments from our distributors, which has funded an increase in available
inventories. After the control of the coronavirus, we will depend on our distributor network to sell our other products throughout
the world. The amount of a future operating deficit could occur depending on strategic and other operating decisions, thereby
affecting our need for additional capital. If needed, we expect additional investment capital to come from (i) additional issuances
of our common stock with existing and new investors and (ii) the private placement of other securities with investors similar
to those that have provided funding in the past.
Our
monthly cash operating expenses, including our technology research and development expenses and interest expense, were approximately
$445,100 per month during the quarter ended March 31, 2020. We completed the registered direct offering described above in January
2020 to fund operations through 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 expenses fluctuate from period to period.
To
date, we have financed our operations through sales of common stock and the issuance of debt.
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On
January 30, 2019, we entered into a securities purchase agreement with investors, whereby the investors purchased from the
Company an aggregate of 30,000 shares of Series A Convertible Preferred Stock of the Company for an aggregate purchase price
of $3,000,000. The purchase price was paid by the investors with $1 million in cash and the conversion of a $2 million promissory
note issued by the Company to one of the investors. All of the preferred shares have been converted to common stock.
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On
February 4, 2019, we completed the sale of an aggregate of 3,925,716 shares of common stock, at a purchase price of $1.40
per share in a registered direct offering pursuant the Shelf Registration Statement. The aggregate gross proceeds for the
sale of the shares were $5,496,002 and we received net proceeds after offering costs of $4,996,322.
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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”).
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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.
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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.
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On
March 6, 2020, we received $50,000 in gross proceeds from the exercise of a warrant for 25,000 shares of common stock for
$2.00 per share.
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The
amount of our operating deficit could decrease or increase significantly depending on strategic and other operating decisions,
thereby affecting our need for additional capital. We expect that we will generate operating income in the second quarter. At
our current level of operating expenditures, we have sufficient cash to fund operations for the next 12 months. Absent a significant
acquisition or capital expansion, we do not expect to raise additional capital.
Our
long-term liquidity is dependent upon execution of our business model and the commencement of revenue generating activities and
working capital as described above, and upon capital needed for continued commercialization and development of our diagnostic
testing technology.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.