Item
1. Financial Statements
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
18,550,437
|
|
|
$
|
893,138
|
|
Accounts
receivables, net
|
|
|
5,349,876
|
|
|
|
131,382
|
|
Inventory
|
|
|
10,110,786
|
|
|
|
197,168
|
|
Prepaid
expenses
|
|
|
521,180
|
|
|
|
362,566
|
|
Total
current assets
|
|
|
34,532,279
|
|
|
|
1,584,254
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
473,376
|
|
|
|
196,832
|
|
Investment
in joint venture
|
|
|
1,416,480
|
|
|
|
434,240
|
|
Total
other assets
|
|
|
1,889,856
|
|
|
|
631,072
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
36,422,135
|
|
|
$
|
2,215,326
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,127,709
|
|
|
$
|
5,959
|
|
Accrued
expenses
|
|
|
691,385
|
|
|
|
200,788
|
|
Accrued
expenses (related party)
|
|
|
120,000
|
|
|
|
120,000
|
|
Deferred
revenue
|
|
|
1,045,548
|
|
|
|
1,323
|
|
Total
current liabilities
|
|
|
2,984,642
|
|
|
|
328,070
|
|
Long-term
Liabilities, net of current portion
|
|
|
|
|
|
|
|
|
Accrued
expenses-long-term (related party)
|
|
|
80,000
|
|
|
|
150,000
|
|
Total
long-term liabilities, net of current portion
|
|
|
80,000
|
|
|
|
150,000
|
|
Total
liabilities
|
|
|
3,064,642
|
|
|
|
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 June 30,
2020 and December 31, 2019, respectively
|
|
|
—
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized; 27,991,042 and 17,342,922 shares issued and outstanding, as of June
30, 2020 and December 31, 2019, respectively.
|
|
|
27,991
|
|
|
|
17,343
|
|
Additional
paid-in capital
|
|
|
46,726,869
|
|
|
|
26,687,701
|
|
Accumulated
deficit
|
|
|
(13,397,367
|
)
|
|
|
(24,967,814
|
)
|
Total
stockholders’ equity
|
|
|
33,357,493
|
|
|
|
1,737,256
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
36,422,135
|
|
|
$
|
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 June 30,
|
|
|
For
the Six Months
Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net
revenue
|
|
$
|
24,040,274
|
|
|
$
|
61,574
|
|
|
$
|
25,588,802
|
|
|
$
|
64,974
|
|
Cost
of revenue
|
|
|
8,344,674
|
|
|
|
38,809
|
|
|
|
8,826,414
|
|
|
|
39,261
|
|
Gross
profit
|
|
|
15,695,600
|
|
|
|
22,765
|
|
|
|
16,762,388
|
|
|
|
25,713
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
390,191
|
|
|
|
252,076
|
|
|
|
658,674
|
|
|
|
508,179
|
|
Administrative
and general
|
|
|
2,191,034
|
|
|
|
807,769
|
|
|
|
3,650,518
|
|
|
|
1,448,132
|
|
Research
and development
|
|
|
750,249
|
|
|
|
312,590
|
|
|
|
1,150,271
|
|
|
|
659,896
|
|
Depreciation
and amortization
|
|
|
25,218
|
|
|
|
16,094
|
|
|
|
45,966
|
|
|
|
29,762
|
|
Total
operating expenses
|
|
|
3,356,692
|
|
|
|
1,388,529
|
|
|
|
5,505,429
|
|
|
|
2,645,969
|
|
Income
(loss) from operations
|
|
|
12,338,908
|
|
|
|
(1,365,764
|
)
|
|
|
11,256,959
|
|
|
|
(2,620,256
|
)
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
38,173
|
|
|
|
19,640
|
|
|
|
45,748
|
|
|
|
20,048
|
|
Interest
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(106,427
|
)
|
Gain
on disposition of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
850
|
|
Gain
(loss) on equity method investment in joint venture
|
|
|
258,559
|
|
|
|
1,728
|
|
|
|
267,740
|
|
|
|
(7,000
|
)
|
Total
other expense
|
|
|
296,732
|
|
|
|
21,368
|
|
|
|
313,488
|
|
|
|
(92,529
|
)
|
Income
(loss) before income taxes
|
|
|
12,635,640
|
|
|
|
(1,344,396
|
)
|
|
|
11,570,447
|
|
|
|
(2,712,785
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
12,635,640
|
|
|
$
|
(1,344,396
|
)
|
|
$
|
11,570,447
|
|
|
$
|
(2,712,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
$
|
0.46
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share
|
|
$
|
0.43
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic
|
|
|
27,582,229
|
|
|
|
17,017,964
|
|
|
|
27,605,137
|
|
|
|
16,544,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding diluted
|
|
|
29,152,222
|
|
|
|
17,017,964
|
|
|
|
29,094,475
|
|
|
|
16,544,926
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
11,570,447
|
|
|
$
|
(2,712,785
|
)
|
Adjustments
to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
45,966
|
|
|
|
29,762
|
|
Stock
based compensation
|
|
|
1,124,242
|
|
|
|
294,677
|
|
Accretion
of notes payable discount
|
|
|
—
|
|
|
|
91,428
|
|
Gain
on disposition of assets
|
|
|
—
|
|
|
|
(850
|
)
|
Loss
(gain) of equity method investment
|
|
|
(267,740
|
)
|
|
|
7,000
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in accounts and other receivables
|
|
|
(5,218,494
|
)
|
|
|
(42,065
|
)
|
Increase
in prepaid and other assets
|
|
|
(158,614
|
)
|
|
|
(183,446
|
)
|
Decrease
(increase) in inventory
|
|
|
(10,030,838
|
)
|
|
|
9,920
|
|
Increase
in deferred revenue
|
|
|
1,044,225
|
|
|
|
—
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
1,542,347
|
|
|
|
(191,332
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(348,459
|
)
|
|
|
(2,697,691
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(205,290
|
)
|
|
|
(52,775
|
)
|
Investment
in joint venture
|
|
|
(714,500
|
)
|
|
|
(247,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(919,790
|
)
|
|
|
(299,775
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
19,470,005
|
|
|
|
5,496,002
|
|
Proceeds
from sale of preferred stock
|
|
|
—
|
|
|
|
1,000,000
|
|
Proceeds
from exercise of options and warrants
|
|
|
913,465
|
|
|
|
—
|
|
Payment
of offering costs
|
|
|
(1,457,922
|
)
|
|
|
(592,764
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
18,925,548
|
|
|
|
5,903,238
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
17,657,299
|
|
|
|
2,905,772
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents beginning of period
|
|
|
893,138
|
|
|
|
950,237
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents end of period
|
|
$
|
18,550,437
|
|
|
$
|
3,856,009
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
—
|
|
|
$
|
15,000
|
|
Income
taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Inventory
moved to property, plant and equipment
|
|
$
|
117,220
|
|
|
$
|
—
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For
the Six Months ending June 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for option and warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
530,289
|
|
|
|
530
|
|
|
|
862,935
|
|
|
|
—
|
|
|
|
863,465
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
9,689
|
|
|
|
10
|
|
|
|
691,409
|
|
|
|
—
|
|
|
|
691,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,635,640
|
|
|
|
12,635,640
|
|
Balance
as of June 30, 2020
|
|
|
—
|
|
|
$
|
—
|
|
|
|
27,991,042
|
|
|
$
|
27,991
|
|
|
$
|
46,726,869
|
|
|
$
|
(13,397,367
|
)
|
|
$
|
33,357,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
505,970
|
|
|
|
—
|
|
|
|
505,970
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
80,300
|
|
|
|
|
|
|
|
80,400
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,344,396
|
)
|
|
|
(1,344,396
|
)
|
Balance
as of June 30, 2019
|
|
|
28,000
|
|
|
$
|
28
|
|
|
|
17,115,766
|
|
|
$
|
17,116
|
|
|
$
|
26,195,614
|
|
|
$
|
(21,406,952)
|
|
|
$
|
4,805,806
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 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 six and three-month periods ended June 30, 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 (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 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.
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 – SUMMARY of SIGNIFICANT ACCOUNTING POLICIES
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount (net of allowance) and do not bear interest. The Company maintains an
allowance for doubtful accounts for amounts the Company does not expect to collect. In establishing the required allowance, management
considers historical losses, current market condition, customers’ financial condition, the age of receivables, and current
payment patterns. Account balances are written off against the allowance once the receivable is deemed uncollectible. Recoveries
of trade receivables previously written off are recorded when collected. At June 30, 2020 total accounts receivable was $5,885,065
with an allowance for uncollectable accounts of $535,389 resulting in a net amount of $5,349,876.
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 June 30, 2020, we had $10,110,786 in inventory of which $3,763,472
was finished goods and $6,347,314 was raw materials. Provisions are made to reduce low-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. For the three and six months ended June 30, 2020 the Company included
1,401,561 and 87,777, and 1,493,821 and 76,172 for outstanding options and warrants, respectively in calculating
the diluted earnings per share. As the Company experienced net losses during the three and six months ended June 30, 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 and six months ended June 30, 2019, there were 4,534,575 potentially dilutive
shares consisting of: (i) 1,247,707 for outstanding options, (ii) 953,535 for outstanding warrants and (iii) 2,333,333 for issued
and outstanding shares of convertible preferred stock.
Research
and Development
Research
and development costs are expensed when incurred. The Company expensed $750,249 and $1,150,271 of research and development costs
for the three and six months ended June 30, 2020, respectively. The Company expensed $312,590 and $659,896 of research and development
costs for the three and six months ended June 30, 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) (“ASU 2016-13, 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 upon election, it
on January 1, 2021. The standard requires a cumulative effect adjustment to the balance sheet as of the beginning of the first
early 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.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which removes certain exceptions
for investments, intraperiod allocations and interim calculations and adds guidance to reduce complexity in accounting for income
taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2020; early adoption is permitted. The Company is still assessing the amendments of ASU 2019-12 and the impact the amendments
will have on the Company’s consolidated financial statements and related disclosures.
Commitments
and Contingency
On
July 16, 2020, we were served in an action filed in the United States District Court for the District of Utah claiming that the
Company promulgated false and misleading press releases to increase the price of our stock to improperly benefit the officers
and directors of the Company. The Plaintiff, Gelt Trading, Ltd., a Cayman Islands limited company, demands compensatory damages
sustained as a result of our alleged wrongdoing in an amount to be proven at trial. We will vigorously defend this action as we
do not believe it has any merit.
In
addition, there is a threatened lawsuit from former consultants claiming compensation for services rendered in 2015. We will vigorously
defend this matter if it results in a lawsuit.
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 of our common stock valued at $31,193 to 2 companies for
investment relations services rendered.
During
the three months ended June 30, 2020, we received $220,000 from the exercise of 110,000 unregistered warrants at an exercise
price of $2.00 per share and issued an aggregate of 110,000 shares of our common stock to four individuals.
During
the three months ended June 30, 2020, we received $643,465 from the exercise of 420,289 registered options by10 employees
and two Members of our Board of Directors and issued an aggregate of 420,289 shares of our common stock.
During
the three months ended June 30, 2020, we issued 9,689 shares of our commons stock valued at $86,050 to 3 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.
In
June 2019, we issued 100,000 shares of our common stock to a company valued at $80,400 pursuant to a professional services agreement.
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 awards authorized under the plan at June 30, 2020 was 3,828,183.
Stock
Options
We
use 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:
|
|
Six
Months Ended
June
30, 2020
|
|
|
Six
Months Ended
June
30, 2019
|
|
Risk
free interest rate
|
|
|
1.05
|
%
|
|
|
1.56
|
%
|
Expected
life (in years)
|
|
|
7.3
|
|
|
|
10
|
|
Expected
volatility
|
|
|
62.82
|
%
|
|
|
63.65
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock price
|
|
$
|
8.14
|
|
|
$
|
1.07
|
|
We
recognized $301,568 and $703,198 of stock-based compensation expense, related to stock options for the three and six months ended
June 30, 2020 respectively, which is included in administrative and general expenses.
We
recognized $126,483 and $214,278 of stock-based compensation expense, related to stock options for the three and six months ended
June 30, 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 six months ended June 30, 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
|
|
|
150,000
|
|
|
|
8.14
|
|
|
|
4.70
|
|
|
|
7.30
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(420,289)
|
|
|
|
(1.53)
|
|
|
|
(0.79)
|
|
|
|
(7.62)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2020
|
|
|
1,751,528
|
|
|
$
|
2.28
|
|
|
$
|
1.21
|
|
|
|
8.50
|
|
The
intrinsic value of options outstanding at June 30, 2020 and 2019 was $15,462,981 and $72,093, respectively. There were 843,333
and 566,667 of unvested option included the table above as of June 30, 2020 and 2019, respectively. At June 30, 2020 there
were 843,333 unvested options.
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 six months ended June 30, 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
|
|
|
20,000
|
|
|
|
16.49
|
|
|
|
15.19
|
|
|
|
5.00
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(894,445
|
)
|
|
|
(1.37
|
)
|
|
|
(1.05
|
)
|
|
|
(2.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2020
|
|
|
109,090
|
|
|
$
|
2.06
|
|
|
$
|
1.17
|
|
|
|
3.62
|
|
The
intrinsic value of options and warrants exercised in the six months ended June 30, 2020 was $16,083,097. Total unrecognized
stock-based compensation was $468,295 at June 30, 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
|
|
$
|
198,148
|
|
2021
|
|
|
234,149
|
|
2022
|
|
|
35,998
|
|
Total
|
|
$
|
468,295
|
|
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 June 30, 2020, the aggregate
balance of this related party liability was $200,000.
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 at a monthly rate of $28,825 and expires in February
2024. For the three and six months ended June 30, 2020 the Company expensed $86,969 and $138,787, respectively, for rent. For
the three and six months ended June 30, 2019, the Company expensed $45,040 and $90,621, respectively, for rent. The Company’s
ongoing lease obligation as of June 30, 2020 is as follows:
Year
|
|
Amount
|
|
Remainder
of 2020
|
|
$
|
172,950
|
|
2021
|
|
|
345,900
|
|
2022
|
|
|
345,900
|
|
2023
|
|
|
345,900
|
|
2024
|
|
|
57,653
|
|
Total
|
|
$
|
1,268,303
|
|
NOTE
7 – SUBSEQUENT EVENTS
In
August, 2020, we discovered that a freezer that held manufactured tests had failed and that approximately $1,200,000 of finished
goods inventory had thawed and was no longer saleable and will be written off.
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 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:
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●
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the
results of clinical trials and the regulatory approval process;
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●
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market
acceptance of any products that may be approved for commercialization;
|
|
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●
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our
ability to protect our intellectual property rights;
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|
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●
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the
impact of any infringement actions or other litigation brought against us;
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|
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●
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competition
from other providers and products;
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●
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our
ability to develop and commercialize new and improved products and services;
|
|
|
|
|
●
|
changes
in government regulation; and
|
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●
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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, 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
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.
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.
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 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.
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.
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 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.
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 and sales 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
Rinoli, 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 twenty-one of our MDx Devices with labs in India. Each of the reagent rental placements requires the purchase of
a minimum of 250 tests per month. 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). We believe that we will be able to sell our tuberculosis test in India
through our sales distribution network that we are building currently.
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 still resulted in sales significant enough to make CoSara profitable for the quarter ending
June 30, 2020.
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 before the end of the third quarter of 2020 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.
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 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.
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.
|
|
|
|
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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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●
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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.
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|
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●
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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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|
|
|
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●
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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/RNA testing is the fastest-growing segment of in-vitro diagnostic testing.
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|
|
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●
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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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|
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|
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●
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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.
|
Liquid
Biopsy for Cancer Screening
The
development of the liquid biopsy test will be expected to 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 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 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. 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 July 31, 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.
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 six months ended June 30, 2020. These three customers together accounted for approximately 58% and 55%
of the Company’s total revenue for the three and six months ended June 30, 2020, respectively. 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 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 are in the process of registering for sale our Logix Smart COVID-19
test in a number of major countries around the world.
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
Results
of Operations for the Six Months ended June 30, 2020 and 2019
Net
Sales
For
the six months ended June 30, 2020, we generated $25,588,802 of net sales compared to net sales of $64,974 in the six months ended
June 30, 2019. The increase in sales of $25,523,828 was primarily due to sales of our LogixSmart COVID-19 test due to the
current COVID-19 pandemic. Of the total sales, $1,782,312 was from the sale of third party manufactured equipment that
we sourced and sold to customers to facilitate usage of our test. $49,800 of the revenue in 2019 was the result of sales of equipment
and tests to two mosquito abatement districts and the remainder was sales of our test reagents.
Cost
of Sales
For
the six months ended June 30, 2020, we recorded cost of sales of $8,826,414, of which $7,175,019 was the cost of test reagents
sold and $1,651,395 was the cost of equipment sold. For the six months ended June 30, 2019, we recorded cost of sales of $39,261
primarily for the cost of equipment included in the sales to mosquito abatement districts.
Operating
Expenses
We
incurred total operating expenses of $5,505,429 for the six months ended June 30, 2020 compared to total operating expenses of
$2,645,969 for the six months ended June 30, 2019. The increase in operation expenses was due to the increase in business activities
experienced as a result of the sales increases due to the COVID-19 pandemic.
General
and administrative expenses increased $2,202,386 from $1,448,132 for the six months ended June 30, 2019 to $3,650,518 for the
six months ended June 30, 2020. The increase in general and administrative expenses resulted from an increase of $888,572 in other
professional services, and increase of $514,266 in bad debt expense as an allowance for bad debts was established due to the significant
increase in receivables. Additionally, stock-based compensation expense related to options and warrants increased by $488,920
due to options granted to employees and directors, salaries and related benefits increased by $112,935, attorneys’
fees increased by $54,001 and a 401K contribution of $40,600 was also incurred.
Our
sales and marketing expenses for the six months ended June 30, 2020 were $658,674 compared to sales and marketing expenses of
$508,179 for the six months ended June 30, 2019. The increase of $150,495 was the result of an increase in salaries and related
benefits of $131,903, an increase of $23,966 in advertising and trade shows, and an increase of $21,600 for a 401K contribution.
These increases were partially offset by a decrease in travel and related expenses of $43,462 as travel was curtailed by the current
pandemic.
Our
research and development expenses increased by $490,376 from $659,896 for the six months ended June 20, 2019 to $1,150,271 for
the six months ended June 30, 2020. The increase was primarily due to an increase of $193,117 in other profession services related
to development of the capability of freeze drying our COVID-19 test to enable easier international shipping. In addition, salaries
and related benefits increased $113,946 reflecting additional lab personnel, expenditures for lab supplies increased $89,252,
our 401K contribution increased by $37,800, and the rent for lab space increased $34,929.
Interest
Expense
For
the six months ended June 30, 2020, we incurred no interest expense compared to interest expense for the six months ended June
30, 2019 of $28,187. The decrease of $28,187was the result of having a $2,000,000 loan outstanding during the month of January
2019 for which we incurred $28,187 in interest. Additionally, we incurred a loss of $78,241 on extinguishment of debt incident
to the payoff of the loan referenced herein. For the six months ended June 30, 2020 we recorded interest income of $45,748 from
interest on our cash not used in the operations of the business compared to interest income of $20,049 for the six months ending
June 30, 2019
Net
Income
We
realized net income for the six months ended June 30, 2020 of $11,570,447 compared with a net loss for the six months ended June
30, 2019 of $2,712,785. The increase in net income of $14,283,232 was primarily the result of sales of our LogixSmart COVID-19
test and resulting margins from those sales. In addition, we realized income from our Indian joint venture of $267,740 compared
to a loss in the joint venture of $7,000 in the six months ending June 30, 2019 as our joint venture began sales of the Saragene
COVID-19 test after clearance to begin manufacture and sale of the test in India. The sales in India were primarily made in the
month of June.
The
three months ended June 30, 2020 compared to the three months ended June 30, 2019
Revenues
For
the three months ending June 30, 2020 we generated revenues of $24,040,274 compared to revenues of $61,574 for the three months
ending June 30, 2019. The revenue in the quarter ending June 30, 2020 primarily represented sales of our LogixSmart COVID-19 test.
Of the total revenue in the three months ending June 30, 2020, $1,676,820 related to the sale of third party manufactured equipment,
which we source and sold to customers to facilitate the sales of our COVID-19 test.
Cost
of Revenues
For
the three months ended June 30, 2020 we recorded costs of revenues of $8,344,674 and for the three months ended June 30, 2019,
we recorded costs of revenues of $38,809. 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 sale, $1,580,968 was due to equipment that was sold to our customers.
Expenses
We
incurred total operating expenses of $3,356,692 for the three months ended June 30, 2020, compared to total operating expenses
of $1,388,529 for the three months ended June 30, 2019. The increase of $1,968,163 was due primarily to increased general and
administrative costs of $1,383,264, and an increase of $437,659 in our research and development expenses.
General and administrative expenses increased
$1,383,265, from $807,769 for the three months ended June 30, 2019 to $2,191,034 for the three months ended June 30, 2020. The
increase was primarily the result of an increase of $511,607 in other professional services expense, an increase $483,266 in bad
debt expense reserves and an increase of $175,085 in option and warrant expense. The increase in option expense was primarily
related to, vesting of options granted in the third quarter of 2019, which had not been outstanding in the second quarter of 2019.
In addition, salaries and other benefits increased $68,421, a contribution to our 401K of $40,600 and attorney fees increased
$35,858.
Our
sales and marketing expenses for the three months ended June 30, 2020 were $390,191, compared to sales and marketing expenses
of $252,076 for the three months ended June 30, 2019. The increase of $138,115 is due primarily to an increase of $114,394
in salary and related benefits expense and an increase of $21,600 in 401K contributions, an increase of $10,467 in advertising
expense partially offset by a decrease of $30,004 in travel and lodging. The reduction of travel related expenses was directly
related to a ban on travel due to the coronavirus pandemic.
Our
research and development expenses increased by $437,659, from $312,590 for the three months ended June 30 2019 to $750,249 for
the three months ended June 30, 2020. The increase was primarily due to an increase of $191,292 in payroll and employee related
expenses resulting from the addition of technical personnel and $196,226 in other professional services related to a development
contract for the freeze drying of our tests to facilitate international shipping. In addition, lab supplies increased by $56,792
and the 401K contribution for lab employees increased by $37,800.
Other
Income/Expense
For
the three months ended June 30, 2020 we had total other income of $296,732 compared to a total other income of $21,368 for the
three months ended June 30, 2019. The increase of $275,364 was due to a gain of $258,559 from our India joint venture compared
to a gain of $1,728 in the same period in 2019 and an increase of $18,533 in interest income in the three months ended June 30,
2020.
Net
Income
We
realized net income for the three months ended June 30, 2020 of $12,635,640, compared with a net loss for the three months
ended June 30, 2019 of $1,344,396. The income realized was due to the increase in gross profit realized from sales of our LogixSmart
COVID-19 test commencing in March 2020, partially offset by the increase in operating expenses of $1,968,163 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
June 30, 2020, we had cash and cash equivalents of $18,550,437, total current assets of $34,532,279, total current liabilities
of $2,984,642 and total stockholders’ equity of $33,357,493. 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 six months ended June 30, 2020 of $348,459, compared to negative
cash flow used in operations for the six months ended June 30, 2019 of $2,697,691. The cash generated from operations enabled
us to increase our inventories by $10,030,838 and increase our receivables by $5,742,883. In addition, we used $1,457,922
of our cash in financing transactions, $714,500 in contributions to our joint venture in India and $205,290 for the purchase of
equipment. The negative operating cash flow for the six months ending June 30, 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 and received $913,465 from the exercise of warrants and options. Since
we commenced significant 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 technical staff
to complete development of additional tests to enable us to use 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
$686,200 per month during the six months ending June 30, 2020. We completed the registered direct offering described above
in January and February 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 our LogixSmart COVID-19 test and 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.
During
the three months ending June 30, 2020, we received $863,465 from the exercise of warrants and stock options.
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We
generated $11,570,447 in net income during the six months ending June 30, 2020 to fund our operations.
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The
amount of our operating income going forward could decrease or increase significantly depending on strategic and other operating
decisions, thereby affecting our need for additional capital. We have increased our work force and are using the increased technical
staff to complete development on products related to the current pandemic and on products unrelated thereto in an attempt to remain
profitable in the future. At our current level of operating expenditures, we believe we have sufficient cash to fund operations
for the next 12 months. Absent a significant acquisition or capital expansion, we do not expect to require additional capital
in the foreseeable future.
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.