NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2018 AND 2017
NOTE
1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Co-Diagnostics,
Inc. (“Company,” “CDI,” “we”), a Utah corporation headquartered in Salt Lake City, Utah, is
a molecular diagnostics company formed in April, 2013 that develops, manufactures and markets a new diagnostics technology.
The
accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiary. All intercompany
account balances and transactions have been eliminated in consolidation.
We
entered into a joint venture agreement with a company in India for the purpose of setting up a manufacturing location in India
of our products and for distribution of our products in India. We invested $339,000 and $60,000 in 2018 and 2017, respectively
for our 50% interest in the joint venture. We determined that we had a variable interest in the joint venture company, which is
considered a variable interest entity, but that we were not the primary beneficiary as the power to direct the significant activities
of the joint venture company are shared. Therefore, we used the equity method of accounting to record our investment in the joint
venture. Our equity method investees are recorded in other long-term assets in the accompanying consolidated balance sheet. Our
share of earnings or losses from equity method investees is included in other losses in the accompanying consolidated statements
of operations.
The
Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying
amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment
and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
Profits
from the joint venture shall be divided as follows:
Profit
Level
|
|
CDI
Share
|
|
|
Partner
Share
|
|
|
|
|
|
|
|
|
Up to
$1,000,000
|
|
|
50
|
%
|
|
|
50
|
%
|
$1,000,000-$2,000,000
|
|
|
60
|
%
|
|
|
40
|
%
|
$2,000,000-$3,000,000
|
|
|
70
|
%
|
|
|
30
|
%
|
Above $3,000,000
|
|
|
80
|
%
|
|
|
20
|
%
|
The
joint venture partner will be reimbursed for some expenses, such as approximately $96,000 per year for office space. If the joint
venture needs additional funding, it will be achieved through loans obtained by the joint venture, or if loans are not available
on commercially reasonable terms, from capital contributions. There is no term to the joint venture agreement but it can be dissolved
by mutual agreement or by one party upon a material breach by the other party.
Basis
of Presentation
The
accompanying audited consolidated financial statements of Co-Diagnostics, Inc. have been prepared to reflect the financial position,
results of operations and cash flows of the Company and have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
Reverse
Stock Split
On
May 24, 2017 the Company affected an 11 to 1 reverse stock split. The statements in this report have been prepared showing the
effect as of the beginning of the periods included.
Initial
Public Offering
On
July 12, 2017, we entered into an underwriting agreement (the “Underwriting Agreement”) with WallachBeth Capital,
LLC and Network 1 Financial Securities, Inc. (the “Underwriters”), related to the Company’s initial public offering
of 1,178,533 shares of the Company’s common stock, at a price of $6.00 per share, less $0.60 constituting the underwriting
commissions and expense allowance. Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option,
exercisable for 45 days, to purchase up to an additional 176,780 shares of common stock to cover over-allotments, if any. Total
gross proceeds from the offering were $7,071,192 and the Company received net proceeds after costs of $5,977,924.
Coincident
with the closing of the IPO, the Company retired all of its principal debt of $3,440,440 and $283,423 of accrued interest through
the issuance of 857,047 shares of common stock.
Significant
Account Policies
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, and highly liquid investments to be cash equivalents. At December 31, 2018, the
Company had $700,237 in bank balances in excess of amounts insured by the Federal Deposit Insurance Corporation. At December 31,
2017, the Company had $3,284,454 in bank balances in excess of amounts insured by the Federal Deposit Insurance Corporation. Included
in cash and cash equivalents at December 31, 2017, was $2,200,288 in short-term federally insured certificates of deposits. The
Company has not experienced any losses in such accounts, and management believes the Company is not exposed to any significant
credit risk on cash and cash equivalents.
I
nventory
Inventory
is stated at the lower of cost or market. Inventory cost is determined on a first-in first-out basis that approximates average
cost in accordance with ASC 330-10-30-12. 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.
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.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the
property, generally from three to five years. Repairs and maintenance costs are expensed as incurred except when such repairs
significantly add to the useful life or productive capacity of the asset, in which case the repairs are capitalized.
Equity-Method
Investments
Our
equity method investments are initially recorded at costs and are included in other long-term assets in the accompanying 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 losses in the
accompanying consolidated statements of operations.
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 years ending December
31, 2018 and 2017, 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. As of December 31, 2018, and 2017, there were 1,656,242 and 1,028,969
potentially dilutive shares, respectively.
Stock-based
Compensation
The
Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation-Stock Compensation (“ASC
718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees
and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on
the date of grant using the Black-Scholes-Merton option-pricing model (the “Black-Scholes Model”). The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the
straight-line method.
The
Company estimates forfeitures at the time of grant and revises its estimate in subsequent periods if actual forfeitures differ
from those estimates.
The
Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments
to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based
compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
All
issuances of stock options or other equity instruments to employees and non-employees as the consideration for goods or services
received by the Company are accounted for based on the fair value of the equity instruments issued or the fair market value of
the services provided. Any stock options issued to non-employees are recorded in expense and additional paid-in capital in shareholders’
equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the
options at the end of each reporting period.
Income
Taxes
We
account for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by ASC Topic
740. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in
the years in which those temporary differences are expected to be recovered or settled.
Deferred
taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Research
and Development
Research
and development costs are expensed when incurred. The Company expensed $1,361,154 and $1,003,167 of research and development costs
for the years ended December 31, 2018 and 2017, respectively.
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.
Fair
Value Measurements
The
carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their
immediate or short-term maturities. The aggregate carrying amount of the notes payable approximates fair value as the individual
notes bear interest at market interest rates and there has not been a significant change in our operations and risk profile.
Patents
and Intangibles
Patents
represent initial legal costs incurred to apply for United States and international patents on the diagnostic testing technology,
and are amortized on a straight-line basis over their useful life of approximately 20 years. 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, or 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, 2019, we had two additional patents pending in the U.S. and
foreign counterpart applications. While we are unsure whether we can develop the technology in order to obtain the full benefits
of the issued patents, the patents themselves hold value and could be sold to companies with more resources to complete the development.
On-going legal expenses incurred for patent follow-up have been expensed from April 2013 forward.
Long-Lived
Assets
We
review our long-lived assets, including patents, whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount
of an asset to future un-discounted net cash flows expected to be generated by the asset. If such assets are considered to be
impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations. After our
review at December 31, 2018, it was determined that no adjustment was required.
Customer
Leased Equipment
Customer
leased equipment is capitalized and depreciated using the straight-line method over the estimated useful life of the equipment,
generally from three to five years. The expense for the depreciation on this equipment is included in cost of sales. The company
typically retains ownership of this equipment.
Revenue
Recognition
We
recognize revenue when evidence exists that there is an arrangement between us and our customers, delivery of products sold or
service has occurred, the selling price to our customers is fixed and determinable with required documentation, and collectability
is reasonably assured. We recognize as deferred revenue, payments made in advance by customers for products not yet provided.
In
instances where we have entered into license agreements with a third parties to use our technology within their product offering,
we recognize any base or prepaid revenues over the term of the agreement and any per occurrence or periodic usage revenues in
the period they are earned.
Related-Party
Transactions
Parties
are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company,
its management, members of the immediate families of principal stockholders of the Company and its management and other parties
with which the Company may deal where one party controls or can significantly influence the management or operating policies of
the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
The Company discloses all material related-party transactions. All transactions shall be recorded at fair value of the goods or
services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or
on behalf of the related party in excess of the cost is reflected as compensation or distribution to related parties depending
on the transaction.
Recently
Issued Accounting Standards
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.
The
Company, an emerging growth company (“EGC”), 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
March 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-08, Receivables – Nonrefundable Fees
and Other Costs (Subtopic 310-20). The amendments in this update shorten the amortization period for certain callable debt securities
held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments
do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For
public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019, for public EGC companies like us. This update is not expected to have a significant
impact on the Company’s financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments, to clarify guidance on the presentation and classification of certain cash receipts and payments in the statement
of cash flows. This update was issued with the intent of reducing diversity in practice with respect to eight types of cash flows.
This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,
for public EGC companies like us. The update did not have a significant impact on the Company’s financial statements.
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, 2019, for public EGC companies like us. Management is currently
evaluating the impact that the updated standard will have on its consolidated financial statements and related disclosures.
In
May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)” which supersedes the
revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and requires entities to recognize revenue
in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. Additional revenue recognition updates were also
issued in 2016 and 2017, which further clarified certain aspects of the new revenue recognition guidance. The new authoritative
guidance is effective for interim and annual periods beginning after December 15, 2018, for public EGC companies like us. The
guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(the modified retrospective method). The Company adopted the modified retrospective method. The update did not to have a significant
impact on the Company’s financial statements.
NOTE
2: NOTES PAYABLE
The
recorded value of our notes payable (net of $91,428 debt discount) for the years ending December 31, 2018 and 2017, were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Notes
payable, net of debt discount
|
|
|
|
|
|
|
|
|
Robert
Salna Promissory Note Payable
|
|
|
1,908,572
|
|
|
|
—
|
|
Total
|
|
|
1,908,572
|
|
|
|
—
|
|
Less
Current Portion
|
|
|
(1,908,572
|
)
|
|
|
—
|
|
Total
Long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Robert
Salna Promissory Note
On
August 3, 2018, we entered into a Note Purchase Agreement with Robert Salna, an existing shareholder of the Company and prior
investor in the Company’s convertible debt securities. Pursuant to the agreement, the Company issued to Mr. Salna a Promissory
Note, dated August 3, 2018, in the principal amount of $2,000,000 (the “Note”) in exchange for a loan to the Company
of equal principal amount.
The
Note bears interest at the rate of nine percent (9.0%) per annum, payable quarterly in arrears. The maturity date of the Note
is July 31, 2019. All unpaid principal and accrued interest on the Note will become due and payable on the maturity date. The
Note is unsecured and provides for a default interest rate of eighteen percent (18.0%) per annum. The note is repayable in Canadian
dollars with a minimum of 2.6 million in Canadian dollars due at maturity, at December 31, 2018 if the note had been retired the
company would have paid the $2,000,000 principal amount. For the 12 months ended December 31, 2018, we included $71,000 in interest
expense. We incurred $153,845 in note origination costs which are being accreted of the life of the note. For the 12 months ended
December 31, 2018 we included $62,417 in interest expense for the accretion these note origination costs.
At
December 31, 2017 we had no outstanding notes payable. However, for the 12 months ended December 31 2017, we included $310,233
of interest expense for notes outstanding prior to December 31, 2017.
NOTE
3: STOCK-BASED COMPENSATION
Stock
Incentive Plans
Under
the Co-Diagnostics, Inc. 2015 Long-term Incentive Plan (the “2015 Plan”), the board of directors may issue incentive
stock options, share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock
units to employees and directors and non-qualified stock options to consultants of the company. Options generally expire ten years
after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually
ratably over a three-year vesting schedule upon anniversary date of the grant with the first 1/3 vesting on the grant date. Should
an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. The Company has
used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions
including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based
on market-based implied volatility. The 2015 Plan reserves an aggregate of 6,000,000 shares. The number of unissued stock options
authorized under the 2015 Plan at December 31, 2018 was 4,827,293.
Stock
Options
There
were 850,000 and 61,335 options granted in the years ended December 31, 2018 and 2017, respectively. The Black-Scholes valuation
model 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 warrant was issued 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:
|
|
Year
Ended
December 31, 2018
|
|
|
Year
Ended
December 31, 2017
|
|
Risk free
interest rate
|
|
|
2.95
|
%
|
|
|
1.53
|
%
|
Expected life (in years)
|
|
|
5.5
|
|
|
|
5.0
|
|
Expected volatility
|
|
|
47.75
|
%
|
|
|
95.24
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock price
|
|
$
|
2.63
|
|
|
$
|
3.85
|
|
The
weighted average fair value of options granted during the years ended December 31, 2018 and 2017 was $1.24 and $1.59, respectively.
Included
in stock-based compensation for the 12 months ended December 31, 2018, the Company recognized expense of $468,240 recorded in
our general and administrative department for 850,000 options granted to nine employees.
Included
in stock-based compensation for the year ended December 31, 2017, the Company recognized expense of $122,259 recorded in our general
and administrative department (i) $97,474 for 61,335 options granted to three members of our board of directors and (ii) $24,785
for options vesting which had been granted prior to January 1, 2017.
The
following table summarizes option activity during the years ended December 31, 2018 and December 31, 2017, respectively.
|
|
Options
Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Fair Value
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
Outstanding at January 1,
2017
|
|
|
261,372
|
|
|
$
|
0.55
|
|
|
$
|
0.49
|
|
|
|
8.63
|
|
Options granted
|
|
|
61,335
|
|
|
|
3.85
|
|
|
|
1.59
|
|
|
|
4.60
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
322,707
|
|
|
$
|
1.29
|
|
|
$
|
0.70
|
|
|
|
7.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
850,000
|
|
|
|
2.63
|
|
|
|
1.24
|
|
|
|
9.73
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2018
|
|
|
1,172,707
|
|
|
$
|
2.23
|
|
|
$
|
1.09
|
|
|
|
8.72
|
|
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 associated
underlying contract, as earned. 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
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 warrant was issued with
a maturity equal to the expected term of the warrant.
There
were 50,000 and 595,133 warrants issued in the years December 31, 2018 and 2017, respectively. The fair values for the warrants
issued were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
|
|
Year
Ended
December 31, 2018
|
|
|
Year
Ended
December 31, 2017
|
|
Risk free
interest rate
|
|
|
2.94
|
%
|
|
|
1.89
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
4.7
|
|
Expected volatility
|
|
|
47.95
|
%
|
|
|
46.80
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock price
|
|
$
|
2.41
|
|
|
$
|
2.98
|
|
The
weighted average fair value of warrants issued during the years ended December 31, 2018 and 2017 was $1.22 and $1.74 per share,
respectively.
In
the year ended December 31, 2018, the Company included $61,100 in our sales and marketing department for 50,000 warrants issued
to 1 company as part of the repurchasing of a market licensing agreement, as stock-based compensation.
Included
in stock-based compensation for the year ended December 31, 2017, the Company recognized expense of $256,199 recorded in our general
and administrative department for 297,727 warrants issued to 2 companies for services rendered.
The
following table summarizes warrant activity during the years ended December 31, 2018 and 2017, respectively.
|
|
Warrants
Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Fair Value
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
Outstanding at January 1,
2017
|
|
|
111,129
|
|
|
$
|
8.25
|
|
|
$
|
0.11
|
|
|
|
4.91
|
|
Warrants issued
|
|
|
595,133
|
|
|
|
2.91
|
|
|
|
1.74
|
|
|
|
4.28
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
706,262
|
|
|
$
|
3.27
|
|
|
$
|
1.48
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
50,000
|
|
|
|
2.00
|
|
|
|
1.22
|
|
|
|
5.00
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
272,727
|
|
|
|
0.11
|
|
|
|
0.54
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2018
|
|
|
483,535
|
|
|
$
|
4.92
|
|
|
$
|
1.99
|
|
|
|
3.29
|
|
The
following table summarizes information about stock options and warrants outstanding at December 31, 2018.
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Range
of
|
|
|
|
|
|
Weighted
Average
Remaining
|
|
|
Weighted
Average
|
|
|
|
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Contractual
Life (years)
|
|
|
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Exercise
Price
|
|
$
|
0.55
|
|
|
|
261,372
|
|
|
|
6.63
|
|
|
$
|
0.55
|
|
|
|
261,372
|
|
|
$
|
0.55
|
|
|
2.00-3.85
|
|
|
|
986,335
|
|
|
|
8.94
|
|
|
|
2.66
|
|
|
|
419,668
|
|
|
|
2.70
|
|
|
5.10-7.20
|
|
|
|
408,535
|
|
|
|
3.08
|
|
|
|
5.46
|
|
|
|
408,535
|
|
|
|
5.46
|
|
$
|
0.55-7.20
|
|
|
|
1,656,242
|
|
|
|
7.13
|
|
|
$
|
3.02
|
|
|
|
1,089,575
|
|
|
$
|
3.22
|
|
Common
Stock
In
the year ended December 31, 2018, the Company issued 606,199 shares of our common stock as follows: 1) 272,727 shares for the
exercise of outstanding warrants for $30,000 in cash, 2) 84,112 shares valued at $202,090 to 4 companies for consulting services,
in our general and administrative department and, 3) 249,360 shares valued at $600,958 issued to 1 company as part of the repurchasing
of a market licensing agreement in our sales and marketing department.
In
the year ended December 31, 2017, the Company issued 399,209 shares of our common stock valued at $1,655,500 to 4 companies for
consulting services, as stock-based compensation. For the year ended December 31, 2017, the Company recognized expense of $813,229
in our general and administrative department for to-date services rendered.
Total
unrecognized stock-based compensation was $585,311 at December 31, 2018 which the Company expects to recognize as follows:
Year
|
|
Amount
|
|
2019
|
|
$
|
351,180
|
|
2020
|
|
|
234,131
|
|
Total
|
|
$
|
585,311
|
|
NOTE
4: LEASE OBLIGATIONS
Our
offices are located at 2401 S Foothill Dr. Suite D Salt Lake City Utah 84109-1479. The space consists of approximately 10,273
square feet and is leased under a multi-year contract a rate of $14,086 per month expiring on January 31, 2020. For the years
December 31, 2018 and 2017, the Company expensed $166,146 and $53,132, respectively for rent. The Company’s future lease
rent obligation is as follows:
Year
|
|
Amount
|
|
2019
|
|
$
|
169,033
|
|
2020
|
|
|
14,086
|
|
Total
|
|
$
|
218,119
|
|
NOTE
5: RELATED PARTY TRANSACTIONS
The
Company acquired the exclusive rights to the Co-Primer technology pursuant to a license agreement dated April 2014, between us
and DNA Logix, Inc., which was assigned to Dr. Satterfield prior to our acquisition of DNA Logix, Inc. Pursuant to the license
the Company was to pay Dr. Satterfield minimum royalty payments of $30,000 per month until the Company receives an equity funding
of at least $4,000,000, at which time the payments increase to $60,000 per month for the remainder of the year. The payment terms
were orally modified to maintain the monthly royalties at $30,000 per month through December 2016. On March 1, 2017, the Company
entered into an amendment effective January 1, 2017, to its Exclusive License Agreement for its Cooperative Primers (“License”)
technology with Dr. Satterfield, a member of our Board of Directors. The amendment provides in part that all accrued royalties
under the License cease as of January 1, 2017, and we began in January to pay $700,000 of accrued royalties at the rate of $10,000
per month. For the years ended December 31, 2018 and 2017, the Company paid $100,000 and $170,000, respectively for this license
agreement. For the year ended December 31, 2017, the Company included $107,500 as an expense for this license agreement in research
and development.
The
Company financed operations partly through short term loans with related parties and through the deferral of payment to related
parties for expenses incurred. At December 31, 2018, and 2017 the Company had $480,000 and $380,000 respectively, in unpaid accrued
expenses for technology royalties payable to Dr. Satterfield
NOTE
6: EQUITY
2018
For
the year ended December 31, 2018, the Company issued warrants to purchase 50,000 shares of our common stock with a weighted average
exercise price of $2.00 with an aggregate value of $61,100 to 1 company as part of the repurchasing of a market licensing agreement,
as stock-based compensation.
In
the year ended December 31, 2018, the Company issued 606,199 shares of common stock as follows: (i) 272,727 shares for the exercise
of warrants, (ii) 249,360 shares for the repurchasing of a market licensing agreement, and (iii) 84,122 shares for services rendered.
On
December 28, 2018 the Company amended it’s Articles of Incorporation to authorized two classes of stock, Common Stock and
Preferred Stock. The total number of shares which the company is authorized to issue is 105,000,000 shares, 100,000,000 shares
shall be Commons Stock, par value $.001 and 5,000,000 shares shall be Preferred Stock, par value $.001.
2017
For
the year ended December 31, 2017, the Company issued warrants to purchase 595,133 shares of our common stock with a weighted average
exercise price of $2.91 with an aggregate value of $1,035,624 as follows: (i) 297,727 for consulting services to two companies,
(ii) 211,740 for debt conversion to six individuals and four companies, and (iii) 85,666 for agency fees related to equity funding
to four companies.
In
the year ended December 31, 2017, the Company issued 2,434,789 shares of common stock as follows: (i) 1,178,533 shares related
to the sale of equity, (ii) 857,047 shares associated with the conversion of debt, and (iii) 399,209 shares for services rendered.
NOTE
7: INCOME TAXES
Net
deferred tax assets consist of the following components as of December 31, 2018 and 2017:
|
|
2018
|
|
2017
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
NOL
carry-forward
|
|
$
|
3,841,400
|
|
|
$
|
2,537,300
|
|
Sec
179 carry-forwards
|
|
|
1,600
|
|
|
|
1,600
|
|
Depreciation
|
|
|
9,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(3,852,500
|
)
|
|
|
(2,541,400
|
)
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income
from continuing operations for the years ended December 31, 2018 and 2017 due to the following:
|
|
2018
|
|
2017
|
|
|
|
|
|
Book
loss
|
|
$
|
(1,630,600
|
)
|
|
$
|
(1,809,400
|
)
|
Depreciation
|
|
|
(3,000
|
)
|
|
|
4,900
|
|
Meals
and entertainment
|
|
|
400
|
|
|
|
1,100
|
|
Other
non-deductible expenses
|
|
|
356,500
|
|
|
|
359,300
|
|
Change
in valuation allowance
|
|
|
1,276,700
|
|
|
|
1,444,100
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2018, the Company had net operating loss carry-forwards of approximately $14,775,000 that may be offset against future
taxable income from the year 2019 through 2035. No tax benefit has been reported in the December 31, 2018 and 2017, consolidated
financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Additionally, DNA
Logix, Inc. is a pass-through entity and therefore no provision or liability for federal income tax has been included in the consolidated
financial statements for that entity.
Due
to change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting
purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited
as to use in future years.
The
Company’s policy on the classification of interest and penalties related to income taxes is to recognize the interest and
penalties in the period incurred. There were no penalties or interest incurred for the years ending December 31, 2018 and 2017,
related to income taxes.
NOTE
8: SUBSEQUENT EVENTS
On
January 30, 2019, we entered into a securities purchase agreement with investors, whereby the investors purchased from the Company
30,000 shares of Series A Convertible Preferred Stock of the Company for a 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 note owed by the Company to one of 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 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 Common Shares
was $5,496,002 and we received net proceeds after offering costs of $4,996,322.
On
March 7, 2019, we issued 166,667 shares of our common stock to an individual who converted 2,000 shares of our Series A Preferred
Stock 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.
The
Company evaluated subsequent events pursuant to ACS Topic 855 and determined that there are no additional events that need to
be reported.