CO-DIAGNOSTICS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report and the documents incorporated by reference herein, including statements regarding future events, our future financial performance, business strategy, and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should," or "will" or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors and the documents incorporated by reference herein, which may affect our or our industry's actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a highly regulated, very competitive, and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report, and in particular, the risks discussed below and under the heading "Risk Factors" in other documents we file with the SEC. The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal years ended and 2017 and notes incorporated by reference therein. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statement.

You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this Quarterly Report to conform our statements to actual results or changed expectations.

You are advised, however, to consult any further disclosures we make on related subjects in our reports on Forms 10-Q, 8-K and 10-K filed with the SEC. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider this list to be a complete set of all potential risks or uncertainties.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation:

? the results of clinical trials and the regulatory approval process;

? our ability to raise capital to fund continuing operations;

? market acceptance of any products that may be approved for commercialization;

? our ability to protect our intellectual property rights;

? the impact of any infringement actions or other litigation brought against us;

? competition from other providers and products;

? our ability to develop and commercialize new and improved products and

services;

? changes in government regulation;

? our ability to complete capital raising transactions;

? and other factors relating to our industry, our operations and results of

  operations.




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Critical Accounting Policies


The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions and estimates, including those related to recognition of revenue, valuation of investments, valuation of inventory, valuation of intangible assets, measurement of stock-based compensation expense and litigation. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

As an emerging growth company, we have elected to opt-in to the extended transition period for new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates.



Executive Overview


The following management's discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition. This discussion should be read in conjunction with the accompanying unaudited financial statements, and notes thereto, included elsewhere in this report. The information contained in this discussion is subject to a number of risks and uncertainties. We urge you to review carefully the section of this report entitled "Forward-Looking Statements" for a more complete discussion of the risks and uncertainties associated with an investment in our securities.



Overview


Co-Diagnostics, Inc. ("Company," or "CDI,") is developing robust and innovative molecular tools for detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications.

Our diagnostics systems enable very rapid, low-cost, molecular testing for organisms and genetic diseases by automating historically complex procedures in both the development and administration of tests. CDI's newest technical advance involves a novel approach to PCR test design ("CoPrimers") that eliminates one of the key vexing issues of PCR amplification occurring especially in multiplexed transactions, which is the exponential growth of primer-dimer pairs (false positives and false negatives) adversely interfering with identification of the target DNA.

Our proprietary molecular diagnostics technology is paving the way for innovation in disease detection and life sciences research through our enhanced detection of genetic material. Because we own our platform, we are able to accomplish this faster and more economically, allowing for wider margins while still positioning Co-Diagnostics to be a low-cost provider of molecular diagnostics and screening services.

The Company, a Utah corporation, is a molecular diagnostics company that has developed and intends to 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 test products we may sell diagnostic equipment from other manufacturers as self-contained lab systems (which we refer to as the "MDx device").

In addition, continued development has demonstrated the unique properties of our CoPrimer technology that make them ideally suited to a variety of applications where specificity is key to optimal results, including multiplexing several targets simultaneously, enhanced Single Nucleotide Polymorphism ("SNP") detection and enrichment for next gen sequencing.

Our scientists were the first to understand the complex mathematics of DNA test design, to "engineer" primers and probes for DNA tests 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 Polymerase Chain Reaction ("PCR") testing systems. CDI technologies are now protected by seven granted or pending US or foreign patents, as well as certain trade secrets and copyrights.

We may either sell or lease the MDx Device to existing diagnostic centers, through sale or lease agreements, and sell the reagents that comprise our proprietary test products to those laboratories and testing facilities.



Agreement with Synbiotics


The Company has entered into a joint venture agreement to manufacture diagnostics tests for seven infectious diseases with Synbiotics Limited, a pharmaceutical manufacturing company in India. The Company and Synbiotics are equal partners in the joint venture. The agreement provides for the manufacture of the tests named above and the joint sales and marketing of those tests in India. The Company will license its technology to the joint venture on a royalty-free basis. The profits from the partnership shall be divided as follows:




Profit Level            CDI Share       Synbiotics 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 %




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Synbiotics will be reimbursed by the joint venture for some expenses, such as approximately $96,000 in rent for the manufacturing plant and 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. The manufacturing plant is completed and is scheduled to be ready for production in the third quarter of 2019. We have submitted or will submit technical files describing seven difference diagnostic tests to the Indian regulatory bodies requesting approval for those tests to be manufactured in our plant and sold in the Indian market. We have received test licenses for various certain diseases allowing us to sell test products for research. The joint venture is currently marketing our products in the Indian market and has commenced sales of our probes and primers to various laboratories and other users to be used as Research Use Only tests in their facilities, which we anticipate will be the beginning of sales of our products in India.

Intellectual Property Protection

Because much of our future success and value depends on our proprietary technology, our patent and intellectual property strategy is of critical importance. Four of our initial U.S. patents related to our technology have been granted by the U.S. Patent and Trademark Office, 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. As of , we had four additional patents pending in the U.S. and foreign counterpart applications. Two of our issued patents expire in 2034, one in 2036 and one in 2038.

We have identified additional applications of the technology, which represent potential patents that further define specific applications of the processes that are covered by the original patents. We intend to continue building our intellectual property portfolio as development continues and resources are available.

We have copyrighted our development software that can be used by any lab or developer to develop diagnostic tests based on our technology. We have allowed one potential customer access to our development software and intend to sell customized reagents through that customer to labs serviced by that customer throughout the world. To date we have not sold any products to that customer.



Major Customers


We currently have no major customers.



Competition


The molecular diagnostics industry is extremely competitive. There are many firms that provide some or all of the products we provide and provide many diagnostic tests that we have yet to develop. Many of these competitors are larger than us and have significantly greater financial resources. Because we are not established, many of our competitors have a competitive advantage in the diagnostic testing industry because they also have other lines of business in the pharmaceutical industry from which they derive revenues and for which they are well known and respected in the medical profession. We will need to overcome the disadvantage of being a start up with no history of success and no respect of the medical and testing professionals. In the diagnostic testing industry, we compete with such companies as BioMerieux, Siemens, Qiagen, and Cepheid and with such pharmaceutical companies as Abbott Laboratories, Becton, Dickinson and Johnson and Johnson.

Many of these competitors already have an established customer base with industry standard technology, which we must overcome to be successful.



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Employees


We currently employ 20 full-time personnel at our executive offices and lab facilities in Salt Lake City, Utah, and two employees outside of Utah. We have engaged independent contractors in India to promote the use of our products and develop outlets for products and employ the services of independent sales representatives on an "as needed" basis.



Government Regulation


We will be regulated by the U.S. Federal Drug Administration and our products must be approved by the FDA before we will be allowed to sell our tests in the United States. Because our lab is ISO certified we are allowed to apply for CE-Marking, which will allow us to sell in most countries in Europe, South America and Asia. We currently have CE Marks issued for our tuberculosis test, our zika virus test, and a triplex test that tests for zika, dengue, and chikungunya simultaneously.

Organizational History and Corporate Information

We were incorporated as Co-Diagnostics, Inc. in Utah on . 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



RESULTS OF OPERATIONS


Results of Operations for the Six Months ended and 2018



Net Sales


For the six months ended , we generated $64,974 of net sales compared to net sales of $19,392 in the six months ended . $50,000 of the revenue in 2019 was the result of sales of two MDx Devices to mosquito abatement districts and most of the remainder was service revenue from designing custom tests for a large agricultural company. The revenue in 2018 represented a license fee for licensing our Zika tests and certain other Flaviviruses for limited distribution to a Canadian company, which license has since been terminated.



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Cost of Sales



For the six months ended , we recorded cost of sales of $39,261 primarily for the cost of equipment included in the sales to mosquito abatement districts. For the six months ended , we recorded no cost of sales.



Operating Expenses


We incurred total operating expenses of $2,645,969 for the six months ended compared to total operating expenses of $2,650,189 for the six months ended . The decrease of $4,220 resulted from an increase of $269,026 in sales and marketing expenses which was due to increased sales activities offset by a decrease in general and administrative expenses of $282,582 with research and development expenses remaining basically unchanged. Depreciation and amortization expense also increased $4,744 as a result of the purchase of additional equipment.

General and administrative expenses decreased $282,582 from $1,730,714 for the six months ended to $1,448,132 for the six months ended . The decrease was primarily the result of a decrease of $710,377 in independent consulting expenses partially offset by an increase of $214,278 in option and warrant expense and an increase of $95,645 in other professional services. In addition, insurance expenses increased $55,523 related to D&O insurance and $43,409 in salaries and related employee costs.

Our sales and marketing expenses for the six months ended were $508,179 compared to sales and marketing expenses of $239,153 for the six months ended . The increase of $269,026 is due primarily to an increase of $136,852 in salary and related benefits expense, an increase of $73,340 in consulting expenses, and an increase of $53,014 in travel and lodging.

Our research and development expenses increased by $4,592 from $655,304 for the six months ended to $659,896 for the six months ended . The increase was primarily due to an increase of $99,584 in payroll and employee related expenses, and an increase of $16,368 in travel and lodging, all of which was offset by a decrease of $58,362 in other professional services, a decrease of $37,549 in consulting fees, and a decrease of $15,584 in lab supplies expenses.



Interest Expense


For the six months ended , we incurred no interest expense compared to interest expense for the six months ended of $106,427. The increase of $106,427 was the result of having a $2,000,000 loan outstanding during the month of , which was retired coincident with the completion of our registered direct offering. For the six months ended , we included $106,427 in interest expense of which $15,000 was for interest paid and $91,427 was for accretion of note discount upon retirement of the loan. We also realized interest income of $20,048 from the investment of funds not used in the operations of the business compared to $13,841 of interest earned in the six months ended .



Net Loss


We realized a net loss for the six months ended of $2,712,785 compared with a net loss for the six months ended of $2,682,410. The increase in net loss of $30,375 was primarily the result of increased interest expenses as explained above partially offset by a decrease of $58,454 in loss from investment related to our Indian joint venture.

Results of Operations for the Three Months ended and 2018



Net Sales


For the three months ended , we generated $61,574 of net sales compared to net sales of $9,696 in the three months ended . $50,000 of the revenue in 2019 was the result of sales of two MDx Devices to mosquito abatement districts and most of the remainder was service revenue from designing custom tests for a large agricultural company. The revenue in 2018 represented a license fee for licensing our Zika tests and certain other Flaviviruses for limited distribution to a Canadian company, which has since been terminated.



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Cost of Sales


For the three months ended , we recorded cost of sales of $38,809 related to the cost of materials in the MDx Devices sold to mosquito abatement labs and for the three months ended , we recorded no cost of sales.



Operating Expenses


We incurred total operating expenses of $1,388,529 for the three months ended compared to total operating expenses of $1,363,062 for the three months ended . The increase of $25,467 was due primarily to an increase of $108,186 in sales and marketing expenses following completion of development and regulatory compliance of several of our infectious disease tests. The increase in sales and marketing expenses were offset by a decrease in general and administrative expenses of $40,899 and a decrease of $45,299 in our research and development expenses.

General and administrative expenses decreased $40,899 from $848,668 for the three months ended to $807,769 for the three months ended . The decrease was primarily the result of a decrease of $333,659 in independent consulting expenses partially offset by an increase of $126,483 in option and warrant expense, an increase of $99,166 in professional services expense, an increase of $26,395 in insurance expense and an increase of $18,942 in salaries and related benefits.

Our sales and marketing expenses for the three months ended were $252,086 compared to sales and marketing expenses of $143,890 for the three months ended . The increase of $108,186 is due primarily to an increase of $68,300 in salary and related benefits expense, an increase of $33,586 in consulting fees and an increase of $12,999 in travel expenses.

Our research and development expenses decreased by $45,299 from $357,889 for the three months ended to $312,590 for the three months ended . The decrease was primarily due to a decrease of $67,204 in lab supplies and a decrease of $20,873 in consulting fees, which was partially offset by an increase of $34,847 in payroll and employee related expenses.



Interest Expense


We incurred no interest expense for the three months ended or 2019. We realized interest income of $19,640 for the three months ended compared to interest income of $6,280 for the three months ended from the investment of funds not used in the operations of the business.



Net Loss


We realized a net loss for the three months ended of $1,344,396 compared with a net loss for the three months ended of $1,372,177. The decrease in net loss of $22,401 resulted from an increase of $25,467 in operating expenses explained above offset by $13,069 of gross profit on revenue, a decreased loss on investment related to our Indian joint venture of $23,363 and increased interest income of $13,360.

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.

To date we have financed our operations through sales of common stock and the issuance of debt.



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At , we had cash and cash equivalents of $950,237, total current assets of $1,051,913, total current liabilities of $2,351,983 and total stockholders' deficit of $1,058,811. At , we had cash and cash equivalents of $3,856,009, total current assets of $4,560,263, total current liabilities of $312,079 and total stockholders' equity of $4,805,806.

On , 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 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 , 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 of $4,903,238 after offering costs of $592,764.

We experienced negative cash flow used in operations during the six months ended of $2,697,691 compared to negative cash flow used in operations for the six months ended of $1,936,498. During the six months ended and 2018, we received net cash from financing activities of $5,903,238 and $0 as described above and used $247,000 and $60,000, respectively of our cash in contributions to our joint venture in India. The negative cash flow in the quarter was met by cash reserves from the issuances of common stock incident to the completion of registered direct offering in February and the issuance of preferred stock in January. The amount of our operating deficit could decrease or increase significantly depending on strategic and other operating decisions, thereby affecting our need for additional capital. We expect our operating losses will continue until we are able to generate material revenue. Until our operations become profitable, we will continue to rely on proceeds received from our offerings of stock. In we filed a shelf registration of our securities with the SEC and in it was declared effective. In we completed the registered direct offering described above pursuant to that registration. We expect additional investment capital to come from (i) additional issuances of our common stock pursuant to our S-3 shelf registration 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.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy our liabilities and sustain operations. These factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to generate sufficient income and cash flow to meet our obligations on a timely basis and to obtain additional financing as may be required. The Company is actively seeking options to obtain additional capital and financing.



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Our monthly cash operating expenses, including our technology research and development expenses and interest expense, were approximately $449,000 per month during the six months ended . 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.

The amount of our operating deficit could decrease or increase significantly depending on strategic and other operating decisions, thereby affecting our need for additional capital. We expect our operating losses will continue until we are able to generate revenue. Revenue has commenced in 2019 and our need for additional investment will depend on the amount of revenue generated.

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. Commercialization and future development of diagnostic tests utilizing our PCR technology are expected to require additional capital estimated to be approximately $1,400,000 annually for the foreseeable future. This estimate will increase or decrease depending on specific opportunities and available funding.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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