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.
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You should not place undue reliance on any forward-looking statement, each of
which applies only as of the date of this Quarterly Report. Except as required
by law, we undertake no obligation to update or revise publicly any of the
forward-looking statements after the date of this Quarterly Report to conform
our statements to actual results or changed expectations.
You are advised, however, to consult any further disclosures we make on related
subjects in our periodic and current reports filed with the SEC. You should
understand that it is not possible to predict or identify all risk factors.
Consequently, you should not consider this list to be a complete set of all
potential risks or uncertainties.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, without limitation:
? the results of clinical trials and the regulatory approval process;
? market acceptance of any products that may be approved for commercialization;
? our ability to protect our intellectual property rights;
? the impact of any infringement actions or other litigation brought against us;
? competition from other providers and products;
? our ability to develop and commercialize new and improved products and
services;
? changes in government regulation; and
? other factors (including the risks contained in the section entitled "Risk
Factors" in other documents we file with the SEC) relating to our industry,
our operations and results of operations.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires
that we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our assumptions and
estimates, including those related to recognition of revenue, valuation of
investments, valuation of inventory, 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.
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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.
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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.
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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.
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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.
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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.
? Speed: We believe our rapid assay design system software provides shorter time
to product release. This has been demonstrated with the conception, design,
product manufacture, clinical verification and submission for a CE Mark for
our Logix Smart coronavirus disease (COVID-19) test being approximately 30
days.
? Accuracy: We believe our tests are more sensitive and specific than
competitors' and can detect more strains of viruses.
? Exclusivity: We own all patents and all intellectual property used in
preparation of our tests.
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? Personalized Medicine: We project that rising health care costs in developed
and developing nations will increasingly require that health care systems be
patient specific to eliminate waste, misdiagnoses, and ineffectiveness. We
believe a critical component will be accurate, more affordable DNA/RNA-based
diagnostics, which we plan to offer.
? Low-cost Provider: We plan to keep our overhead low. Our platform technology
obviates the need to pay patent royalties typically required of our
competitors which use patented test platforms to design their tests.
? Worldwide Footprint: With a dynamic technology that encompasses markets
worldwide, we anticipate that we can identify the best target markets, not
only in highly burden developing countries (HBDC's) but also in developed
nations.
? Growth Industry Category: We believe that DNA/RNA testing is the
fastest-growing segment of in-vitro diagnostic testing.
? Combination Product Offering: Our ultra-sensitive tests can be a well-designed
match for a new generation of handheld and other small point-of-care (POC)
devices now entering the market. Used together, these affordable tests and
devices may revolutionize the molecular diagnostics industry in cost, speed of
test results and simplification.
? Multi-plexing: Our existing multiplexed tests demonstrate that our CoPrimer
designed tests are able to test for multiple targets in the same sample
without the distortion caused by false negatives and false positives that
generally occur in multiplexed tests.
Liquid Biopsy for Cancer Screening
The development of 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".
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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.
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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 $6,457,045,
of which $4,805,650 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.
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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 $13,939,816
compared with a net loss for the six months ended June 30, 2019 of $2,712,785.
The increase in net income of $16,652,601 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
$5,975,305 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.
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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 $15,005,009,
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 $36,901,648, total current liabilities of $2,984,642 and total
stockholders' equity of $35,726,862. 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.
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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.
? 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.
? 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.
? In January 2020, we sold an aggregate of 3,448,278 shares of common stock to
institutional investors for $1.45 per share for gross proceeds of
approximately $5 million pursuant to a shelf-registration statement on Form
S-3 (File No: 333-226835) declared effective by the SEC on September 7, 2018
(the "Shelf Registration Statement").
? On February 10, 2020, the Company entered into securities purchase agreements
with certain institutional investors pursuant to which such investors
purchased an aggregate of 3,324,676 shares of common stock at a purchase price
of $ 3.08 per share in a registered direct offering pursuant to the Shelf
Registration Statement. The aggregate gross proceeds for the sale of the
shares were approximately $10.2 million. The closing of the offering occurred
on or about February 13, 2020.
? On February 28, 2020, the Company entered into securities purchase agreements
with certain institutional investors pursuant to which such investors
purchased an aggregate of 470,000 shares of common stock at a purchase price
of $9.00 per share in a registered direct offering pursuant to the Shelf
Registration Statement. The aggregate gross proceeds for the sale of the
shares were approximately $4 million. The closing of the offering occurred on
or about February 28, 2020.
? 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.
? We generated $13,939,816 in net income during the six months ending June 30,
2020 to fund our operations.
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.
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