Co-Diagnostics Inc

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DIAGNOSTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 09:47 pm

Cautionary Note Regarding Forward-Looking Statements



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



We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business
strategy, short term and long-term business operations, and financial needs.
These forward-looking statements are subject to certain risks and uncertainties
that could cause our actual results to differ materially from those reflected in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Quarterly
Report, and in particular, the risks discussed below and under the heading "Risk
Factors" in other documents we file with the SEC. The following discussion
should be read in conjunction with the Annual Report on Form 10-K for the fiscal
years ended December 31, 2018 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.




13







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 %




14








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 May 13, 2019, 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.






15







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 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






RESULTS OF OPERATIONS




Results of Operations for the Six Months ended June 30, 2019 and 2018






Net Sales




For the six months ended June 30, 2019, we generated $64,974 of net sales
compared to net sales of $19,392 in the six months ended June 30, 2018. $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.






16







Cost of Sales




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. For the six months ended June 30, 2018, we recorded no cost of sales.






Operating Expenses




We incurred total operating expenses of $2,645,969 for the six months ended June
30, 2019
compared to total operating expenses of $2,650,189 for the six months
ended June 30, 2018. 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 June 30, 2018 to $1,448,132 for the six months ended June 30,
2019
. 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 June 30, 2019 were
$508,179 compared to sales and marketing expenses of $239,153 for the six months
ended June 30, 2018. 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 June 20, 2018 to $659,896 for the six months ended June 30,
2019
. 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 June 30, 2018, we incurred no interest expense compared
to interest expense for the six months ended June 30, 2019 of $106,427. The
increase of $106,427 was the result of having a $2,000,000 loan outstanding
during the month of January 2019, which was retired coincident with the
completion of our registered direct offering. For the six months ended June 30,
2019
, 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 June 30, 2018.






Net Loss




We realized a net loss for the six months ended June 30, 2019 of $2,712,785
compared with a net loss for the six months ended June 30, 2018 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 June 30, 2019 and 2018






Net Sales




For the three months ended June 30, 2019, we generated $61,574 of net sales
compared to net sales of $9,696 in the three months ended June 30, 2018. $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.






17







Cost of Sales




For the three months ended June 30, 2019, 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 June 30, 2018, we recorded no cost of sales.






Operating Expenses




We incurred total operating expenses of $1,388,529 for the three months ended
June 30, 2018 compared to total operating expenses of $1,363,062 for the three
months ended June 30, 2018. 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 June 30, 2018 to $807,769 for the three months ended June 30,
2019
. 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 June 30, 2019 were
$252,086 compared to sales and marketing expenses of $143,890 for the three
months ended June 30, 2018. 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 June 30, 2018 to $312,590 for the three months ended June 30,
2019
. 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 June 30, 2018 or
2019. We realized interest income of $19,640 for the three months ended June 30,
2019
compared to interest income of $6,280 for the three months ended June 30,
2018
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 June 30, 2019 of $1,344,396
compared with a net loss for the three months ended June 30, 2018 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.






18








At December 31, 2018, 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 June 30, 2019, 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 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 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 of $4,903,238
after offering costs of $592,764.



We experienced negative cash flow used in operations during the six months ended
June 30, 2019 of $2,697,691 compared to negative cash flow used in operations
for the six months ended June 30, 2018 of $1,936,498. During the six months
ended June 30, 2019 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 August 2018 we filed a shelf
registration of our securities with the SEC and in September 2018 it was
declared effective. In February 2019 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.






19








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 June 30, 2019. 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.

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