NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Overview and Basis of Presentation
Description
of Business
Co-Diagnostics,
Inc., a Utah corporation (the “Company”, “Co-Dx” or “CODX”), develops, manufactures and sells reagents
used for diagnostic tests that function via the detection and/or analysis of nucleic acid molecules (DNA or RNA), including robust and
innovative molecular tools for detection of infectious diseases, liquid biopsy for cancer screening, and agricultural applications. 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”). We are also developing a unique, ground-breaking portable PCR testing platform (the “Co-Dx
PCR home testing platform”) designed to bring affordable, reliable gold-standard polymerase chain reaction (“PCR”)
to patients in point-of-care and at-home settings.
Unaudited
Consolidated Financial Statements
The
accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q as they are prescribed
for smaller reporting companies and emerging growth companies. Accordingly, they do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been
included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2022. These statements should be read in conjunction with the Company’s audited
financial statements and related notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K
filed on March 24, 2022.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Such estimates include receivables
and other long-lived assets, legal and regulatory contingencies, income taxes, share based arrangements, and others. These estimates
and assumptions are based on management’s best estimates and judgments. Actual amounts and results could differ from those estimates.
Note
2 – Summary of Significant Accounting Policies
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, money market funds and highly liquid investments with an original maturity date of 90 days
or less from the date of purchase. The fair value of cash equivalents approximated their carrying value as of September 30, 2022 and
December 31, 2021. The Company has its cash and cash equivalents with a large creditworthy financial institution and the balance exceeded
federally insured limits. The Company has not experienced any losses in such accounts, and management believes the Company is not exposed
to any significant credit risk on cash and cash equivalents.
Marketable
Investment Securities
The
Company’s marketable investment securities are comprised of investments in certificates of deposit and U.S. treasury bills. The
Company determines the appropriate classification of its marketable investment securities at the time of purchase and re-evaluates such
designation at each balance sheet date. The Company has classified and accounted for its marketable investment securities as available-for-sale
securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to
maturity. As a result, the Company classifies its marketable investment securities, including securities with stated maturities beyond
twelve months, within current assets in the consolidated balance sheets. Any unrealized gains or losses are immaterial.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount (net of allowance) and do not bear interest. The Company maintains an allowance
for doubtful accounts for amounts the Company does not expect to collect. In establishing the required allowance, management considers
historical losses, current market condition, customers’ financial condition, the age of receivables, and current payment patterns.
Account balances are written off against the allowance once the receivable is deemed uncollectible. Recoveries of trade receivables previously
written off are recorded when collected. At September 30, 2022, total accounts receivable was $8,969,317 with an allowance for uncollectable
accounts of $1,007,653 resulting in a net amount of $7,961,664. At December 31, 2021, total accounts receivable was $21,508,779 with
an allowance for uncollectable accounts of $669,597 resulting in a net amount of $20,839,182.
Equity-Method
Investments
Our
equity method investments are initially recorded at cost and are included in other long-term assets in the accompanying consolidated
balance sheet. We adjust the carrying value of our investment based on our share of the earnings or losses in the periods which they
are reported by the investee until the carrying amount is zero. The earnings or losses are included in other income (expense) in the
accompanying consolidated statements of operations.
Inventory
Inventory
is stated at the lower of cost or net-realizable value. Inventory cost is determined on a first-in first-out basis that approximates
average cost in accordance with ASC 330-10-30-12. At September 30, 2022, the Company had $5,441,726 in inventory, of which $1,283,850
was finished goods and $4,157,876 was raw materials. At December 31, 2021, the Company had $2,004,169 in inventory, of which $983,088
was finished goods and $1,021,081 was raw materials. The Company establishes reserves to reduce slow-moving, obsolete, or unusable inventories
to their estimated useful or scrap values.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the property, generally from three
to five years. Repairs and maintenance costs are expensed as incurred except when such repairs significantly add to the useful life
or productive capacity of the asset, in which case the repairs are capitalized.
The
Company reviews its long-lived assets, including property and equipment, for impairment whenever an event or change in facts and circumstances
indicates that their carrying amounts may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount
to the estimated undiscounted future cash flows expected to be generated. If the carrying amount exceeds the undiscounted cash flows,
the assets are determined to be impaired and an impairment charge is recognized as the amount by which the carrying amount exceeds fair
value.
Business
Combinations
We
estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is
measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities
assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable, and as a result, actual results may differ from estimates.
Leases
As
described in “Recently Adopted Accounting Standards” below, the Company adopted ASC 842, Leases (“ASC 842”) effective
January 1, 2022. Under ASC 842, the Company determines if an arrangement is or contains a lease at inception by assessing whether the
arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (ROU) assets represent
the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value
of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease
payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable.
As
the implicit rate in the Company’s leases is generally unknown, the Company uses its incremental borrowing rate based on the information
available at the lease commencement date in determining the present value of future lease payments. The Company considers its credit
risk, term of the lease, total lease payments and adjusts for the impacts of collateral, as necessary, when calculating its incremental
borrowing rates. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it
is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease costs for
the Company’s operating leases are recognized on a straight-line basis within operating expenses and cost of revenue over the reasonably
assured lease term.
The
Company has elected to not separate lease and non-lease components for leases of office space and, as a result, accounts for any lease
and non-lease components for office space as a single lease component, to the extent they are fixed. Non-lease components that are not
fixed are expensed as incurred as variable lease payments. The Company’s office leases typically include non-lease components such
as common-area maintenance costs. The Company has also elected to not apply the recognition requirement to any leases within its existing
classes of assets with a term of 12 months or less.
Revenue
Recognition
The
Company generates revenue from product sales and license sales. The Company recognizes revenue when all of the following criteria are
satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or
services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction
price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when, or as the Company satisfies each performance obligation.
The
Company constrains revenue by giving consideration to factors that could otherwise lead to a probable reversal of revenue. The Company
records any payments received from customers prior to the Company fulfilling its performance obligation(s) as deferred revenue.
Deferred
Revenue
Deferred
revenue primarily consists of payments received from customers prior to the Company fulfilling its performance obligation of providing
the product. When this occurs, the Company records a contract liability as deferred revenue. Deferred revenue is recognized as revenue
as the related performance obligations are satisfied.
Research
and Development
Research
and development costs are expensed when incurred. For the three and nine months ended September 30, 2022, the Company expensed $5,037,461
and $12,698,632 of research and development costs, respectively. For the three and nine months ended September 30, 2021, the Company
expensed $5,893,350 and $12,779,573, respectively.
Stock-based
Compensation
The
Company has granted stock-based awards, including restricted stock, stock options, stock warrants and restricted stock units (“RSUs”),
to its employees, certain consultants and members of its board of directors. The Company records stock-based compensation based on the
grant date fair value of the awards and recognizes the fair value of those awards as expense using the straight-line method over the
requisite service period of the award. The Company estimates the grant date fair value of stock options using the Black-Scholes option-pricing
model. When an award is forfeited prior to the vesting date, the Company recognizes an adjustment for the previously recognized expense
in the period of the forfeiture.
Income
Taxes
The
Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under this method, deferred
income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and
tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes
only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the
taxing authority.
Valuation
allowances are provided when it is more-likely-than-not that some or all of the deferred income tax assets may not be realized. In assessing
the need for a valuation allowance, the Company has considered its historical levels of income, expectations of future taxable income
and ongoing tax planning strategies.
Developing
the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant
judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income
tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and
tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income
tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse
effect on the consolidated financial positions, result of operations, or cash flows.
Net
Income per Share
Basic
net income or loss per common share is computed by dividing net income or loss applicable to common shareholders by the weighted average
number of shares outstanding during each period.
Diluted
net income or loss per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number
of shares of common stock outstanding during the period increased by common shares that could be issued upon conversion or exercise of
other outstanding securities to the extent those additional common shares would be dilutive. The dilutive effect of potentially dilutive
securities is reflected in diluted net income or loss per share by application of the treasury stock method. During periods when the
Company is in a net loss position, basic net loss per share is the same as diluted net loss per share as the effects of potentially dilutive
securities are anti-dilutive.
Concentrations
Risk and Significant Customers
The
Company had certain customers which are each responsible for generating 10% or more of the total revenue for the three and nine months
ended September 30, 2022. One customer accounted for approximately 52% of total revenue for the three months ended September 30, 2022,
and two customers together accounted for approximately 47% of total revenue for the nine months ended September 30, 2022. Two customers
together accounted for approximately 56% of total revenue for the three months ended September 30, 2021, and three customers together
accounted for approximately 49% of total revenue for the nine months ended September 30, 2021.
Four
customers accounted for more than 10% of accounts receivable at September 30, 2022 and two customers accounted for more than 10% of accounts
receivable at December 31, 2021. These customers together accounted for approximately 67% and 66% of accounts receivable at September
30, 2022 and December 31, 2021, respectively.
Recent
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted
by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
Recently
Adopted Accounting Standards
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires
the measurement and recognition of expected credit losses for certain financial instruments, which includes the Company’s accounts
receivable. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in
more timely recognition of credit losses. The Company adopted ASU 2016-13 on January 1, 2022. The adoption did not have an impact on
the Company’s financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires a lessee to recognize
most leases on the balance sheet as lease liabilities with corresponding right-of-use assets. The objective of ASU 2016-02 is to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing
key information about leasing arrangements. The recognized lease liabilities and lease assets represent the obligation to make payments
and the right to use or control the use of a specified asset for the lease term, respectively.
On
January 1, 2022, the Company adopted Topic 842 using the modified retrospective approach with the effective date as the date of initial
application. Consequently, results for the three and nine months ended September 30, 2022 are presented under Topic 842. No prior period
amounts were adjusted and continue to be reported in accordance with previous lease guidance, ASC Topic 840, Leases. The Company elected
the practical expedients available under the provisions of the new standard, including not reassessing whether expired or existing contracts
are or contain leases; not reassessing the classification of expired or existing leases; and not reassessing the initial direct cost
for any existing leases. Upon adoption, the Company recognized an operating lease liability of $626,699 and a corresponding operating
right-of-use asset of $681,327.
Note
3 – Business Combinations
On
December 31, 2021, the Company completed its acquisition of Advanced Conceptions, Inc. (“ACI”) and Idaho Molecular Inc. (“IdMo”),
which were related entities developing, with the Company, an at-home/point-of-care medical diagnostic device. Upon the completion of
the acquisition, all outstanding ACI and Idaho Molecular common stock was initially exchanged for approximately 3.2 million shares of
the Company’s common stock and contingent consideration that includes up to approximately 1.4 million shares and approximately
456,000 warrants to purchase shares of the Company’s common stock. The contingent consideration is based on the achievement of
certain milestones, which include regulatory approval for identified products, as well as production and net revenue targets. Upon the
completion of the acquisition, both ACI and IdMo became 100% wholly-owned subsidiaries of the Company.
During
the quarter ended June 30, 2022, the Company finalized negotiations that were ongoing as of December 31, 2021, with one remaining shareholder
of ACI, which resulted in an increase to the purchase consideration of $580,135. Additionally, there was an increase of $101,593 in the
estimated tax liabilities that resulted from the acquisition. Due to the change in purchase consideration and estimated tax liabilities,
a measurement period adjustment was recorded, resulting in an increase to goodwill of $681,728.
Following
the resolution with the remaining shareholder, the total number of shares exchanged as purchase consideration was approximately 3.3 million
shares. Additionally, the updated purchase consideration includes contingent consideration of up to approximately 1.4 million shares
and 465,000 warrants to purchase shares of the Company’s common stock.
In
addition, the adjustments to the provisional purchase consideration amount resulted in an increase in the gain on remeasurement of acquisition
contingencies of $78,617.
Note
4 – Goodwill and Intangible Assets
Goodwill
Goodwill
represents the excess of purchase price and related costs over the value assigned to net tangible and identifiable intangible assets
acquired in business combinations. The following table presents the changes in the carrying amount of goodwill for the nine months ended
September 30, 2022:
Schedule
of Goodwill
Balance as of December 31, 2021 | |
$ | 14,706,818 | |
Measurement period adjustments | |
| 681,728 | |
Balance as of September 30, 2022 | |
$ | 15,388,546 | |
Intangible
Assets, Net
The
following table presents details of the Company’s intangible assets, excluding goodwill:
Schedule
of Intangible Assets, Net
| |
September 30, 2022 |
| |
Weighted-Average | |
Gross | | |
| | |
Net | |
| |
Useful Life (1) | |
Carrying | | |
Accumulated | | |
Carrying | |
| |
(in Years) | |
Amount | | |
Amortization | | |
Amount | |
In-process research and development | |
Indefinite | |
$ | 26,101,000 | | |
$ | - | | |
$ | 26,101,000 | |
Non-competition agreements | |
2.7 | |
| 1,094,000 | | |
| (320,000 | ) | |
| 774,000 | |
Total intangible assets | |
| |
$ | 27,195,000 | | |
$ | (320,000 | ) | |
$ | 26,875,000 | |
| |
December 31, 2021 |
| |
Weighted-Average | |
Gross | | |
| | |
Net | |
| |
Useful Life (1) | |
Carrying | | |
Accumulated | | |
Carrying | |
| |
(in Years) | |
Amount | | |
Amortization | | |
Amount | |
In-process research and development | |
Indefinite | |
$ | 26,101,000 | | |
$ | - | | |
$ | 26,101,000 | |
Non-competition agreements | |
2.7 | |
| 1,094,000 | | |
| - | | |
| 1,094,000 | |
Total intangible assets | |
| |
$ | 27,195,000 | | |
$ | - | | |
$ | 27,195,000 | |
(1) |
|
Based
on weighted-average useful life established as of the acquisition date. |
Note
5 – Fair Value Measurements
The
Company measures and records certain financial assets at fair value on a recurring basis. Fair value is based on the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date.
The
Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds. The following
three levels of inputs are used to measure the fair value of financial instruments:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs that are not corroborated by market data.
The
following table summarizes the assets measured at fair value on a recurring basis as of September 30, 2022, and December 31, 2021, by
level within the fair value hierarchy:
Schedule of Fair Value Assets and Liabilities
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
Total | |
| |
September 30, 2022 | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
Total | |
Assets: | |
| | |
| | |
| | |
| |
Cash equivalents | |
$ | - | | |
$ | 5,060,362 | | |
$ | - | | |
$ | 5,060,362 | |
Marketable securities (U.S. treasury bills) | |
| - | | |
| 4,982,350 | | |
| - | | |
| 4,982,350 | |
Total assets measured at fair value | |
$ | - | | |
$ | 10,042,712 | | |
$ | - | | |
$ | 10,042,712 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Contingent consideration - common stock | |
$ | - | | |
$ | - | | |
$ | 3,183,437 | | |
$ | 3,183,437 | |
Contingent consideration - warrants | |
| - | | |
| - | | |
| 369,117 | | |
| 369,117 | |
Total liabilities measured at fair value | |
$ | - | | |
$ | - | | |
$ | 3,552,554 | | |
$ | 3,552,554 | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
Total | |
| |
December 31, 2021 | |
| |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
Total | |
Assets: | |
| | |
| | |
| | |
| |
Marketable securities (certificates of deposit) | |
$ | - | | |
$ | 1,255,266 | | |
$ | - | | |
$ | 1,255,266 | |
Total assets measured at fair value | |
$ | - | | |
$ | 1,255,266 | | |
$ | - | | |
$ | 1,255,266 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Contingent consideration - common stock | |
$ | - | | |
$ | - | | |
$ | 8,684,669 | | |
$ | 8,684,669 | |
Contingent consideration - warrants | |
| - | | |
| - | | |
| 1,747,972 | | |
| 1,747,972 | |
Total liabilities measured at fair value | |
$ | - | | |
$ | - | | |
$ | 10,432,641 | | |
$ | 10,432,641 | |
The
Company’s financial instruments that are measured at fair value on a recurring basis consist of certificates of deposit and U.S
treasury bills as of December 31, 2021 and September 30, 2022, respectively.
The
changes for Level 3 items measured at fair value on a recurring basis are as follows:
Schedule of Changes in Fair Value Measurement
| |
| | |
Fair value as of December 31, 2021 | |
$ | 10,432,641 | |
Change in contingent purchase consideration for measurement period adjustments | |
| 199,359 | |
Change in fair value of contingent consideration issued for business acquisitions | |
| (7,079,446 | ) |
Fair value as of September 30, 2022 | |
$ | 3,552,554 | |
The
fair value of the contingent consideration is based on the fair value of the contingent consideration-common stock and contingent consideration-warrants.
The fair value of the contingent consideration-common stock is equal to the probability-adjusted value of the Company’s common
stock as of September 30, 2022. The fair value of the contingent consideration-warrants is equal to the probability adjusted value of
a call option with terms consistent with the terms of the warrants as of September 30, 2022. Prior to the probability adjustments, the
warrants were valued based on the following inputs:
Schedule of Contingent Consideration Common Stock and Warrants
| |
September 30, 2022 | | |
December 31, 2021 | |
Stock price | |
$ | 3.21 | | |
$ | 8.93 | |
Strike price | |
$ | 9.13 | | |
$ | 9.13 | |
Volatility | |
| 75.00 | % | |
| 80.00 | % |
Risk-free rate | |
| 4.10 | % | |
| 1.30 | % |
Expected term | |
| 4.3 | | |
| 5.0 | |
Note
6 – Revenue
The
following table sets forth revenue by geographic area:
Summary of Revenue by Geographic Area
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
United States | |
$ | 4,699,444 | | |
$ | 16,907,574 | | |
$ | 23,425,186 | | |
$ | 34,701,035 | |
Rest of World | |
| 395,012 | | |
| 13,193,779 | | |
| 9,391,540 | | |
| 42,783,227 | |
Total | |
$ | 5,094,456 | | |
$ | 30,101,353 | | |
$ | 32,816,726 | | |
$ | 77,484,262 | |
Percentage of revenue by area: | |
| | | |
| | | |
| | | |
| | |
United States | |
| 92 | % | |
| 56 | % | |
| 71 | % | |
| 45 | % |
Rest of World | |
| 8 | % | |
| 44 | % | |
| 29 | % | |
| 55 | % |
Deferred
Revenue
Changes
in the Company’s deferred revenue balance for the nine months ended September 30, 2022 were as follows:
Schedule of Deferred Revenue
Balance as of December 31, 2021 | |
$ | 150,000 | |
Revenue recognized included in deferred revenue balance at the beginning of the period | |
| (150,000 | ) |
Balance as of September 30, 2022 | |
$ | - | |
Note
7 – Earnings Per Share
The
following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share for three and nine
months ended September 30, 2022:
Schedule of Basic and Diluted Earnings Per Share
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator | |
| | | |
| | | |
| | | |
| | |
Net income (loss), as reported | |
$ | (1,361,062 | ) | |
$ | 11,475,966 | | |
$ | 7,667,231 | | |
$ | 29,160,154 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator | |
| | | |
| | | |
| | | |
| | |
Weighted average shares, basic | |
| 31,321,368 | | |
| 28,941,357 | | |
| 32,109,213 | | |
| 28,800,450 | |
Dilutive effect of stock options, warrants and RSUs | |
| - | | |
| 1,011,333 | | |
| 893,326 | | |
| 1,071,965 | |
Shares used to compute diluted earnings per share | |
| 31,321,368 | | |
| 29,952,690 | | |
| 33,002,539 | | |
| 29,872,415 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per share | |
$ | (0.04 | ) | |
$ | 0.40 | | |
$ | 0.24 | | |
$ | 1.01 | |
Diluted earnings per share | |
$ | (0.04 | ) | |
$ | 0.38 | | |
$ | 0.23 | | |
$ | 0.98 | |
For
the three and nine months ended September 30, 2022, potentially dilutive securities of 2,631,642 and 1,385,869 were excluded from the
calculation because their effect would have been anti-dilutive. For the three and nine months ended September 30, 2021, potentially dilutive
securities of 50,000 and 147,436 were excluded from the calculation because their effect would have been anti-dilutive. The computation
of basic and diluted earnings per share for the three and nine months ended September 30, 2022 also excludes the approximately 1.4 million
shares of common stock and approximately 465,000 warrants to purchase shares of common stock that are contingent upon the achievement
of certain milestones.
Note
8 – Stock-Based Compensation
Stock
Incentive Plans
The
Company’s board of directors adopted, and shareholders approved, the Co-Diagnostics, Inc. Amended and Restated 2015 Long Term Incentive
Plan (the “Incentive Plan”) providing for the issuance of stock-based incentive awards to employees, officers, consultants,
directors and independent contractors. On August 31, 2022 the shareholders approved an increase in the number of awards available for
issuance under the Incentive Plan to an aggregate of 12,000,000 shares of common stock. The number of awards available for issuance under
the Incentive Plan was 6,210,790 at September 30, 2022.
Stock
Options
The
following table summarizes option activity during the nine months ended September 30, 2022:
Schedule of Option Activity
| |
Number of Options | | |
Weighted Average
Exercise
Price | | |
Weighted Average Fair Value | | |
Weighted
Average
Remaining
Contractual
Life (Years) | |
Outstanding at December 31, 2021 | |
| 1,111,363 | | |
$ | 2.12 | | |
$ | 1.31 | | |
| 6.62 | |
Granted | |
| - | | |
| - | | |
| - | | |
| | |
Expired | |
| - | | |
| - | | |
| - | | |
| | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | | |
| | |
Exercised | |
| (70,791 | ) | |
| 1.10 | | |
| 0.51 | | |
| | |
Outstanding at September 30, 2022 | |
| 1,040,572 | | |
$ | 2.19 | | |
$ | 1.37 | | |
| 6.13 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at September 30, 2022 | |
| 1,040,572 | | |
$ | 2.19 | | |
$ | 1.37 | | |
| 6.13 | |
The
total intrinsic value of options exercised during the nine months ended September 30, 2022 was approximately $0.4 million. The aggregate
intrinsic value of outstanding options at September 30, 2022 was approximately $1.4 million.
Stock-based
compensation cost is measured at the grant date based on the fair value of the award granted and recognized as expense over the vesting
period using the straight-line method. The Company uses the Black-Scholes model to value options granted.
As
of September 30, 2022, there were no unvested options and no unrecognized stock-based compensation expense related to options.
Restricted
Stock Units
The
grant date fair value of RSUs granted is determined using the closing market price of the Company’s common stock on the grant date
with the associated compensation expense amortized over the vesting period of the awards. The following table sets forth the outstanding
RSUs and related activity for the nine months ended September 30, 2022:
Schedule of Outstanding Restricted Stock Units and Related Activity
| |
Number of RSUs | | |
Weighted Average Grant Date Fair Value | |
Unvested at December 31, 2021 | |
| 1,267,415 | | |
$ | 9.94 | |
Granted | |
| 1,925,476 | | |
| 5.66 | |
Vested | |
| (303,083 | ) | |
| 10.01 | |
Forfeited/Cancelled | |
| (41,000 | ) | |
| 8.31 | |
Unvested at September 30, 2022 | |
| 2,848,808 | | |
$ | 7.06 | |
As
of September 30, 2022, there was approximately $17.1 million of unrecognized stock-based compensation expense related to outstanding
RSUs which is expected to be recognized over a weighted-average period of 2.4 years.
Warrants
The
Company has issued warrants related to financings, acquisitions and as compensation to third parties for services provided. The Company
estimates the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model. The Company amortizes
the fair value of issued warrants using a vesting schedule based on the terms and conditions of each warrant if granted for services.
The
following table summarizes warrant activity during the nine months ended September 30, 2022:
Schedule of Warrant Activity
| |
Number of Warrants | | |
Weighted
Average
Exercise Price | | |
Weighted Average Fair Value | | |
Weighted
Average
Remaining
Contractual
Life (Years) | |
Outstanding at December 31, 2021 | |
| 526,281 | | |
$ | 8.15 | | |
$ | 4.01 | | |
| 4.7 | |
Issued for adjustments to contingent purchase consideration | |
| 8,719 | | |
| 9.13 | | |
| 1.88 | | |
| 4.6 | |
Granted | |
| - | | |
| - | | |
| - | | |
| | |
Expired | |
| - | | |
| - | | |
| - | | |
| | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | | |
| | |
Exercised | |
| (50,000 | ) | |
| 2.00 | | |
| 1.22 | | |
| | |
Outstanding at September 30, 2022 | |
| 485,000 | | |
$ | 8.81 | | |
$ | 2.43 | | |
| 4.3 | |
The
intrinsic value of warrants exercised during the nine months ended September 30, 2022 and 2021 was approximately $0.3 million and $0,
respectively. The aggregate intrinsic value of outstanding warrants at September 30, 2022 was approximately $0.1 million.
The
total number of warrants exercisable at September 30, 2022 are 20,000. The ability to exercise the approximately 465,000 warrants issued
in connection with acquisitions in the prior year is contingent upon the achievement of certain development and revenue milestones on
or before January 1, 2027. There was no unrecognized stock-based compensation expense related to warrants.
Stock
Issued for Services
The
Company has issued restricted stock to third parties for services provided. The grant date fair value of the restricted stock granted
is determined using the closing market price of the Company’s common stock on the grant date with the associated compensation expense
amortized over the vesting period of the stock awards. The Company issued 0 and 5,548 shares of restricted stock for services during
the nine months ended September 30, 2022 and 2021, respectively. There was no unrecognized stock-based compensation expense related to
restricted stock issued.
Stock-Based
Compensation Expense
The
Company recognized stock-based compensation expense related to the types of awards discussed above as follows:
Schedule of Recognized Stock-based Compensation Expense
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options | |
$ | - | | |
$ | 66,247 | | |
$ | 78,115 | | |
$ | 219,033 | |
Restricted stock units | |
| 2,230,434 | | |
| 1,344,698 | | |
| 5,060,700 | | |
| 3,580,360 | |
Stock | |
| - | | |
| - | | |
| - | | |
| 51,900 | |
Total stock-based compensation expense | |
$ | 2,230,434 | | |
$ | 1,410,945 | | |
$ | 5,138,815 | | |
$ | 3,851,293 | |
Note
9 – Income Taxes
For
the three months ended September 30, 2022, the Company recognized a benefit from income taxes of $2,114,638, representing an effective
tax rate of 43.8%. For the nine months ended September 30, 2022, the Company recognized a benefit from income taxes of $1,470,058, representing
an effective tax rate of 30.0%. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of
21.0% due to state taxes, permanent items, and discrete items. For the three and nine months ended September 30, 2021, the Company recognized
expense from income taxes of $2,100,594 and $6,231,310, respectively.
Note
10 – Related Party Transactions
The
Company acquired the exclusive rights to the CoPrimer technology pursuant to an exclusive license agreement, dated April 2014 (the “Exclusive
License Agreement”), between the Company and DNA Logix, Inc., which was assigned to Dr. Brent Satterfield, a former executive officer,
prior to the Company’s acquisition of DNA Logix, Inc. On March 1, 2017, the Company entered into an amendment to its Exclusive
License Agreement for its Cooperative Primers (“License”) technology with Dr. Satterfield. The amendment provides in part
that all accrued royalties under the License cease as of January 1, 2017, and the Company began in January 2017 to pay to Dr. Satterfield
$700,000 of accrued royalties at the rate of $10,000 per month through December 2021. At September 30, 2022 and 2021, the aggregate balance
of this related party liability was $0 and $30,000, respectively.
Note
11 – Leases
The
Company leases office space under a non-cancellable operating lease and leases cancellable with one month notice. The Company expenses
the cancellable leases in the period incurred in accordance with the practical expedient elected. As such, one lease makes up the entirety
of the right-of-use asset and lease liability disclosed.
For
the three and nine months ended September 30, 2022, components of lease expense are summarized as follows:
Schedule
of Lease Expense
| |
Three Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2022 | |
Operating lease costs | |
$ | 82,797 | | |
$ | 253,748 | |
Short-term lease costs | |
| 113,294 | | |
| 277,454 | |
Total lease costs | |
$ | 196,091 | | |
$ | 531,202 | |
Short-term
lease costs under month-to-month lease agreements are paid to related parties.
As
of September 30, 2022, the maturities of the Company’s lease liabilities are as follows:
Schedule
of Maturities on Company Lease Liabilities
| |
Year Ending December 31, | |
2022 (remainder) | |
$ | 73,783 | |
2023 | |
| 303,059 | |
2024 | |
| 50,773 | |
2025 | |
| - | |
2026 | |
| - | |
Thereafter | |
| - | |
Total lease payments | |
| 427,615 | |
Less: imputed interest | |
| 8,799 | |
Present value of operating lease liabilities | |
| 418,816 | |
Less: current portion | |
| 292,536 | |
Long-term portion | |
$ | 126,280 | |
Other
information related to operating leases was as follows:
Schedule
of Other Information Related to Operating Lease
| |
Three Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2022 | |
Cash paid for operating leases included in operating cash flows | |
$ | 192,659 | | |
$ | 514,009 | |
Remaining lease term of operating leases | |
| 1 year | | |
| 1 year | |
Discount rate of operating leases | |
| 3.1 | % | |
| 3.1 | % |
As
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, future lease payments under ASC 840 for
operating leases were as follows:
Schedule of Future Minimum Lease Payments
| |
| | |
Year Ending December 31, | |
2022 | |
$ | 293,595 | |
2023 | |
| 303,059 | |
2024 | |
| 50,774 | |
Total lease payments | |
$ | 647,428 | |
Note
12 – Commitments and Contingencies
Litigation
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable
that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
The
Company is currently a defendant in five different securities class action complaints that were filed by certain stockholders of the
Company claiming that the Company promulgated false and misleading press releases to increase the price of our stock to improperly benefit
the officers and directors of the Company. The plaintiffs demand compensatory damages sustained as a result of the Company’s alleged
wrongdoing in an amount to be proven at trial. The Company believes these lawsuits are without merit and intends to defend the cases
vigorously. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in
these cases. As of the date of this report, the Company does not believe it is probable that these cases will result in an unfavorable
outcome; however, if an unfavorable outcome were to occur in these cases, it is possible that the impact could be material to the Company’s
results of operations in the period(s) in which any such outcome becomes probable and estimable.
Note
13 – Share Repurchase Program
In
March 2022, the Company’s Board of Directors authorized a share repurchase program that would allow the Company to repurchase up
to $30.0 million of CODX common stock. The repurchase program does not obligate the Company to acquire any particular number of common
shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The timing and amount
of any share repurchases under the share repurchase program will be determined by Co-Diagnostics’ management at its discretion
based on ongoing assessments of the capital needs of the business, the market price of the Company’s common stock, corporate and
regulatory requirements, and general market conditions.
For
accounting purposes, common stock repurchased under the stock repurchase program is recorded based upon the transaction date of the applicable
trade. Such repurchased shares are held in treasury and are presented using the cost method. These shares are not retired and are considered
issued but not outstanding. The following table shows the changes in treasury stock for the periods presented:
Schedule
of Treasury Stock
| |
Nine Months Ended | |
| |
September 30, 2022 | |
Balance, beginning of period | |
| - | |
Repurchases of common stock | |
| 3,414,326 | |
Balance, end of period | |
| 3,414,326 | |
Note
14 – Subsequent Events
The
Company evaluated subsequent events pursuant to ASC Topic 855 and determined that there are no subsequent events to be reported.