Item
1. Financial Statements
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,176,565
|
|
|
$
|
3,534,454
|
|
|
Other receivables
|
|
|
2,597
|
|
|
|
—
|
|
|
Inventory
|
|
|
—
|
|
|
|
9,068
|
|
|
Prepaid expenses
|
|
|
211,719
|
|
|
|
908,352
|
|
|
Total current assets
|
|
|
2,390,881
|
|
|
|
4,451,874
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
140,122
|
|
|
|
165,567
|
|
|
Investment in joint venture
|
|
|
182,392
|
|
|
|
44,885
|
|
|
Total other assets
|
|
|
322,514
|
|
|
|
210,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,713,395
|
|
|
$
|
4,662,326
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
66,669
|
|
|
$
|
40,819
|
|
|
Accrued expenses
|
|
|
95,110
|
|
|
|
96,645
|
|
|
Accrued expenses (related party)
|
|
|
120,000
|
|
|
|
—
|
|
|
Notes payable net of discount of $130,988 and $0
|
|
|
1,869,012
|
|
|
|
—
|
|
|
Deferred income-current
|
|
|
39,184
|
|
|
|
10,792
|
|
|
Total current liabilities
|
|
|
2,189,975
|
|
|
|
148,256
|
|
|
Long-term Liabilities, net of current portion
|
|
|
|
|
|
|
|
|
|
Accrued expenses-long-term (related party)
|
|
|
270,000
|
|
|
|
480,000
|
|
|
Deferred income-long-term
|
|
|
126,066
|
|
|
|
183,546
|
|
|
Total long-term liabilities, net of current portion
|
|
|
396,066
|
|
|
|
663,546
|
|
|
Total liabilities
|
|
|
2,586,041
|
|
|
|
811,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY :
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 180,000,000 shares authorized; 12,665,023 and 12,317,184 shares issued and outstanding, respectively.
|
|
|
12,665
|
|
|
|
12,317
|
|
|
Additional paid-in capital
|
|
|
16,860,688
|
|
|
|
16,260,651
|
|
|
Accumulated deficit
|
|
|
(16,745,999
|
)
|
|
|
(12,422,444
|
)
|
|
Total stockholders’ equity
|
|
|
127,354
|
|
|
|
3,850,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,713,395
|
|
|
$
|
4,662,326
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Net sales
|
|
$
|
9,696
|
|
|
$
|
2,598
|
|
|
$
|
29,088
|
|
|
$
|
5,064
|
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
Gross profit
|
|
|
9,696
|
|
|
|
2,598
|
|
|
|
29,088
|
|
|
|
4,762
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
180,257
|
|
|
|
117,078
|
|
|
|
419,410
|
|
|
|
306,921
|
|
|
Administrative and general
|
|
|
1,150,170
|
|
|
|
1,405,955
|
|
|
|
2,880,884
|
|
|
|
2,013,213
|
|
|
Research and development
|
|
|
330,422
|
|
|
|
272,209
|
|
|
|
985,726
|
|
|
|
721,777
|
|
|
Depreciation and amortization
|
|
|
12,616
|
|
|
|
12,416
|
|
|
|
37,634
|
|
|
|
33,228
|
|
|
Total operating expenses
|
|
|
1,673,465
|
|
|
|
1,807,658
|
|
|
|
4,323,654
|
|
|
|
3,075,139
|
|
|
Loss from operations
|
|
|
(1,663,769
|
)
|
|
|
(1,805,060
|
)
|
|
|
(4,294,566
|
)
|
|
|
(3,070,377
|
)
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,520
|
|
|
|
—
|
|
|
|
17,361
|
|
|
|
—
|
|
|
Interest expense
|
|
|
(48,857
|
)
|
|
|
(14,801
|
)
|
|
|
(48,857
|
)
|
|
|
(310,233
|
)
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(2,072,365
|
)
|
|
|
—
|
|
|
|
(2,072,365
|
)
|
|
Loss on disposition of assets
|
|
|
—
|
|
|
|
(1,281
|
)
|
|
|
—
|
|
|
|
(1,281
|
)
|
|
Gain on equity method investment in joint venture
|
|
|
67,961
|
|
|
|
—
|
|
|
|
2,507
|
|
|
|
—
|
|
|
Total other expense
|
|
|
22,624
|
|
|
|
(2,088,447
|
)
|
|
|
(28,989
|
)
|
|
|
(2,383,879
|
)
|
|
Loss before income taxes
|
|
|
(1,641,145
|
)
|
|
|
(3,893,507
|
)
|
|
|
(4,323,555
|
)
|
|
|
(5,454,256
|
)
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net loss
|
|
$
|
(1,641,145
|
)
|
|
$
|
(3,893,507
|
)
|
|
$
|
(4,323,555
|
)
|
|
$
|
(5,454,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
12,356,316
|
|
|
|
11,751,649
|
|
|
|
12,341,482
|
|
|
|
10,512,327
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,323,555
|
)
|
|
$
|
(5,454,256
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
570,385
|
|
|
|
675,966
|
|
|
Accretion of notes payable discount
|
|
|
—
|
|
|
|
84,101
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
2,072,365
|
|
|
Loss on disposition of assets
|
|
|
—
|
|
|
|
1,281
|
|
|
Gain of equity method investment
|
|
|
(2,507
|
)
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
37,634
|
|
|
|
33,228
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in deferred income
|
|
|
(29,088
|
)
|
|
|
196,936
|
|
|
Decrease in prepaid and other assets
|
|
|
694,036
|
|
|
|
114,279
|
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
(66,306
|
)
|
|
|
57,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,119,401
|
)
|
|
|
(2,218,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,500
|
)
|
|
|
(90,958
|
)
|
|
Investment in joint venture
|
|
|
(135,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(137,500
|
)
|
|
|
(90,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of equity
|
|
|
30,000
|
|
|
|
7,071,192
|
|
|
Proceeds from the issuance of debt
|
|
|
2,000,000
|
|
|
|
—
|
|
|
Payment of deferred debt acquisition costs
|
|
|
(130,988
|
)
|
|
|
—
|
|
|
Principal payments on debt (related party)
|
|
|
—
|
|
|
|
(41,500
|
)
|
|
Payment of deferred offering costs
|
|
|
—
|
|
|
|
(1,093,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,899,012
|
|
|
|
5,936,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(1,357,889
|
)
|
|
|
3,626,501
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
3,534,454
|
|
|
|
998,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
2,176,565
|
|
|
$
|
4,625,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
26,000
|
|
|
$
|
73,523
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Warrants issued for services
|
|
$
|
—
|
|
|
$
|
256,198
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
CO
– DIAGNOSTICS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018
(Unaudited)
Note
1 - Basis of Presentation
The
accompanying unaudited condensed 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. 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-month periods ended September 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2018. These statements should be read in conjunction
with the Company’s audited financial statements and related notes for the year ended December 31, 2017, included in the
Company’s Annual Report on Form 10-K filed on March 28, 2018.
Certain
2017 financial statement amounts have been reclassified to conform to 2018 presentations.
Description
of Business
Co-Diagnostics,
Inc. (“we,” “our,” the “Company” or “CDI”), a Utah corporation headquartered in
Salt Lake City, Utah, is a molecular diagnostics company formed in April 2013 that develops, manufactures and markets a new, state-of-the-art
diagnostics technology.
CDI’s
diagnostics systems are designed to enable very rapid, low-cost, sophisticated molecular testing for organisms and genetic diseases
by greatly automating historically complex procedures in both the development and administration of tests. CDI’s newest
technical advance involves a novel approach to Polymerase Chain Reaction (“PCR”) primer design (CoPrimers™)
that eliminates one of the key vexing issues of PCR amplification, the exponential growth of primer-dimer pairs which adversely
interferes with identification of the target DNA. In addition, CDI scientists have enhanced the understanding of the mathematics
of DNA test design, so as to “engineer” a DNA test and automate algorithms to screen millions of possible designs
to optimize DNA test design. CDI’s proprietary platform of Co-Dx™ technologies integrates and streamlines these steps
as it analyzes biological samples.
Co-Diagnostics’
portfolio of molecular diagnostics development products and tests represents a new advancement in the understanding of the molecular
interactions of DNA. The Company uses highly specialized, proprietary cooperative-theory mathematics that may lead to a revolutionary
leap forward in the detection of infectious diseases, genetic disorders and other conditions. CoDx™ tests are a fraction
of the cost of other DNA-based tests, designed for a new generation of affordable, mobile point-of-care diagnostic devices and
compatible with many other devices, creating opportunities for state-of-the-art diagnostics available anywhere in the world, including
developing countries.
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.
The
Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition
period provided for in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting
standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply
to private companies.
In
March 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-08, Receivables – Nonrefundable Fees
and Other Costs (Subtopic 310-20). The amendments in this update shorten the amortization period for certain callable debt securities
held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments
do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For
public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019, for public EGC companies like us. This update is not expected to have a significant
impact on the Company’s financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments, to clarify guidance on the presentation and classification of certain cash receipts and payments in the statement
of cash flows. This update was issued with the intent of reducing diversity in practice with respect to eight types of cash flows.
This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,
for public EGC companies like us. The update is not expected to have a significant impact on the Company’s financial statements.
In
February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), which requires recognition of leased assets and liabilities
on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual periods and
interim periods with those periods beginning after December 15, 2019, for public EGC companies like us. Management is currently
evaluating the impact that the updated standard will have on its consolidated financial statements and related disclosures.
In
May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)” which supersedes the
revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and requires entities to recognize revenue
in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. Additional revenue recognition updates were also
issued in 2016 and 2017, which further clarified certain aspects of the new revenue recognition guidance. The new authoritative
guidance is effective for interim and annual periods beginning after December 15, 2018, for public EGC companies like us. The
guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(the modified retrospective method). The Company is in the process of determining the method of adoption, but the update is not
expected to have a significant impact on the Company’s financial statements since the Company’s revenue is currently
immaterial.
Note
2 - Significant Accounting Policies
Earnings
(Loss) per Share
Basic
earnings or loss per common share is computed by dividing net income or loss applicable to common shareholders by the weighted
average number of shares outstanding during each period. As the Company experienced net losses during the three and nine months
ended September 30, 2018, and 2017, respectively, no common stock equivalents have been included in the diluted earnings per common
share calculations as the effect of such common stock equivalents would be anti-dilutive. For the three and nine months ended
September 30, 2018, there were 1,606,242 potentially dilutive shares consisting of 1,172,707 outstanding options and 433,535 outstanding
warrants. For the three and nine months ended September 30, 2017, there were 1,028,969 potentially dilutive shares consisting
of 322,707 outstanding options and 706,262 outstanding warrants.
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
3 – Notes Payable
On
August 3, 2018, we entered into a Note Purchase Agreement with Robert Salna, an existing shareholder of the Company and prior
investor in the Company’s convertible debt securities. Pursuant to the agreement, the Company issued to Mr. Salna a Promissory
Note, dated August 3, 2018, in the principal amount of $2,000,000 (the “Note”) in exchange for a loan to the
Company of equal principal amount.
The
Note bears interest at the rate of nine percent (9.0%) per annum, payable quarterly in arrears. The maturity date of the Note
is July 31, 2019. All unpaid principal and accrued interest on the Note will become due and payable on the maturity date. The
Note is unsecured and provides for a default interest rate of eighteen percent (18.0%) per annum. The note is repayable in Canadian
dollars with a minimum of 2.6 million in Canadian dollars due at maturity. For the three and nine months ended September 30, 2018,
we included $26,000 in interest expense.
At
December 31, 2017 and September 30, 2017, we had no outstanding notes payable. However, for the three and nine months ended September
30, 2017, we included $14,801 and $310,233, respectively, of interest expense for notes outstanding prior to September 30, 2017.
Note
4 – Stock-based Compensation
Stock
Incentive Plans
The
Co-Diagnostics, Inc. 2015 Long Term Incentive Plan reserves an aggregate of 6,000,000 shares. The number of unissued stock options
authorized under the plan at September 30, 2018 was 4,827,293.
Stock
Options
There
were 850,000 options granted to nine employees in the three and nine months ended September 30, 2018 valued at $1,070,859. There
were 61,335 options granted to three independent members of our Board of Directors in the three and nine months ended September
30, 2017 valued at $97,474. We recognize the value of granted options over the vesting period of each option. The Black-Scholes
valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and expected
option term. In determining the expected volatility our computation is based the stock prices of 3 comparable companies and is
based on a combination of historical and market-based implied volatility. The risk-free interest rate was based on the yield curve
of a zero-coupon U.S. Treasury bond on the date the option was issued with a maturity equal to the expected term of the
option. The fair values for the options granted were estimated at the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions:
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
Risk free interest rate
|
|
|
3.07
|
%
|
|
|
1.53
|
%
|
|
Expected life (in years)
|
|
|
10.0
|
|
|
|
5.0
|
|
|
Expected volatility
|
|
|
64.12
|
%
|
|
|
45.54
|
%
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Stock price
|
|
$
|
2.63
|
|
|
$
|
3.85
|
|
The
weighted average fair value of options granted during the nine months ended September 30, 2018 and 2017 was $1.93 and $1.59 per
share, respectively.
Included
in stock-based compensation for the three and nine months ended September 30, 2018, the Company recognized expense of $380,445
recorded in our general and administrative department for 850,000 options granted to nine employees.
Included
in stock-based compensation for the nine months ended September 30, 2017, the Company recognized expense of $111,068 recorded
in our general and administrative department (i) $97,474 for 61,335 options granted to three members of our board of directors
and (ii) $13,594 for options vesting which had been granted prior to January 1, 2017.
Included
in stock-based compensation for the three months ended September 30, 2017, the Company recognized expense of $103,672 recorded
in our general and administrative department (i) $97,474 for 61,335 options granted to three members of our board of directors
and (ii) $6,198 for options vesting which had been granted prior to January 1, 2017.
The
following table summarizes option activity during the nine months and year ended September 30, 2018 and December 31, 2017, respectively.
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
|
Outstanding at January 1, 2017
|
|
|
261,372
|
|
|
$
|
0.55
|
|
|
$
|
0.49
|
|
|
|
8.63
|
|
|
Options granted
|
|
|
61,335
|
|
|
|
3.85
|
|
|
|
1.59
|
|
|
|
4.60
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at December 31, 2017
|
|
|
322,707
|
|
|
$
|
1.29
|
|
|
$
|
0.70
|
|
|
|
7.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
850,000
|
|
|
|
2.63
|
|
|
|
1.24
|
|
|
|
9.98
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,172,707
|
|
|
$
|
2.23
|
|
|
$
|
1.09
|
|
|
|
8.97
|
|
Warrants
The
Company estimates the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model.
The Company amortizes the fair value of issued warrants using a vesting schedule based on the terms and conditions of each warrant.
The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest
rate and expected warrant term. In determining the expected volatility our computation is based on the stock prices of
three comparable companies and on a combination of historical and market-based implied volatility. The risk-free interest
rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the warrant was issued with a maturity
equal to the expected term of the warrant.
There
were no warrants issued in the nine months ended September 30, 2018. There were 595,133 warrants issued in the nine months ended
September 30, 2017. The fair values for the warrants issued were estimated at the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions:
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
Risk free interest rate
|
|
|
1.89
|
%
|
|
Expected life (in years)
|
|
|
4.7
|
|
|
Expected volatility
|
|
|
46.80
|
%
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
Stock price
|
|
$
|
2.98
|
|
The
weighted average fair value of warrants issued during the nine months ended September 30, 2017 was $1.74 per share.
Included
in stock-based compensation for both the three and nine months ended September 30, 2017, the Company recognized expense of $256,198
recorded in our general and administrative department for 297,727 warrants issued to two companies for services rendered.
The
following table summarizes warrant activity during the nine months and year ended September 30, 2018 and December 31, 2017, respectively.
|
|
|
Warrants
Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Fair Value
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
|
Outstanding at January 1, 2017
|
|
|
111,129
|
|
|
|
8.25
|
|
|
|
0.11
|
|
|
|
4.91
|
|
|
Warrants issued
|
|
|
595,133
|
|
|
|
2.91
|
|
|
|
1.74
|
|
|
|
4.28
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at December 31, 2017
|
|
|
706,262
|
|
|
$
|
3.27
|
|
|
$
|
1.48
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
272,727
|
|
|
|
0.64
|
|
|
|
0.54
|
|
|
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
433,535
|
|
|
$
|
5.26
|
|
|
$
|
2.08
|
|
|
|
3.37
|
|
The
following table summarizes information about stock options and warrants outstanding at September 30, 2018.
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
|
|
|
Weighted
Average
|
|
|
|
|
|
Weighted
Average
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Contractual
Life (years)
|
|
|
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Exercise
Price
|
|
|
$
|
0.55
|
|
|
|
261,372
|
|
|
|
6.88
|
|
|
$
|
0.55
|
|
|
|
261,372
|
|
|
$
|
0.55
|
|
|
|
2.00-3.85
|
|
|
|
936,335
|
|
|
|
9.42
|
|
|
|
2.69
|
|
|
|
369,668
|
|
|
|
2.79
|
|
|
|
5.10-7.20
|
|
|
|
408,535
|
|
|
|
3.34
|
|
|
|
5.46
|
|
|
|
408,535
|
|
|
|
5.46
|
|
|
$
|
0.11-7.20
|
|
|
|
1,606,242
|
|
|
|
7.46
|
|
|
$
|
3.05
|
|
|
|
1,039,575
|
|
|
$
|
3.27
|
|
Total
unrecognized stock-based compensation was $707,929 at September 30, 2018 of which (i) $34,823 was for stock issued
for services to be provided and ii) $673,106 was for options granted. The Company expects to recognize the aggregate amount of
this compensation expense over the next years in accordance with contractual provisions and vesting as follows:
|
Year
|
|
Amount
|
|
|
2018
|
|
$
|
110,760
|
|
|
2019
|
|
|
363,038
|
|
|
2020
|
|
|
234,131
|
|
|
Total
|
|
$
|
707,929
|
|
Note
5 – Related Party Transactions
The
Company acquired the exclusive rights to the CoPrimer technology pursuant to a license agreement dated April 2014, between us
and DNA Logix, Inc., which was assigned to Dr. Brent Satterfield, one of our current executive officers and directors,
prior to our 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 we began in January to pay $700,000 of accrued royalties
at the rate of $10,000 per month. For the nine months ended September 30, 2018 and 2017, the Company included $0 and $107,500,
respectively as an expense for this license agreement in research and development. For the three months ended September 30, 2018
and 2017, the Company included no expense for this license agreement. At September 30, 2018, the aggregate balance of this related
party liability was $390,000.
Prior
to July 12, 2017, the Company financed operations partly through short-term loans with related parties and through the deferral
of payment to related parties for expenses incurred. At December 31, 2017, the Company accrued $480,000 in expenses for technology
royalties payable to Dr. Satterfield.
Note
6 – Lease Obligations
Our
offices are located at 2401 S. Foothill Dr., Suite D, Salt Lake City, Utah 84109-1479. On June 18, 2018, the Company entered into
an addendum with our landlord for additional space. The new aggregate space consists of approximately 10,273 square feet and is
leased under a multi-year contract at a rate of $14,086 per month expiring on January 31, 2020. For the three and nine months
ended September 30, 2018, the Company expensed $46,539 and $122,165, respectively, for rent. For the three and nine months ended
September 30, 2017, the Company expensed $18,900 and $44,583, respectively, for rent. The Company’s lease rent obligation
is as follows:
|
Year
|
|
Amount
|
|
|
2018
|
|
$
|
154,147
|
|
|
2019
|
|
|
169,033
|
|
|
2020
|
|
|
14,086
|
|
|
Total
|
|
$
|
337,266
|
|
Note
7 – Subsequent Events
On
June 14, 2017, the Company entered into an Exclusive License Agreement with DNA Logix-Canada, Ltd., under the terms of which the
Company exclusively licensed the right to market and sell various of the Company’s tests for mosquito borne diseases in
Cuba, Brazil, and Canada in consideration of a $200,000 license fee. In 2018, the Company and the licensee jointly
determined to terminate the license, which is in the best interests of the Company because it allows the Company
to retain marketing and sales control of its tests. Pursuant to an Asset Purchase Agreement dated October
2, 2018, the Company terminated the license and acquired all of the marketing and sales contacts made by the licensee in consideration
of the issuance of 249,360 shares of common stock and the issuance of a warrant to acquire 50,000 shares of common stock at an
exercise price of $2.00 per share. The warrant has a five-year life. The licensee will remain a non-exclusive distributor
of the Company’s tests in Cuba.
In
October 2018, the Company entered into an exclusive license
agreement with LGC Biosearch Technologies, Inc. pursuant to which, the Company licensed the right to make, use and sell PCR tests
for the AgBio field primarily to detect genetic sequences in seed products for the licensee’s customers and for research.
The Company retains the right to design all such tests and intends to derive revenue from such design services.
The
Company evaluated subsequent events pursuant to ASC Topic 855 and has determined that there are no additional events that need
to be reported.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements reflect the current
view about future events. When used in this Quarterly Report, the words “anticipate,” “believe,” “estimate,”
“expect,” “future,” “intend,” “plan,” or the negative of these terms and similar
expressions, identify forward-looking statements. Such statements, include, but are not limited to, statements contained in this
Quarterly Report relating to our portfolio of products and tests, molecular diagnostics technologies, future opportunities, sales
plans, product offerings, CE mark designations and estimated costs, business strategy, additional investment capital, future
revenue, expenses and operating results, and liquidity and capital resources. Forward-looking statements are based on our current
expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements
relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.
Our actual results may differ materially from those contemplated or anticipated by the forward-looking statements. They are neither
statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any
of these forward-looking statements. 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;
|
|
|
|
|
|
|
●
|
our
continued losses and concerns relating to our financial uncertainty;
|
|
|
|
|
|
|
●
|
market
acceptance of any products that may be approved for commercialization;
|
|
|
|
|
|
|
●
|
ineffective
internal disclosure, operational and financial control systems;
|
|
|
|
|
|
|
●
|
our
ability to protect our intellectual property rights;
|
|
|
|
|
|
|
●
|
the
impact of any infringement actions or other litigation brought against us;
|
|
|
|
|
|
|
●
|
competition
from other providers, products and technologies;
|
|
|
|
|
|
|
●
|
our
ability to develop and commercialize new and improved molecular diagnostic products and services;
|
|
|
|
|
|
|
●
|
dependence
on the sales efforts of others;
|
|
|
|
|
|
|
●
|
our
ability to hire and retain specialized and key personnel;
|
|
|
|
|
|
|
●
|
changes
in government regulation; and
|
|
|
|
|
|
|
●
|
other
factors, including the risks contained in the “Risk Factors” section of our Registration Statement on Form
S-3 (Registration No. 333-226835) filed with the Securities and Exchange Commission (the “Commission”)
on August 14, 2018.
|
Should
one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results
may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors
or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict
all of them. We cannot guarantee future results, levels of activity, performance or achievements. Each forward-looking statement
speaks only as of the date on which it is made. Except as required by applicable law, including the securities laws of the United
States, we do not intend to update any of the forward-looking statements to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of future events or developments.
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
Co-Diagnostics,
Inc. (“we,” “our,” the “Company” or “CDI”) is a molecular diagnostics company
that develops, manufactures and markets a new, state-of-the-art diagnostics technology. Our technology is utilized for tests that
are designed to identify infectious disease and other conditions using the detection and/or analysis of nucleic acid molecules
(DNA or RNA). We also use our proprietary technology to design specific tests to locate genetic markers for use in industries
other than infectious disease and license the use of those tests to specific customers. One of those other industries is the
AgBio industry as discussed below.
On
October 30, 2018, we announced the entry into an Exclusive License Agreement with LGC, Biosearch Technologies, a global leader
in the design, development, and manufacture of sophisticated, custom oligonucleotide-based tools and associated reagents for applied
markets, relating to the use of our
CoPrimer™ technology for both research and commercial applications
in the AgBio industry. The license was the culmination of a research project with one of the licensee’s customers that was
active over the past year verifying the effectiveness of the CoPrimer tests and test design.
CDI’s diagnostics systems are designed to enable very rapid, low-cost, sophisticated molecular testing
for organisms and genetic diseases by greatly automating historically complex procedures in both the development and administration
of tests. CDI’s newest technical advance involves a novel approach to Polymerase Chain Reaction (“PCR”) primer
design that eliminates one of the key vexing issues of PCR amplification, the exponential growth of primer-dimer pairs which adversely
interferes with identification of the target DNA. In addition, CDI scientists have enhanced the understanding of the mathematics
of DNA test design, so as to “engineer” a DNA test and automate algorithms to screen millions of possible designs to
optimize DNA test design. CDI’s proprietary platform of Co-Dx™ technologies integrates and streamlines these steps
as it analyzes biological samples.
Co-Diagnostics’
portfolio of molecular diagnostics development products and tests represents a new advancement in the understanding of the molecular
interactions of DNA. The Company uses highly specialized, proprietary cooperative-theory mathematics that may lead to a revolutionary
leap forward in the detection of infectious diseases, genetic disorders and other conditions. CoDx™ tests are a fraction
of the cost of other DNA-based tests, designed for a new generation of affordable, mobile point-of-care diagnostic devices and
compatible with many other devices, creating opportunities for state-of-the-art diagnostics available anywhere in the world, including
developing countries.
Dr.
Brent Satterfield, our Chief Science Officer, created the Company’s suite of intellectual properties. Our technologies
are now protected by six granted or pending U.S. patents, as well as certain trade secrets and copyrights. Our platform allows
us to avoid paying existing patent royalties required by other PCR test systems, which has the potential of allowing CDI to sell
diagnostic tests at a lower cost than competitors, while maintaining profit margins.
Using
its proprietary test design system and proprietary reagents, CDI will design and plans to sell PCR diagnostic tests for diseases
and pathogens starting with tests for tuberculosis, a drug resistant tuberculosis test, hepatitis B and C, Malaria, dengue, HIV
and Zika virus, all of which tests have been designed and verified in CDI’s laboratory.
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
Product
Offering
Caribbean
and Central and South America
Our
initial sales will be to entities within the Caribbean Public Health Agency Member States (Anguilla, Antigua and Barbuda, Aruba,
Bahamas, Barbados, Belize, Bermuda, BES Islands, British Virgin Islands, Cayman Islands, Curacao, Dominica, Grenada, Haiti, Guyana,
Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, St Maarten, Saint Vincent and the Grenadines, Suriname, Trinidad and
Tobago, Turks and Caicos Islands). In some of these countries, there are no regulatory hurdles and we can start offering our tests
immediately.
The
U.S. Food and Drug Administration (“FDA”) has granted permission for us to export certain of our tests. 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 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. Section 801(e) applies to medical devices that are acceptable to the importing
country and that are manufactured under the FDA’s Good Manufacturing Practices.
We
expect to offer our Zika test in this region first because of the demand for such test followed by tests for tuberculosis, hepatitis
B and C, dengue and then our full range of tests.
India
The
Company has entered into an agreement to manufacture diagnostics tests for seven infectious diseases with a pharmaceutical manufacturing
company in India. The agreement provides for the manufacture of the five tests named above and malaria and HIV and the joint sales
and marketing of those tests in India.
Since
the tests will be conducted in India on Indian citizens, no FDA approval or inspection will be required. Certain Indian regulatory
approval from the Central Drugs Standard Control Organization must be acquired. We are engaging the services of an experienced
consultant in India to help us get through this process. Research Use Only reagents are able to be sold without requiring regulatory
approval as long as they are labeled and designated as such.
India
is the country with the highest burden of tuberculosis. According to the World Health Organization, 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).
Europe
Most
molecular tests, such as our tests, are governed in Europe by the European Union’s 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.
Examples of current obligations include having in place a qualitative manufacturing process, user instructions that are clear
and fit for purpose, and 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. In July 2018, we received notification that our test for tuberculosis had
received a CE Mark designation and is available for sale in all countries that accept the CE Mark as approval for distribution.
We
have received ISO 13485 and ISO 9001 certifications relating to the design and manufacture of certain of our 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 in each country. We have CE-marked our Zika and tuberculosis tests and expect to soon have CE
marking for a malaria test and a tri-plex test for dengue, Zika and Chikingunya. We estimate the remaining costs
for CE-marks to be approximately $100,000.
United
States
We
do not anticipate offering our tests in the United States in the near future. We believe, however, our tests may be able to qualify
as Laboratory Developed Tests (“LDTs”), diagnostic tests that are developed and manufactured by Clinical Laboratory
Improvement Amendments (“CLIA”) certified laboratories. These tests are developed by the lab for use only in that
laboratory. CLIA laboratories develop the performance characteristics, perform the analytical validation for their LDTs 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 previously published 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 LDTs regulation.
Market
Opportunity
The
molecular diagnostics market is a fast-growing portion of the in vitro (test tube based, controlled environment) diagnostics market.
There are several advantages of molecular tests over other forms of diagnostic testing, which include higher sensitivities, the
ability to perform multiplex tests and the ability to test for drug resistance or individual genes.
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 (“PTO”), including our CoPrimer patent, which we consider our most important technology. Our Rapid Probe patent
has been issued in England, but as of September 30, 2018, it is pending in the U.S. and foreign counterpart applications. In addition,
we filed a new patent concerning SNP detection and multiplexing in October, 2018. 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.
RESULTS
OF OPERATIONS
Results
of Operations for the Nine Months ended September 30, 2018 and 2017
Net
Sales
For
the nine months ended September 30, 2018, we generated $29,088 of net sales compared to net sales of $5,064 in the nine months
ended September 30, 2017. The revenue in 2018 represented a license fee for licensing our Zika tests and certain other Flaviviruses
to a Canadian company for limited distribution. The net sales in 2017 represented the license fee for a limited period of time
and, to a lesser degree, the remainder was rental revenue for the lease of our portable lab.
Cost
of Sales
For
the nine months ended September 30, 2018, we recorded no cost of sales. For the nine months ended September 30, 2017, we recorded
cost of sales of $302 related to the portable lab leased to a customer.
Operating
Expenses
We
incurred total operating expenses of $4,323,654 for the nine months ended September 30, 2018 compared to total operating expenses
of $3,075,139 for the nine months ended September 30, 2017. The increase of $1,248,515 was due primarily to increased business
activities following the completion of our initial public offering in July, 2017. There was an increase in general and
administrative expenses of $867,671, an increase of $263,949 in our research and development expenses and an increase in sales
and marketing expenses of $112,489. Depreciation and amortization expense also increased $4,406 as a result of the purchase of
additional equipment.
General
and administrative expenses increased $867,671 from $2,013,213 for the nine months ended September 30, 2017 to $2,880,884 for
the nine months ended September 30, 2018. The increase was primarily the result of the following increases related primarily
to becoming a publicly traded company: an increase of $380,003 in independent consulting expenses, an increase of $340,908
in salaries and related benefits, an increase of $264,377 in stock option and warrant expense, $90,178 in legal
and other professional expenses, an increase of $82,500 in directors’ fees, and an increase of $22,516 in
office rent incident to moving into our current offices. The increases in expenses were partially offset by a decrease
of $282,664 in other professional services and a decrease of $44,745 in licenses and fees.
Our
sales and marketing expenses for the nine months ended September 30, 2018 were $419,410 compared to sales and marketing expenses
of $306,921 for the nine months ended September 30, 2017. The increase of $112,489 was due primarily to an increase of
$70,061 in salary and related benefits expense, an increase of $18,548 in office rent, an increase of $15,400 in consulting fees,
an increase of $11,740 in postage and delivery, and an increase of $8,209 in travel expenses; all of which were
partially offset by a decrease of $11,558 in advertising and promotion expenses.
Our
research and development expenses increased by $263,949 from $721,777 for the nine months ended September 30, 2017 to $985,726
for the nine months ended September 30, 2018. The increase was primarily due to an increase of $113,215 in payroll and employee
related expenses, an increase of $128,173 in lab, consulting and other professional services, an increase of $74,418 in lab supplies,
and an increase in building rent and equipment lease expense of $45,519. These increases were partially offset by a decrease in
technology royalties expense of $107,500.
Interest
Expense
For
the nine months ended September 30, 2018, we incurred interest expense of $48,857 compared to $310,233 for the nine
months ended September 30, 2017. The decrease of $261,376 was the result of having all of our indebtedness retired
incident to the funding of our initial public offering and having no debt for the majority of the nine-month period
ended September 30, 2018. In August of 2018, we entered into a one year note in the principal amount of
$2,000,000 bearing interest at the rate of 9% per annum that is currently outstanding. We also realized interest income of
$17,361 from the investment of funds not used in the operations of the business.
Net
Loss
We
realized a net loss for the nine months ended September 30, 2018 of $4,323,555 compared with a net loss for the nine months ended
September 30, 2017 of $5,454,256. The decrease in net loss of $1,130,701 was primarily the result of realizing a loss of $2,072,365
on the extinguishment of debt incident to the retirement of all of our outstanding debt at the time of our initial public offering
in 2017 through conversion of the debt to common stock. The decrease in loss occasioned by the extinguishment of debt and
the decrease in interest expense of $261,376, was partially offset by the increase in operating expenses of $1,248,515
as explained above.
Results
of Operations for the Three Months ended September 30, 2018 and 2017
Net
Sales
For
the three months ended September 30, 2018, we generated $9,696 of net sales compared to net sales of $2,598 in the three months
ended September 30, 2017. The revenue in 2018 represented a license fee for licensing our Zika tests and certain other Flaviviruses
to a Canadian company for limited distribution. The net sales in 2017 represented rental revenue for the lease of our portable
lab.
Cost
of Sales
For
the three months ended September 30, 2018, and the three months ended September 30, 2017, we recorded no cost of sales.
Operating
Expenses
We
incurred total operating expenses of $1,673,465 for the three months ended September 30, 2018 compared to total operating expenses
of $1,807,658 for the three months ended September 30, 2017. The decrease of $134,193 was due primarily to a decrease other professional
services in our general and administrative expenses. There was a decrease in general and administrative expenses of $255,786,
partially offset by an increase of $58,215 in our research and development expenses and an increase in sales and marketing expenses
of $63,179.
General
and administrative expenses decreased $255,785 from $1,405,955 for the three months ended September 30, 2017 to $1,150,170 for
the three months ended September 30, 2018. The decrease was primarily the result of a decrease of $474,600 for investor
relations professionals with whom we consulted in 2017 following our initial public offering, and a decrease of $122,766
in consulting fees. These decreases were partially offset by an increase of $276,773 in option and warrant expenses,
an increase of $97,182 in legal, accounting and other professional services, and an increase in office rent $6,847
incident to moving into our current offices.
Our
sales and marketing expenses for the three months ended September 30, 2018 were $180,257 compared to sales and marketing expenses
of $117,078 for the three months ended September 30, 2017. The increase of $63,179 was due primarily to an increase of
$34,624in salary and related benefits expense related to the addition of sales personnel, an increase of $8,752 in office
rent and an increase of $15,095 in consulting expenses for sales professionals in other countries.
Our
research and development expenses increased by $58,213 from $272,209 for the three months ended September 30, 2017 to $330,422
for the three months ended September 30, 2018. The increase was primarily due to an increase of $22,030 in consulting expenses
for a research scientist engaged for a development project, an increase of $9,798 in other professional services and an increase
in building rent and equipment lease expense of $14,130.
Interest
Expense
For
the three months ended September30, 2018, we incurred interest expense of $48,857 compared to interest expense for the three months
ended September 30, 2017 of $14,801. The increase of $34,056 was the result of borrowing $2,000,000 in August, 2018 compared to
having all of our indebtedness retired in July, 2017 incident with the funding of our initial public offering. We also realized
interest income of $3,520 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 September 30, 2018 of $1,641,145 compared with a net loss for the three months
ended September 30, 2017 of $3,893,507. The decrease in net loss of $2,252,362 was primarily the result of realizing a loss of
$2,072,365 on the extinguishment of debt incident to the retirement of our outstanding debt at the time of our initial public
offering in 2017 through conversion of the debt to common stock. In addition, we realized a gain of $67,961 from our Indian
joint venture due to audit adjustments recorded by Indian auditors capitalizing certain expenses previously reported. The decrease
in net loss was partially offset by the increase of $134,193 in operating expenses explained above and the increase of $34,056
in interest expense 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.
To
date, we have financed our operations primarily through sales of common stock and the issuance of debt, including
convertible debt.
At
September 30, 2018, we had cash and cash equivalents of $2,176,565, total current assets of $2,390,881, total current liabilities
of $2,189,975 and total stockholders’ equity of $127,354. At December 31, 2017, we had cash and cash equivalents of $3,534,454,
total current assets of $4,451,874, total current liabilities of $148,256 and total stockholders’ equity of $3,850,524.
We
experienced negative cash flow from operations during the nine months ended September 30, 2018 of $3,119,401 compared to negative
cash flow from operations for the nine months ended September 30, 2017 of $2,218,965. The negative cash flow was met by cash reserves
remaining from the issuance of common stock incident to the completion of our initial public offering and the issuance of a $2,000,000
one-year loan, which bears interest payable quarterly. Of the net proceeds of our initial public offering, we have spent approximately
$1,500,000 in research and development, $650,000 in sales and marketing, and $3,900,000 in general and administration expenses.
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. Our liquidity and operating results will also depend on the amount of revenue
generated. We expect our operating losses will continue until we are able to generate significant levels of revenue. Although
licensing fees have enabled us to begin generating revenue in 2018, such revenue has been minimal through September 30, 2018.
Until
our revenues become substantial and our operations become profitable, we will continue to rely on proceeds received from the
sale of common stock and debt securities and other sources of capital. We expect additional investment capital to come
from (i) future sales of our common stock pursuant to our shelf registration of securities covered by our effective
Registration Statement on Form S-3 filed with the Commission and (ii) the private placement of other securities with
investors similar to those that have provided funding in the past.
Our
monthly cash operating expenses, including our technology research and development expenses, were approximately $346,600 per month
during the nine months ended September 30, 2018. Our operating expenses increased significantly upon completion of our initial
public offering as we increased development and sales activities in furtherance of our business plan.
Our
long-term liquidity is dependent upon execution of our business model and the realization of substantial 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 $1,000,000 annually for the foreseeable future. This estimate will increase
or decrease depending on specific opportunities and available funding.
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 and net sales fluctuate from period to period.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.