As filed with the Securities and
Exchange Commission on February 13, 2017
(Address, including zip code, and telephone
number, including area code, of Registrant’s principal executive offices)
(Name, address, including
zip code, and telephone number, including area code, of agent for service)
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
RISK FACTORS
A purchase of our shares of Common Stock
is an investment in our securities and involves a high degree of risk. You should carefully consider the risks and uncertainties
and all other information contained in or incorporated by reference in this prospectus. If any of these risks actually occur, our
business, financial condition and results of operations would likely suffer. In that case, the market price of the Common Stock
could decline, and you may lose part or all of your investment in our company. Additional risks of which we are not presently aware
or that we currently believe are immaterial may also harm our business and results of operations.
Risks Relating to Our Business
We have only a limited operating history,
and, as such, an investor cannot assess our profitability or performance based on past results.
We were incorporated in Delaware in April
2009. Initially, our operations were focused on establishing our CLIA-certified laboratory, commercializing our ForeCYTE and FullCYTE
Breast Aspirators and manufacturing our intraductal microcatheters. In December 2015, we sold our laboratory, ceased generating
revenue and refocused our business on the development of novel therapeutics and delivery methods for the treatment of breast cancer
and other breast conditions. Because of our limited operating history, particularly in the area of pharmaceutical development,
our revenue and income potential cannot be based on prior results and is uncertain. Any evaluation of our business and prospects
must be considered in light of these factors and the risks and uncertainties often encountered by companies in the development
stage. Some of these risks and uncertainties include our ability to:
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Obtain successful results from our clinical studies;
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obtain regulatory approvals in the United States and elsewhere for
our pharmaceuticals and intraductal microcatheters we are developing;
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work with contract manufacturers to produce our pharmaceuticals under
development and our intraductal microcatheter in clinical and commercial quantities on acceptable terms and in accordance with
required standards;
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respond effectively to competition;
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manage growth in operations;
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respond to changes in applicable government regulations and legislation;
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access additional capital when required; and
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attract and retain key personnel.
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We may not continue as a going concern.
We have not yet established an ongoing source
of revenue sufficient to cover operating costs and allow us to continue as a going concern. The report issued by our independent
auditors also emphasized our ability to continue as a going concern. Our ability to continue as a going concern is dependent on
obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we
may be unable to develop and commercialize our product offerings or geographic reach and we could be forced to cease operations.
If we do not raise additional capital,
we anticipate liquidity issues in the next three to six months.
For the nine months ended September 30,
2016, we incurred a net loss of $3,845,235 and we had an accumulated deficit of $54,780,098. As of the date of filing this prospectus,
we expect that our existing resources will be sufficient to fund our planned operations for at least the next three to six months.
We have not yet established an ongoing source of revenue sufficient to cover our operating costs and allow us to continue as a
going concern. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until
we become profitable. The revenue we have generated to date consisted of mainly laboratory services; however, we sold our laboratory
business on December 16, 2015 and we currently have no other products and services approved for commercialization. We may not receive
or maintain regulatory clearance for our products and other sources of capital may not be available when we need them or on acceptable
terms. If we are unable to raise in a timely fashion the amount of capital we anticipate needing; we would be forced to curtail
or cease operations.
We will need to raise substantial
additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable
terms.
When we elect to raise additional funds
or when additional funds are required, we may raise such funds from time to time through public or private equity offerings, debt
financings, corporate collaboration and licensing arrangements or other financing alternatives. These financing arrangements may
not be available on acceptable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms
acceptable to us, we will be prevented from developing our device and pharmaceutical candidates, pursuing acquisition, licensing,
development and commercialization efforts and our ability to continue operations, generate revenues and achieve or sustain profitability
will be substantially harmed.
If we raise additional funds by issuing
equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment
obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity, including
securities convertible into or exercisable for equity securities, that we raise may contain terms, such as liquidation, conversion
and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue
streams or product candidates or to grant licenses on terms that may not be favorable to us. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when we require it, our business, operating results,
financial condition and prospects could be materially and adversely affected and we may be unable to continue our operations.
Failure to raise additional capital
as needed could adversely affect us and our ability to develop our products.
We expect to spend substantial amounts of
capital to:
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develop our pharmaceutical and microcatheter programs under development;
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perform clinical studies for the pharmaceuticals and microcatheters we are developing;
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continue our research and development activities to advance our product pipeline; and
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obtain clinical supplies of the pharmaceuticals and microcatheters we are developing.
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We have not identified other sources for
additional funding, other than our equity line of credit with Aspire Capital, and cannot be certain that additional funding will
be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on acceptable
terms, we may have to significantly delay, scale back or discontinue the commercialization of our products and services or our
research and development activities. Furthermore, such lack of funds may inhibit our ability to respond to competitive pressures
or unanticipated capital needs, or may force us to reduce operating expenses, which could significantly harm the business and development
of operations. Because our independent auditors have emphasized in their report on our financial statements doubt as to our ability
to continue as a “going concern,” our ability to raise capital may be severely hampered. Similarly, our ability to
borrow any such capital may be more expensive and difficult to obtain until this “going concern” issue is eliminated.
We have a history of operating losses
and we expect to continue to incur losses in the future.
We have a limited operating history and
have incurred net losses each year. Our net losses for the nine months ended September 30, 2016 were $3,845,235. We will continue
to incur further losses in connection with research and development costs for development of our programs, including ongoing and
additional clinical studies.
Our business may be affected by legal
proceedings.
We have been in the past, and may become
in the future, involved in legal proceedings. For example, on October 10, 2013, a securities class action complaint was filed
against us, certain of our directors and officers and the underwriters from our initial public offering. This action was purportedly
brought on behalf of a class of persons and entities who purchased our Common Stock between November 8, 2012 and October 4, 2013,
inclusive. The complaint alleges that the defendants made false or misleading statements. The Company and other defendants
filed motions to dismiss the amended complaint on May 30, 2014. The plaintiffs filed briefs in opposition to these motions on July
11, 2014. The Company replied to the opposition briefs on August 11, 2014. On October 6, 2014 the Court granted defendants’
motion dismissing all claims against us and all other defendants. The Court’s order provided plaintiffs with a deadline of
October 26, 2014 to file a motion for leave to amend their complaint and the plaintiffs did not file such a motion by that date.
On October 30, 2014, the Court entered a final order of dismissal. On November 3, 2014, plaintiffs filed a notice of appeal with
the Court and have appealed the Court’s dismissal order to the U.S. Court of Appeals for the Ninth Circuit. On February 11,
2015, plaintiffs filed their opening appellate brief. Defendants filed their answering brief on April 13, 2015, and plaintiffs
filed their reply brief on May 18, 2015. Oral argument for the appeal has been set to begin on May 9, 2017. Although we believe
this complaint is without merit and plan to defend it vigorously, the costs associated with defending and resolving the complaint
and ultimate outcome cannot be predicted.
On January 28, 2016, we filed a complaint
in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins Healthcare Luxembourg
SARL,
Case No. 1:16-cv-00045-UNA. The complaint asserts claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, and for declaratory relief against Besins. Our Company’s claims arise from Besins’
breach of an Intellectual Property License Agreement dated May 14, 2015 (the “
License Agreement
”), under
which Besins licensed to the Company the worldwide exclusive rights to develop and commercialize Afimoxifene Topical Gel, or AfTG,
for the potential treatment and prevention of hyperplasia of the breast. The complaint seeks compensatory damages, a declaration
of the parties’ rights and obligations under the License Agreement, and injunctive relief. On March 7, 2016 Besins responded
to our complaint by denying our claims and asserting counterclaims including breach of contract, fraud and negligent misrepresentation,
and seeking relief in the forms of compensatory damages, injunctive relief, and declaratory relief. In August 2016, we resolved
and settled this dispute by transferring the Afimoxifene program to Besins for a payment to us of $1.8 million.
You should carefully review and consider
the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business. Civil and
criminal litigation is inherently unpredictable and outcomes can result in excessive verdicts, fines, penalties and/or injunctive
relief that affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, and
considering stockholder demands, is time-consuming for our management and detracts from our ability to fully focus our internal
resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant.
We cannot predict with certainty the outcome of any legal proceedings in which we become involved, and it is difficult to estimate
the possible costs to us stemming from these matters. Settlements and decisions adverse to our interests in legal actions could
result in the payment of substantial amounts and could have a material adverse effect on our cash flow, results of operations,
and financial position.
Raising funds by issuing equity or
debt securities could dilute the value of the Common Stock and impose restrictions on our working capital.
If we raise additional capital by issuing
equity securities, including sales of shares of Common Stock to Aspire Capital pursuant to the Aspire Purchase Agreement, the value
of the then outstanding Common Stock may be reduced. If the additional equity securities are issued at a per share price less than
the per share value of the outstanding shares, then all of the outstanding shares would suffer a dilution in value with the issuance
of such additional shares. Further, the issuance of debt securities in order to obtain additional funds may impose restrictions
on our operations and may impair our working capital as we service any such debt obligations.
The products we may develop may never
achieve significant commercial market acceptance.
We may not succeed in achieving commercial
market acceptance of any of our products. In order to gain market acceptance for the drugs and microcatheters under development,
we will need to demonstrate to physicians and other healthcare professionals the benefits of these therapies including the clinical
and economic application for their particular practice. Many physicians and healthcare professionals may be hesitant to introduce
new services or techniques into their practice for many reasons, including lack of time and resources, the learning curve associated
with the adoption of such new services or techniques into already established procedures, and the uncertainty of the applicability
or reliability of the results of a new product. In addition, the availability of full or even partial payment for our products
and tests, whether by third party payors (e.g., insurance companies), or the patients themselves, will likely heavily influence
physicians’ decisions to recommend or use our products.
The loss of the services of our Chief
Executive Officer could adversely affect our business.
Our success is dependent in large part upon
the ability to execute our business plan, manufacture our pharmaceutical drugs and medical devices, and attract and retain highly
skilled professional personnel. In particular, due to the relatively early stage of our business, our future success is highly
dependent on the services of Steven C. Quay, our Chief Executive Officer and founder, who provides much of the necessary experience
to execute our business plan.
We may experience difficulty in locating,
attracting, and retaining experienced and qualified personnel, which could adversely affect our business.
We will need to attract, retain, and motivate
experienced clinical development and other personnel, particularly in the greater Seattle area as we expand our pharmaceutical
development activities. These employees may not be available in this geographic region. In addition, competition for these employees
is intense and recruiting and retaining skilled employees is difficult, particularly for a development-stage organization such
as ours. If we are unable to attract and retain qualified personnel, our development activities may be adversely affected.
Compounds that appear promising in
research and development may fail to reach later stages of development for a number of reasons, including, among others, that clinical
trials may take longer to complete than expected or may not be completed at all, and top-line or preliminary clinical trial data
reports may ultimately differ from actual results once data are more fully evaluated.
Successful development of anti-cancer and
other pharmaceutical products is highly uncertain, and obtaining regulatory approval to market drugs to treat cancer and other
breast conditions is expensive, difficult, and speculative. Compounds that appear promising in research and development may fail
to reach later stages of development for several reasons, including, but not limited to:
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delay
or failure in obtaining necessary U.S. and international regulatory approvals, or the imposition of a partial or full regulatory
hold on a clinical trial;
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difficulties
in formulating a compound, scaling the manufacturing process, timely attaining process validation for particular drug products,
and completing manufacturing to support clinical studies;
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pricing
or reimbursement issues or other factors that may make the product uneconomical to commercialize;
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production
problems, such as the inability to obtain raw materials or supplies satisfying acceptable standards for the manufacture of our
products;
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equipment
obsolescence, malfunctions or failures, product quality/contamination problems or changes in regulations requiring manufacturing
modifications;
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inefficient
cost structure of a compound, finished drug or device compared to alternative treatments;
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obstacles
resulting from proprietary rights held by others, such as patent rights for a particular compound;
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lower
than anticipated rates of patient enrollment as a result of factors, such as the number of patients with the relevant conditions,
the proximity of patients to clinical testing centers, perceived cost/benefit of participating in the study, eligibility criteria
for tests, and competition with other clinical testing programs;
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preclinical
or clinical testing requiring significantly more time than expected, resources or expertise than originally expected and inadequate
financing, which could cause clinical trials to be delayed or terminated;
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failure
of clinical testing to show potential products to be safe and efficacious, and failure to demonstrate desired safety and efficacy
characteristics in human clinical trials;
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suspension
of a clinical trial at any time by us, an applicable collaboration partner or a regulatory authority on the basis that the participants
are being exposed to unacceptable health risks or for other reasons;
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delays
in reaching or failing to reach agreement on acceptable terms with manufacturers or prospective clinical research organizations,
or CROs, and trial sites; and
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failure
of third parties, such as CROs, academic institutions, collaborators, cooperative groups and/or investigator sponsors, to conduct,
oversee and monitor clinical trials and results.
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In addition, from time to time we expect
to report top-line data for clinical trials. Such data are based on a preliminary analysis of then-available efficacy and safety
data, and such findings and conclusions are subject to change following a more comprehensive review of the data related to the
particular study or trial. Top-line or preliminary data are based on important assumptions, estimations, calculations and information
then available to us to the extent we have had, at the time of such reporting, an opportunity to fully and carefully evaluate such
information in light of all surrounding facts, circumstances, recommendations and analyses. As a result, top-line results may differ
from future results, or different conclusions or considerations may qualify such results once existing data have been more fully
evaluated. In addition, third parties, including regulatory agencies, may not accept or agree with our assumptions, estimations,
calculations or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular
program, the approvability or commercialization of the particular compound and our business in general.
If the development of our products is delayed
or fails, or if top-line or preliminary clinical trial data reported differ from actual results, our development costs may increase
and the ability to commercialize our products may be harmed, which could harm our business, financial condition, operating results
or prospects.
We may not obtain or maintain the
regulatory approvals required to develop or commercialize some or all of our products.
We are subject to rigorous and extensive
regulation by the FDA in the U.S. and by comparable agencies in other jurisdictions, including the European Medicines Agency (the
“
EMA
”) in the E.U.
Our product candidates are currently in
research or development and we have not received marketing approval for our products. Our products may not be marketed in the U.S.
until they have been approved by the FDA and may not be marketed in other jurisdictions until they have received approval from
the appropriate foreign regulatory agencies. Each product candidate requires significant research, development and preclinical
testing and extensive clinical investigation before submission of any regulatory application for marketing approval. Our products
may be considered “combination” products in that they use both medical devices and drugs. For example, our intraductal
microcatheters utilize both a medical device and the drug they are intended to deliver. As a result, the regulatory pathway for
these products may be more complex and obtaining regulatory approvals may be more difficult.
Obtaining regulatory approval requires substantial
time, effort and financial resources, and we may not be able to obtain approval of any of our products on a timely basis, or at
all. The number, size, design and focus of preclinical and clinical trials that will be required for approval by the FDA, the EMA
or any other foreign regulatory agency varies depending on the compound, the disease or condition that the products is designed
to address and the regulations applicable to any particular products. Preclinical and clinical data can be interpreted in different
ways, which could delay, limit or preclude regulatory approval. The FDA, the EMA and other foreign regulatory agencies can delay,
limit or deny approval of a product for many reasons, including, but not limited to:
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a product may not be shown to be safe or effective;
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the clinical and other benefits of a product may not outweigh its
safety risks;
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clinical trial results may be negative or inconclusive, or adverse
medical events may occur during a clinical trial;
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the results of clinical trials may not meet the level of statistical
significance required by regulatory agencies for approval;
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regulatory agencies may interpret data from pre-clinical and clinical
trials in different ways than we do;
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regulatory agencies may not approve the manufacturing process or determine
that the manufacturing is not in accordance with current good manufacturing practices, or cGMPs;
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a product may fail to comply with regulatory requirements; or
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regulatory agencies might change their approval policies or adopt
new regulations.
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If our products are not approved at all
or quickly enough to provide net revenues to defray our operating expenses, our business, financial condition, operating results
and prospects could be harmed.
In the event that we seek and the
FDA does not grant accelerated approval or priority review for a drug or device candidate, we would experience a longer time to
commercialization in the U.S., if commercialized at all, our development costs may increase and our competitive position may be
harmed.
We may in the future decide to seek accelerated
approval pathway for our products. The FDA may grant accelerated approval to a product designed to treat a serious or life-threatening
condition that provides meaningful therapeutic benefit over available therapies upon a determination that the product has an effect
on a surrogate endpoint or intermediate clinical endpoint that is reasonably likely to predict clinical benefit. A surrogate endpoint
under an accelerated approval pathway may be used in cases in which the advantage of a new drug over available therapy may not
be a direct therapeutic advantage, but is a clinically important improvement from a patient and public health perspective. There
can be no assurance that the FDA will agree that any endpoint we suggest with respect to any of our drug candidates is an appropriate
surrogate endpoint. Furthermore, there can be no assurance that any application will be accepted or that approval will be granted.
Even if a product candidate is granted accelerated approval, such accelerated approval is contingent on the sponsor’s agreement
to conduct one or more post-approval confirmatory trials. Such confirmatory trial(s) must be completed with due diligence and,
in some cases, the FDA may require that the trial(s) be designed and/or initiated prior to approval. Moreover, the FDA may withdraw
approval of a product candidate or indication approved under the accelerated approval pathway for a variety of reasons, including
if the trial(s) required to verify the predicted clinical benefit of a product candidate fail to verify such benefit or do not
demonstrate sufficient clinical benefit to justify the risks associated with the drug, or if the sponsor fails to conduct any required
post-approval trial(s) with due diligence.
In the event of priority review, the FDA
has a goal to (but is not required to) take action on an application within a total of eight months (rather than a goal of twelve
months for a standard review). The FDA grants priority review only if it determines that a product treats a serious condition and,
if approved, would provide a significant improvement in safety or effectiveness when compared to a standard application. The FDA
has broad discretion whether to grant priority review, and, while the FDA has granted priority review to other oncology product
candidates, our drug candidates may not receive similar designation. Moreover, receiving priority review from the FDA does not
guarantee completion of review or approval within the targeted eight-month cycle or thereafter.
A failure to obtain accelerated approval
or priority review would result in a longer time to commercialization of the applicable product in the U.S., if commercialized
at all, could increase the cost of development and could harm our competitive position in the marketplace.
Even if our products are successful
in clinical trials and receive regulatory approvals, we may not be able to successfully commercialize them.
The development and ongoing clinical trials
for our drug and device candidates may not be successful and, even if they are, the resulting products may never be successfully
developed into commercial products. Even if we are successful in our clinical trials and in obtaining other regulatory approvals,
the respective products may not reach or remain in the market for a number of reasons including:
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they may be found ineffective or cause harmful side effects;
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they may be difficult to manufacture on a scale necessary for commercialization;
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they may experience excessive product loss due to contamination, equipment
failure, inadequate transportation or storage, improper installation or operation of equipment, vendor or operator error, inconsistency
in yields or variability in product characteristics;
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they may be uneconomical to produce;
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we may fail to obtain reimbursement approvals or pricing that is cost
effective for patients as compared to other available forms of treatment or that covers the cost of production and other expenses;
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they may not compete effectively with existing or future alternatives;
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we may be unable to develop commercial operations and to sell marketing
rights;
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they may fail to achieve market acceptance; or
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we may be precluded from commercialization of a product due to proprietary
rights of third parties.
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If we fail to commercialize products or
if our future products do not achieve significant market acceptance, we will not likely generate significant revenues or become
profitable.
The pharmaceutical business is subject
to increasing government price controls and other restrictions on pricing, reimbursement and access to drugs, which could adversely
affect our future revenues and profitability.
To the extent our products are developed,
commercialized and successfully introduced to market, they may not be considered cost-effective and third party or government reimbursement
might not be available or sufficient. Globally, governmental and other third party payors are becoming increasingly aggressive
in attempting to contain health care costs by strictly controlling, directly or indirectly, pricing and reimbursement and, in some
cases, limiting or denying coverage altogether on the basis of a variety of justifications, and we expect pressures on pricing
and reimbursement from both governments and private payors inside and outside the U.S. to continue.
In the U.S., we are subject to substantial
pricing, reimbursement, and access pressures from state Medicaid programs, private insurance programs and pharmacy benefit managers,
and implementation of U.S. health care reform legislation is increasing these pricing pressures. The Affordable Care Act instituted
comprehensive health care reform, and includes provisions that, among other things, reduce and/or limit Medicare reimbursement,
require all individuals to have health insurance (with limited exceptions), and impose new and/or increased taxes. The future status
of elements of the Affordable Care Act are uncertain at this time. In almost all European markets, pricing and choice of prescription
pharmaceuticals are subject to governmental control. Therefore, the price of our products and their reimbursement in Europe is
and will be determined by national regulatory authorities. Reimbursement decisions from one or more of the European markets may
impact reimbursement decisions in other European markets. A variety of factors are considered in making reimbursement decisions,
including whether there is sufficient evidence to show that treatment with the product is more effective than current treatments,
that the product represents good value for money for the health service it provides, and that treatment with the product works
at least as well as currently available treatments.
The continuing efforts of government and
insurance companies, health maintenance organizations, and other payors of health care costs to contain or reduce costs of health
care may affect our future revenues and profitability or those of our potential customers, suppliers, and collaborative partners,
as well as the availability of capital.
We are dependent on third party service
providers for a number of critical operational activities including, in particular, for the manufacture and testing of our products
and associated supply chain operations, as well as for clinical trial activities. Any failure or delay in these undertakings by
third parties could harm our business.
Our business is dependent on the performance
by third parties of their responsibilities under contractual relationships. In particular, we heavily rely on third parties for
the manufacture and testing of our products. We do not have internal analytical laboratory or manufacturing facilities to allow
the testing or production of products in compliance with cGMP. As a result, we rely on third parties to supply us in a timely manner
with manufactured product candidates. We may not be able to adequately manage and oversee the manufacturers we choose, they may
not perform as agreed or they may terminate their agreements with us. In particular, we depend on third party manufacturers to
conduct their operations in compliance with GLP or similar standards imposed by the U.S. and/or applicable foreign regulatory authorities,
including the FDA and EMA. Any of these regulatory authorities may take action against a contract manufacturer who violates cGMP.
Failure of our manufacturers to comply with FDA, EMA or other applicable regulations may cause us to curtail or stop the manufacture
of such products until we obtain regulatory compliance.
We may not be able to obtain sufficient
quantities of our products if we are unable to secure manufacturers when needed, or if our designated manufacturers do not have
the capacity or otherwise fail to manufacture compounds according to our schedule and specifications or fail to comply with cGMP
regulations. Furthermore, in order to ultimately obtain and maintain applicable regulatory approvals, any manufacturers we utilize
are required to consistently produce the respective products in commercial quantities and of specified quality or execute fill-finish
services on a repeated basis and document their ability to do so, which is referred to as process validation. In order to obtain
and maintain regulatory approval of a compound, the applicable regulatory authority must consider the result of the applicable
process validation to be satisfactory and must otherwise approve of the manufacturing process. Even if our compound manufacturing
processes obtain regulatory approval and sufficient supply is available to complete clinical trials necessary for regulatory approval,
there are no guarantees we will be able to supply the quantities necessary to effect a commercial launch of the applicable drug,
or once launched, to satisfy ongoing demand. Any product shortage could also impair our ability to deliver contractually required
supply quantities to applicable collaborators, as well as to complete any additional planned clinical trials.
We also rely on third party service providers
for certain warehousing and transportation. With regard to the distribution of our drugs, we depend on third party distributors
to act in accordance with GDP, and the distribution process and facilities are subject to continuing regulation by applicable regulatory
authorities with respect to the distribution and storage of products.
In addition, we depend on medical institutions
and CROs (together with their respective agents) to conduct clinical trials and associated activities in compliance with GCP and
in accordance with our timelines, expectations and requirements. We are substantially dependent on Montefiore Medical Center for
the clinical study they are conducting for us using our intraductal microcatheters. To the extent any such third parties are delayed
in achieving or fail to meet our clinical trial enrollment expectations, fail to conduct our trials in accordance with GCP or study
protocol or otherwise take actions outside of our control or without our consent, our business may be harmed. Furthermore, we conduct
clinical trials in foreign countries, subjecting us to additional risks and challenges, including, in particular, as a result of
the engagement of foreign medical institutions and foreign CROs, who may be less experienced with regard to regulatory matters
applicable to us and may have different standards of medical care.
With regard to certain of the foregoing
clinical trial operations and stages in the manufacturing and distribution chain of our compounds, we rely on single vendors.
In particular, our current business structure contemplates, at least in the foreseeable future, use of a single commercial supplier
for endoxifen drug substance. In addition, in the event endoxifen is approved, we are initially preparing to have only one commercial
supplier. The use of single vendors for core operational activities, such as clinical trial operations, manufacturing and distribution,
and the resulting lack of diversification, expose us to the risk of a material interruption in service related to these single,
outside vendors. As a result, our exposure to this concentration risk could harm our business.
Although we monitor the compliance of our
third party service providers performing the aforementioned services, we cannot be certain that such service providers will consistently
comply with applicable regulatory requirements or that they will otherwise timely satisfy their obligations to us. Any such failure
and/or any failure by us to monitor their services or to plan for and manage our short- and long-term requirements underlying such
services could result in shortage of the compound, delays in or cessation of clinical trials, failure to obtain or revocation of
product approvals or authorizations, product recalls, withdrawal or seizure of products, suspension of an applicable wholesale
distribution authorization, and/or distribution of products, operating restrictions, injunctions, suspension of licenses, other
administrative or judicial sanctions (including civil penalties and/or criminal prosecution), and/or unanticipated related expenditures
to resolve shortcomings.
Such consequences could have a significant
impact on our business, financial condition, operating results, or prospects.
We may encounter delays in our clinical
trials, or may not be able to conduct our trials timely.
Clinical trials are expensive and subject
to regulatory approvals. Potential trial delays may arise from, but are not limited to:
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Failure to obtain on a timely basis, or at all, approval from the
applicable institutional review board or ethics committee to open a clinical study
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lower than anticipated patient enrollment for reasons such as existing
conditions, eligibility criteria or if patients perceive a lack of benefit to enroll in the study for whatever reason;
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delays in reaching agreements on acceptable terms with prospective
CROs; and
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failure of Montefiore Medical Center, CROs, or other third parties
to effectively and timely monitor, oversee, and maintain the clinical trials.
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Our products and services may expose
us to possible litigation and product liability claims.
Our business may expose us to potential
product liability risks inherent in the testing, marketing, and processing personalized medical products, particularly those products
and services we offered prior to shifting our focus on pharmaceutical development. Product liability risks may arise from, but
are not limited to:
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failure of our microcatheters to inject a sufficient amount of drug
into the desired location, which could lead to ineffective treatment;
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adverse events related to drugs we are developing; and
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inaccurate test results from the nipple aspirate fluid collected with
our medical devices.
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A successful product liability claim, or
the costs and time commitment involved in defending against a product liability claim, could have a material adverse effect on
our business. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the
future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost,
or otherwise, to protect against potential product liability claims could prevent or inhibit the commercialization of our products.
If we are not able to protect our
proprietary technology, others could compete against us more directly, which would harm our business.
Our commercial success will depend, in part,
on our ability to obtain additional patents and licenses and protect our existing patent position, both in the United States and
in other countries, for devices, therapeutics and related technologies, processes, methods, compositions and other inventions that
we believe are patentable. Our ability to preserve our trade secrets and other intellectual property is also important to our long-term
success. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or
negate any competitive advantage we may have, which could harm our business and ability to establish or maintain profitability.
Patents may also issue to third parties which could interfere with our ability to bring our therapeutics and devices to market.
The laws of some foreign countries do not protect our proprietary rights to the same extent as U.S. laws, and we may encounter
significant problems in protecting our proprietary rights in these countries. The patent positions of diagnostic companies and
pharmaceutical and biotechnology companies, including our patent position, are generally highly uncertain and particularly after
the Supreme Court decisions,
Mayo Collaborative Services v. Prometheus Laboratories
, 132 S. Ct. 1289 (2012),
Association
for Molecular Pathology v. Myriad
, 133 S. Ct. 2107 (2013), and
Alice Corp. v. CLS Bank Int’l
, 134 S. Ct. 2347
(2014). Our patent positions also involve complex legal and factual questions, and, therefore, any patents issued to us may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies and any future tests are covered by valid and enforceable
patents or are effectively maintained as trade secrets. In addition, our patent applications may never issue as patents, and the
claims of any issued patents may not afford meaningful protection for our technology or tests.
The degree of future protection for our
proprietary rights is uncertain, and we cannot ensure that:
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we or others were the first to make the inventions covered by each
of our patent applications;
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we or others were the first to file patent applications for our claimed
inventions;
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others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
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any of our patent applications will result in issued patents;
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any of our patents will be valid or enforceable;
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any patents issued to us and collaborators will provide a basis for
commercially viable therapeutics, will provide us with any competitive advantages or will not be challenged by third parties;
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the patents of others will not have an adverse effect on our business;
or
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our patents or patents that we license from others will survive legal
challenges, and remain valid and enforceable.
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If a third party files a patent application
with claims to a drug or device we have discovered or developed, a derivation proceeding may be initiated regarding competing patent
applications. If a derivation proceeding is initiated, we may not prevail in the derivation proceeding. If the other party prevails
in the derivation proceeding, we may be precluded from commercializing our products, or may be required to seek a license. A license
may not be available to us on commercially acceptable terms, if at all.
Any litigation proceedings relating to our
proprietary technology may fail and, even if successful, may result in substantial costs and distract our management and other
employees. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments.
If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price
of our Common Stock. Finally, we may not be able to prevent, alone or with the support of our licensors, misappropriation of our
trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in
the United States.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office (the
“
USPTO
”) and various foreign governmental patent agencies require compliance with a number of procedural,
documentary, fee payment and other similar provisions during the patent process. Periodic maintenance fees, renewal fees, annuity
fees, and various other governmental fees on any issued patents and/or applications are due to be paid to the USPTO and foreign
patent agencies in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to
pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While an inadvertent lapse may
sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in
which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss
of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market earlier than
should otherwise have been the case, which would have a material adverse effect on our business.
Changes in U.S. patent law could
diminish the value of patents in general, thereby impairing our ability to protect our products and services.
As is the case with other medical device
and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing
patents. Obtaining and enforcing patents in the medical device and pharmaceutical industries involve both technological and legal
complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted
and is currently implementing wide-ranging patent reform legislation. Further, recent U.S. Supreme Court rulings have narrowed
the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations.
In particular, on March 20, 2012, the U.S. Supreme Court issued the
Prometheus
decision, holding that several claims drawn
to measuring drug metabolite levels from patient samples were not patentable subject matter. The full impact of the
Prometheus
decision
on diagnostic claims is uncertain. In addition to increasing uncertainty with regard to our ability to obtain patents in the future,
this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on decisions by
the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable
ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in
the future.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting and defending patents
on our products in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries
do not protect intellectual property rights in the same manner and to the same extent as laws in the United States. Consequently,
we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors
may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further,
may export otherwise infringing products to territories where we have patent protection but enforcement of such patent protection
is not as strong as that in the United States. These products may compete with our products and services, and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing with our products.
Many companies have encountered significant
problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property
protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement
of our patents or marketing of competing products and services in violation of our proprietary rights generally. Proceedings to
enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and could provoke third
parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded,
if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world
may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop.
Our current patent portfolio may not
include all patent rights needed for the full development and commercialization of our products. We cannot be sure that patent
rights we may need in the future will be available for license on commercially reasonable terms, or at all.
We may be unable to obtain any licenses
or other rights to patents, technology, or know-how from third parties necessary to conduct our business and such licenses, if
available at all, may not be available on commercially reasonable terms. Others may seek licenses from us for other technology
we use or intend to use. Any failure to obtain such licenses could delay or prevent us from developing or commercializing our proposed
products, which would harm our business. For example, we may seek to develop our intraductal treatment program by licensing a pharmaceutical
from a third party. We may not be able to secure such a license on acceptable terms. Litigation or patent interference proceedings
need to be brought against third parties, as discussed below, to enforce any of our patents or other proprietary rights, or to
determine the scope and validity or enforceability of the proprietary rights of such third parties.
Third party claims alleging intellectual
property infringement may prevent or delay our drug discovery and development efforts.
Our commercial success depends in part on
our avoiding infringement of the patents and proprietary rights of third parties, including the intellectual property rights of
competitors. There is a substantial amount of litigation, both within and outside the United States, involving patents and other
intellectual property rights in the medical device and pharmaceutical fields, as well as administrative proceedings for challenging
patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings
in various foreign jurisdictions. Recently, the America Invents Act (the “
AIA
”) introduced new procedures
including inter partes review and post grant review. The implementation of these procedures brings uncertainty to the possibility
of challenges to our patents in the future, including those patents perceived by our competitors as blocking entry into the market
for their products, and the outcome of such challenges. Numerous U.S. and foreign issued patents and pending patent applications,
which are owned by third parties, exist in the fields in which we are developing our products. As the medical device and pharmaceutical
industries expand and more patents are issued, the risk increases that our activities related to our products may give rise to
claims of infringement of the patent rights of others.
We cannot assure you that our current or
future products will not infringe on existing or future patents. We may not be aware of patents that have already issued that a
third party might assert are infringed by one of our current or future products.
Third parties may assert that we are employing
their proprietary technology without authorization. There may be third party patents of which we are currently unaware with claims
to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our products.
Because patent applications can take many years to issue and may be confidential for eighteen months or more after filing, there
may be currently pending third party patent applications which may later result in issued patents that our products may infringe,
or which such third parties claim are infringed by our products and services.
Parties making claims against us for infringement
or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could
effectively block our ability to further develop and commercialize our products. Defense of these claims, regardless of their merit,
would involve substantial expenses and would be a substantial diversion of employee resources from our business. In the event of
a successful claim of infringement against us by a third party, we may have to (i) pay substantial damages, including treble damages
and attorneys’ fees if we are found to have willfully infringed the third party’s patents; (ii) obtain one or more
licenses from the third party; (iii) pay royalties to the third party; or (iv) redesign any infringing products. Redesigning any
infringing products may be impossible or require substantial time and monetary expenditure. Further, we cannot predict whether
any required license would be available at all or whether it would be available on commercially reasonable terms. In the event
that we could not obtain a license, we may be unable to further develop and commercialize our products, which could harm our business
significantly. Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access
to the same intellectual property.
In addition to infringement claims against
us, if third parties have prepared and filed patent applications in the United States that also claim technology related to our
products, we may have to participate in interference proceedings in the USPTO to determine the priority of invention. Third parties
may also attempt to initiate reexamination, post grant review or inter partes review of our patents in the USPTO. We may also become
involved in similar proceedings in the patent offices in other jurisdictions regarding our intellectual property rights with respect
to our products and technology.
We may be subject to claims that our
employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We have received confidential and proprietary
information from third parties. In addition, we employ individuals who were previously employed at other diagnostic, medical device
or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’
former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations
of consultants or others who are involved in developing our products. We may also be subject to claims that former employees, consultants,
independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property.
Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary
information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such
an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation
could result in substantial cost and be a distraction to our management and employees.
We may be unable to adequately prevent
disclosure of trade secrets and other proprietary information.
We rely on trade secret protection and confidentiality
agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are
difficult to enforce, and any other elements of our discovery and development processes that involve proprietary know-how, information
or technology that is not covered by patents. However, trade secrets can be difficult to protect. We require all of our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, to enter into
confidentiality agreements. However, we cannot be certain that all such confidentiality agreements have been duly executed, that
our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain
access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized
disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally,
if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties
for misappropriating the trade secret.
We use third party suppliers for the
production of the intraductal microcatheters, which are currently manufactured in small quantities. If such suppliers are not capable
of producing quantities sufficient for ongoing and future clinical studies as well as for commercial sale when we are ready, we
may not generate significant revenue or become profitable.
We rely on third party suppliers for the
continued manufacture and supply of the intraductal microcatheters. If our third party suppliers cannot produce the microcatheter
in quantities sufficient for our studies and commercial needs on acceptable terms when needed, we may be unable to commercialize
our microcatheters and generate revenue from their sales as planned. In addition, if at any time after commercialization of our
products, we are unable to secure essential equipment or supplies in a timely, reliable and cost-effective manner, we could experience
disruptions in our services that could adversely affect anticipated results.
Risks Related to Our Industry
Legislative or regulatory reforms
may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market
and distribute our products after approval is obtained.
From time to time, legislation is drafted
and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture
and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or
reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions
or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition,
FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business
and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations
changed, and what the impact of such changes, if any, may be. Similar changes and revisions can also occur in foreign countries.
For example, the FDA may change its clearance
and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or
delay approval or clearance of our products under development or impact our ability to modify our currently cleared products on
a timely basis. For example, in 2011, the FDA initiated a review of the premarket clearance process in response to internal and
external concerns regarding the 510(k) program, announcing 25 action items designed to make the process more rigorous and transparent.
In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, or the FDASIA, Congress enacted several
reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect medical
device regulation both pre- and post-approval. The FDA has implemented, and continues to implement, these reforms, which could
impose additional regulatory requirements upon us and delay our ability to obtain new 510(k) clearances, increase the costs of
compliance or restrict our ability to maintain our current clearances. For example, the FDA recently issued guidance documents
intended to explain the procedures and criteria the FDA will use in assessing whether a 510(k) submission meets a minimum threshold
of acceptability and should be accepted for review. Under the “Refuse to Accept” guidance, the FDA conducts an early
review against specific acceptance criteria to inform 510(k) submitters if the submission is administratively complete, or if not,
to identify the missing element(s). Submitters are given the opportunity to provide the FDA with the identified information, but
if the information is not provided within a defined time, the submission will not be accepted for FDA review. Any change in the
laws or regulations that govern the clearance and approval processes relating to our current and future products could make it
more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products.
Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would
have an adverse effect on our ability to expand our business.
If our products, or malfunction of
our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which
can result in voluntary corrective actions or agency enforcement actions.
Under the FDA’s medical device reporting,
or MDR, regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a
death or serious injury or in which our product malfunctioned and, if the malfunction were to occur, would likely cause or contribute
to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could
divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner,
and have an adverse effect on our reputation, results of operations and financial condition.
In the EU, we must comply with the EU Medical
Device Vigilance System (MEDDEV 2.12/1 rev.8) which is intended to protect the health and safety of patients, users and others
by establishing reporting procedures and reducing the likelihood of reoccurrence of incidents related to the use of a medical device.
Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of
a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, may lead to or may
have led to the death of a patient, or user or other persons or to a serious deterioration in such person’s state of health)
must be reported by manufacturers through a Manufacturer’s Incident Reports to competent authorities within periods of time
specified in the MEDDEV 2.12/1 rev. 8. Such incidents are evaluated and, where appropriate, information is disseminated between
the competent authorities of the EU Member States. The MEDDEV 2.12/1 rev. 8 is also intended to facilitate a direct, early and
harmonized establishment of Field Safety Corrective Actions, or FSCAs, across the EU Member States in which the device is being
marketed. A FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health
associated with the use of a medical device that is already placed on the market. A FSCA may include device recall, modification,
exchange, or destruction. FSCAs must be reported by the manufacturer or the manufacturer’s European Authorized Representative,
to its customers and/or the end users of the device through a Field Safety Notice. FSCAs must also be reported to the competent
authorities of the EU Member States. Failure to comply with any of these requirements could significantly and adversely affect
our business.
The statements and actions of the
Trump administration could negatively affect our business.
President Trump has stated that he will
repeal the Patient Protection and Affordable Care Act, as amended, reduce government regulation, and lower the prices of pharmaceuticals.
He has also placed a temporary ban on immigration from certain countries. These statements and potential actions on these topics
could negatively impact our stock price and could make it more difficult to develop our programs. For example, lower pharmaceutical
prices could reduce the potential market for our drugs under development and reduced government regulation could encourage competition.
The recent temporary ban on immigration from certain countries could make it more difficult for us and our partners to hire qualified
personnel.
Our inadvertent or unintentional failure
to comply with the complex government regulations concerning privacy of medical records could subject us to fines and adversely
affect our reputation.
The federal privacy regulations, among other
things, restrict our ability to use or disclose protected health information in the form of patient-identifiable laboratory data,
without written patient authorization, for purposes other than payment, treatment, or healthcare operations (as defined under the
Health Insurance Portability and Accountability Act, or HIPAA) except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. The privacy regulations provide for significant fines and other penalties
for wrongful use or disclosure of protected health information, including potential civil and criminal fines and penalties. Although
the HIPAA statute and regulations do not expressly provide for a private right of damages, we could incur damages under state laws
to private parties for the wrongful use or disclosure of confidential health information or other private personal information.
We intend to implement policies and practices
that we believe will make us compliant with the privacy regulations. However, the documentation and process requirements of the
privacy regulations are complex and subject to interpretation. Failure to comply with the privacy regulations could subject us
to sanctions or penalties, loss of business, and negative publicity.
The HIPAA privacy regulations establish
a “floor” of minimum protection for patients as to their medical information and do not supersede state laws that are
more stringent. Therefore, we are required to comply with both HIPAA privacy regulations and various state privacy laws. The failure
to do so could subject us to regulatory actions, including significant fines or penalties, and to private actions by patients,
as well as to adverse publicity and possible loss of business. In addition, federal and state laws and judicial decisions provide
individuals with various rights for violation of the privacy of their medical information by healthcare providers such as us.
The collection and use of personal health
data in the EU is governed by the provisions of Directive 95/46/EC of the European Parliament and of the Council of 24 October
1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly
known as the Data Protection Directive. The Directive imposes a number of requirements including an obligation to seek the consent
of individuals to whom the personal data relates, the information that must be provided to the individuals, notification of data
processing obligations to the competent national data protection authorities of individual EU Member States, and the security and
confidentiality of the personal data. The Data Protection Directive also imposes strict rules on the transfer of personal data
out of the EU to the U.S. Failure to comply with the requirements of the Data Protection Directive and the related national data
protection laws of the EU Member States may result in fines and other administrative penalties and harm our business.
The failure to comply with complex
federal and state laws and regulations related to submission of claims for services could result in significant monetary damages
and penalties and exclusion from the Medicare and Medicaid programs.
We are subject to extensive federal and
state laws and regulations relating to the submission of claims for payment for services, including those that relate to coverage
of services under Medicare, Medicaid, and other governmental healthcare programs, the amounts that may be billed for services,
and to whom claims for services may be submitted, such as billing Medicare as the secondary, rather than the primary, payor. The
failure to comply with applicable laws and regulations, for example, enrollment in the Medicare Provider Enrollment, Chain and
Ownership System, could result in our inability to receive payment for our services or attempts by third party payors, such as
Medicare and Medicaid, to recover payments from us that we have already received. Submission of claims in violation of certain
statutory or regulatory requirements can result in penalties, including civil money penalties of up to $10,000 for each item or
service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government
authorities may also assert that violations of laws and regulations related to submission of claims violate the federal False Claims
Act or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. The
Company will be generally dependent on independent physicians to determine when its services are medically necessary for a particular
patient. Nevertheless, we could be adversely affected if it was determined that the services we provided were not medically necessary
and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services.
It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted
by us if it were found that we knowingly participated in the arrangement that resulted in submission of the improper claims.
Healthcare policy changes, including
recently enacted legislation reforming the United States healthcare system, may have a material adverse effect on our financial
condition and results of operations
The Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Affordability Reconciliation Act, (collectively, the “
PPACA
”
or the “
Affordable Care Act
”), enacted in March 2010, makes changes that are expected to significantly
impact the pharmaceutical and medical device industries
Other significant measures contained in
the PPACA include coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures,
initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and
physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud
and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations
and increasing potential penalties for such violations. In addition, the PPACA establishes an Independent Payment Advisory Board,
or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce
health care expenditures, which may have a negative impact on payment rates for services, including our tests. The IPAB proposals
may impact payments for clinical laboratory services that our future diagnostics customers use our technology to deliver beginning
in 2016 and for hospital services beginning in 2020, and may indirectly reduce demand for our diagnostic products.
In addition to the PPACA, the effect of
which cannot presently be quantified, various healthcare reform proposals have also emerged from federal and state governments.
Changes in healthcare policy, such as the creation of broad test utilization limits for diagnostic products in general or requirements
that Medicare patients pay for portions of clinical laboratory tests or services received, could substantially impact the sales
of our tests, increase costs and divert management’s attention from our business. Such co-payments by Medicare beneficiaries
for laboratory services were discussed as possible cost savings for the Medicare program as part of the debt ceiling budget discussions
in mid-2011 and may be enacted in the future. In addition, sales of our tests outside of the United States will subject us to foreign
regulatory requirements, which may also change over time.
We cannot predict whether future healthcare
initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business,
or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation and the expansion
in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements
by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition
and results of operations.
Risks Related to the Securities Markets
and Investment in our Securities
Our shares of Common Stock are listed
on The NASDAQ Capital Market, but we cannot guarantee that we will be able to satisfy the continued listing standards going forward.
Although our shares of Common Stock are
listed on The NASDAQ Capital Market, we cannot ensure that we will be able to satisfy the continued listing standards of The NASDAQ
Capital Market going forward. If we cannot satisfy the continued listing standards going forward, NASDAQ may commence delisting
procedures against us, which could result in our stock being removed from listing on The NASDAQ Capital Market. On September 28,
2015, we received a letter from NASDAQ stating that the Company was not in compliance with NASDAQ Listing Rule 5550(a)(2), because
the Company’s Common Stock failed to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business
days. We regained compliance with the $1.00 minimum bid price requirement in September 2016 after effectuating a reverse stock
split.
If our stock price does not satisfy the
$1.00 minimum bid price requirement and if we don’t otherwise satisfy the other continued listing requirements, we may be
delisted from NASDAQ which could adversely affect our stock price, liquidity and our ability to raise funding.
The sale of a substantial number of
shares of our Common Stock into the market may cause substantial dilution to our existing stockholders and the sale, actual or
anticipated, of a substantial number of shares of Common Stock could cause the price of our Common Stock to decline.
Any actual or anticipated sales of shares
by us, Aspire or other stockholders may cause the trading price of our Common Stock to decline. Additional issuances of shares
by us may result in dilution to the interests of other holders of our Common Stock. The sale of a substantial number of shares
of our Common Stock by us, Aspire or other stockholders or anticipation of such sales, could make it more difficult for us to sell
equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
The trading price of our Common Stock
has been, and is likely to continue to be volatile.
Our stock price is highly volatile. During
the one year prior to January 31 2017, our stock price has ranged from $1.30 to $10.65. In addition to the factors discussed in
this report, the trading price of our Common Stock may fluctuate significantly in response to numerous factors, many of which are
beyond our control, including:
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results
of clinical studies;
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regulatory
and FDA actions, including inspections and warning letters;
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actions
of securities analysts who initiate or maintain coverage of us, and changes in financial estimates by any securities analysts
who follow our Company, or our failure to meet these estimates or the expectations of investors;
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any
ongoing litigation that we are currently involved in or litigation that we may become involved in in the future;
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additional
shares of our Common Stock being sold into the market by us or our existing stockholders or the anticipation of such sales; and
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coverage of our business and financial performance.
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In addition, the stock markets have
experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many healthcare companies. Stock prices of many healthcare companies have fluctuated in a manner unrelated or disproportionate
to the operating performance of those companies. As a result, an investment in our Common Stock may decrease in value.
If our Common Stock is delisted from
The NASDAQ Capital Market, we may be subject to the risks relating to penny stocks.
If our Common Stock were to be delisted
from trading on The NASDAQ Capital Market and the trading price of the Common Stock were below $5.00 per share on the date the
Common Stock was delisted, trading in our Common Stock would also be subject to the requirements of certain rules promulgated under
the Exchange Act. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined
as a “penny stock” (i.e., generally, any non-exchange listed equity security that has a market price of less than $5.00
per share, subject to certain exceptions) and impose various sales practice requirements on broker-dealers who sell penny stocks
to persons other than established customers and accredited investors, generally institutions. These additional requirements may
discourage broker-dealers from effecting transactions in securities that are classified as penny stocks, which could severely limit
the market price and liquidity of such securities and the ability of purchasers to sell such securities in the secondary market.
The ownership of our Common Stock
is concentrated among a small number of stockholders, and if our principal stockholders, directors and officers choose to act together,
they may be able to significantly influence management and operations, which may prevent us from taking actions that may be favorable
to you.
Our ownership is concentrated among
a small number of stockholders, including our founders, directors, officers, and entities related to these persons. Our directors,
officers and entities affiliated with them beneficially own approximately 16.7% of our outstanding voting securities (including
all outstanding vested and unvested options held by such persons). Accordingly, these stockholders, acting together, will have
the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and
removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. This concentration
of ownership could have the effect of delaying, deferring, or preventing a change in control of the Company or impeding a merger
or consolidation, takeover or other business combination that could be favorable to you.
If we are unable to implement and
maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness
of our financial reports and the trading price of our Common Stock may be negatively affected.
We are required to maintain internal controls
over financial reporting and to report any material weaknesses in such internal controls. If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of the Sarbanes-Oxley Act
in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered
public accounting firm is unable to express, if required, an opinion as to the effectiveness of our internal control over financial
reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our
Common Stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities
is listed, the Securities and Exchange Commission, or other regulatory authorities, which could require additional financial and
management resources.
The requirements of being a public
company may strain our resources and divert management’s attention.
We are subject to the reporting requirements
of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements
of The NASDAQ Capital Market, and other applicable securities rules and regulations. Compliance with these rules and regulations
will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase
demand on our systems and resources. As a result, management’s attention may be diverted from other business concerns, which
could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we
may need to hire more employees in the future, which will increase our costs and expenses.
In addition, complying with public disclosure
rules makes our business more visible, which we believe may result in threatened or actual litigation, including by competitors
and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims
do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could
divert the resources of our management and harm our business and operating results.
Our Stockholder Rights Agreement,
the anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control which could limit
the market price of our Common Stock and could prevent or frustrate attempts by the our stockholders to replace or remove current
management and the current Board of Directors.
Our Stockholder Rights Agreement that we
adopted in May 2014, our amended and restated certificate of incorporation, and amended and restated bylaws contain provisions
that could delay or prevent a change in control or changes in our Board of Directors that our stockholders might consider favorable.
These provisions include the establishment of a staggered Board of Directors, which divides the board into three classes, with
directors in each class serving staggered three-year terms. The existence of a staggered board can make it more difficult for a
third party to effect a takeover of our Company if the incumbent board does not support the transaction. These and other provisions
in our corporate documents, our Shareholder Rights Plan and Delaware law might discourage, delay or prevent a change in control
or changes in the Board of Directors of the Company. These provisions could also discourage proxy contests and make it more difficult
for an investor and other stockholders to elect directors not nominated by our Board. Furthermore, the existence of these provisions,
together with certain provisions of Delaware law, might hinder or delay an attempted takeover other than through negotiations with
the Board of Directors.
We do not expect to pay dividends
in the future, which means that investors may not be able to realize the value of their shares except through a sale.
We have never, and do not anticipate that
we will, declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate paying
dividends on Common Stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future, the
only opportunity for our stockholders to realize the creation of value in our Common Stock will likely be through a sale of those
shares.
We are an “emerging growth company”
and we cannot be certain if we will be able to maintain such status or if the reduced disclosure requirements applicable to emerging
growth companies will make our Common Stock less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act, and we intend to adopt certain exemptions from various reporting requirements that are applicable to
other public companies that are not “emerging growth companies” including, but not limited to, not being required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may
remain as an “emerging growth company” for up to five full fiscal years following our initial public offering. We would
cease to be an “emerging growth company,” and therefore not be able to rely upon the above exemptions, if we have more
than $1 billion in annual revenue in a fiscal year, we issue more than $1 billion of non-convertible debt over a three-year period,
or we have more than $700 million in market value of our Common Stock held by non-affiliates as of any June 30 before the end of
the five full fiscal years. Additionally, we cannot predict if investors will find our Common Stock less attractive because we
will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active
trading market for our Common Stock and our stock price may be more volatile.
We will need
to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed
and on acceptable terms.
The extent to which
we utilize the Aspire Purchase Agreement as a source of funding will depend on a number of factors, including the prevailing market
price of our Common Stock, the volume of trading in our Common Stock, and the extent to which we are able to secure funds from
other sources. The number of shares that we may sell to Aspire Capital under the Purchase Agreement on any given day and during
the term of the Purchase Agreement is limited. Additionally, we and Aspire Capital may not effect any sales of shares of our Common
Stock under the Aspire Purchase Agreement during the continuance of an event of default or on any trading day that the closing
sale price of our Common Stock is less than $[1.50] per share. Even if we are able to access the full $10.0 million available under
the Aspire Purchase Agreement, we will still need additional capital to fully implement our business, operating, and development
plans.
When we elect to raise
additional funds or additional funds are required, we may raise such funds from time to time through public or private equity offerings,
debt financings, corporate collaboration, and licensing arrangements or other financing alternatives, as well as through sales
of Common Stock to Aspire Capital under the Purchase Agreement. Additional equity or debt financing or corporate collaboration
and licensing arrangements may not be available on acceptable terms, if at all. If we are unable to raise additional capital in
sufficient amounts or on terms acceptable to us, we will be prevented from pursuing acquisition, licensing, development and commercialization
efforts and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.
If we raise additional
funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased
fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures, or declaring dividends. Any debt financing or additional
equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders.
If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be
favorable to us. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, our business, operating results, financial condition, and prospects could be materially and adversely affected
and we may be unable to continue our operations.