Item
1. Business.
Overview
Akers
Biosciences, Inc. (“Akers,” “we” or the “Company”) develops, manufactures, and supplies rapid,
point-of-care screening and testing products designed to bring health-related information directly to the patient or clinician
in a time- and cost-efficient manner. Akers believes it has advanced the science of diagnostics through the development of several
innovative proprietary platform technologies that provide product development flexibility.
All
of Akers’ rapid, single-use tests are performed
in vitro
(outside the body) and are designed to enhance patient well-being
and reduce total outcome costs of healthcare. The Company’s current product offerings and pipeline products focus on delivering
diagnostic assistance in a wide variety of healthcare fields/specialties, including cardiology/emergency medicine, metabolism/nutrition,
diabetes, respiratory diseases and infectious diseases detection, as well as for on and off-the-job alcohol safety initiatives.
Akers
believes that low-cost, unit-use testing not only saves time and money, but also allows for more frequent, near-patient
testing which may save lives. We believe that Akers’ FDA-cleared rapid diagnostic tests help facilitate targeted diagnoses
and real-time treatment. We also believe that Akers’ rapid diagnostic tests surpass most other current diagnostic products
with their flexibility, speed, ease-of-use, readability, low cost and accuracy. In minutes, detection of disease states and medical
conditions can be performed from single-patient specimens, without sacrificing accuracy.
We
believe the use of rapid tests, which can be performed at the point-of-care when and where the patient is being consulted, can
allow for immediate diagnostic decisions and subsequent treatment regimens and is an important development in the practice
of medicine. Point-of-care testing addresses today’s challenges in the healthcare industry, such as:
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cost
pressures/efficiency of healthcare delivery;
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need
for fast, easy to use, accurate at-home tests for individuals to monitor their
personal health and wellness;
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need
for affordable mass screening tests for key infectious diseases, cardiac conditions, and metabolic markers; and
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public
health needs in developing countries lacking basic health infrastructure.
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Recently,
the Company has developed tests for non-medical use within the health and wellness industry. These tests will monitor general
markers of health and wellness as they relate to diet, nutrition and exercise programs.
Market
Overview
Worldwide,
healthcare professionals use laboratory tests to support their clinical diagnosis and treatment decisions. According to a MarketsandMarkets
report,
In-Vitro Diagnostic (IVD) Market (Applications, End-users & Types) Trends & Global Forecasts (Major & Emerging
Markets — G7, Japan & BRIC) (2011 – 2016)
, published in January 2012 (the “IVD Market Report”),
the use of such tests continues to grow as a result of increased patient awareness, patient self-testing and the aging baby boomer
population across the globe. Other major drivers for the growth of the
in vitro
diagnostic (“IVD”) industry
is a rise in the number of diseases like respiratory and hospital-acquired infections and a rise in the chronic diseases such
as diabetes, hypertension, cardiovascular diseases, and cancer. Both an increasing understanding of the molecular processes underlying
many disease states and the opportunity for clinicians to quickly incorporate that targeted information into treatment decisions
(e.g. companion testing). According to an article published on
in vitro
diagnostics by Medical Device and Diagnostic Industry
(“MDDI”) online in March 2013, in the past, the
in vitro
diagnostics industry has focused on developing tests
that require significant time, skill, and often costly, specialized equipment. Patient specimens often had to be collected remotely
and processed in a central laboratory with test results sent to a physician at a later date. This general protocol is not particularly
well-adapted to the practice of medicine in a cost-effective, timely manner. The pressures on public health budgets and falling
profits among third party payors such as insurers, necessitates an alternative approach to disease management. In addition, there
has been steady growth of the retail health clinic and urgent care center markets.
According
to the IVD Market Report, outside of the United States, socialized medicine and/or a general atmosphere of cost-containment and
healthcare efficiency are driving the need for diagnostic testing solutions that are fast, affordable, accurate, simple-to-perform
and help enable early diagnosis and treatment of medical conditions or provide an assessment of a person’s health status.
Akers
designed its products based on single-use assay platforms with straightforward test procedures that can be completed in minutes.
In the healthcare setting, the Company’s clinical laboratory products can be utilized near or at the point-of-care and do
not require the use of expensive equipment or a highly trained or specialized staff. As a result, an individual’s test
results can immediately be incorporated into diagnostic and treatment decisions, improving the overall efficiency of the healthcare
experience for the patient, and ultimately the payor. In addition, in the developing world, the portability and ease-of-use
of such point-of-care tests can serve to drastically improve the level of disease screening and subsequent patient care. We believe
the benefits of our technology platforms are therefore well-suited to the diagnostic demands of developing countries that
seek to deliver modern medical diagnosis with limited medical infrastructure. In addition, some of our products have received
FDA clearance for over-the-counter use and others that do not fall within the oversight of regulatory authorities have the added
benefit of being self-tests that deliver personal health information on-demand. Akers believes that the products that emerge from
its technology platforms address the needs of the evolving healthcare delivery system that is moving patient care closer to or
in the home.
In
a June 6, 2013 article, “
Global In Vitro Diagnostics Markets Outpace Pharma Industry Growth”
by Frost &
Sullivan estimated the global IVD market was $45 billion, with forecasted revenue expected to reach $64 billion in 2017. While
the U.S. and Western Europe are the largest IVD markets, the Asian-Pacific and Eastern Europe regions are projected to
be the fastest growing by Frost & Sullivan. The Company’s main presence is in the U.S., but the Company has
recently initiated its strategic move into the China and European Union marketplaces by executing joint venture, distribution
and licensing agreements.
Strategy
Akers’
strategy is to target carefully chosen, high margin market segments within the diagnostics industry where (i) existing tests do
not meet clinical requirements, or (ii) where an emerging, unfulfilled need has been identified. The Company seeks to develop
tests for applications based on their ability to compliment a particular treatment, lifestyle or testing regimen that requires
a time and cost-efficient diagnostic alternative or solution. Akers utilizes its existing platform technologies to internally
develop its new products as the Company’s proprietary methods.
Akers
has established and will continue to pursue distribution relationships with high volume, medical and health & wellness product
marketers to maximize its revenue potential, and to be a worldwide competitor in specialized markets within the diagnostics industry.
Akers
has developed and continues to develop key strategic relationships with established companies with well-trained technical sales
forces and strong distribution networks in the following key market segments:
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Clinical
Laboratories;
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Physicians’
Office and Urgent Care Clinics;
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Retail;
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Nutraceutical
Suppliers; and
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Health
and Fitness.
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The
Company plans to target other markets, such as aid organizations seeking rapid infectious disease tests. Additionally,
we plan to target biotechnology companies or pharmaceutical manufacturers that may require companion tests to promote patient
compliance with a medication regimen or facilitate initial screenings to qualify patients for a particular therapy.
Technology
Overview
Akers’
proprietary platform technologies merge scientific innovation with user-friendly formats to deliver cost-effective and time-efficient
testing and sample preparation solutions where and when they are needed.
Testing
Platform Technologies
MPC
Biosensor Technology
MicroParticle
Catalyzed Biosensor (“MPC Biosensor”) Technology permits the rapid identification of medical conditions through biomarkers
in exhaled breath. MPC Biosensor-based products contain microparticles that change color to indicate a positive test result. The
microparticles are coated with recently discovered agents that both decrease the time to result and exhibit a more defined color
change when appropriate. MPC Biosensor-based products are packaged in small, disposable cartridges through which test subjects
can easily blow for several seconds. Breath KetoChek has one U.S. and two international patents granted. In addition,
Akers also holds three US, three Australian and three European Community Design patents for Color Comparison Card technology that
users can utilize to interpret detector results.
Particle
ImmunoFiltration Assay (PIFA®) Technology
PIFA®
technology is an accurate, rapid, immunoassay (
a procedure for detecting or measuring specific proteins or other substances
through their properties as antigens or antibodies
) method based on the selective filtration of dyed microparticles coated
with antigen or antibody. The microparticles are combined with a test sample (whole blood, serum, urine or saliva) within a self-contained
device. If a patient tests positive for the antibody or antigen, a binding event will occur and the dyed microparticles will be
trapped by a filter within the device. As a result, the test window will be void of any color. Conversely, if the patient tests
negative, the dyed microparticles will flow freely into the test window. Specific to the PIFA Heparin tests, the Company has
two international patents and one US patent granted in force.
SMC
Technology
Synthetic
Macrocycle Complex (“SMC”) Technology is a colorimetric testing methodology that pairs a proprietary reagent (
a
substance or mixture for use in chemical analysis or other reactions)
with a hand-held, photometric reader that determines
the quantitative level of a therapeutic drug in a patient’s blood sample. The technology also permits the use of whole blood
samples collected from a simple finger stick, making products that use this technology extremely flexible within the healthcare
delivery system.
Rapid
Enzymatic Assay
Rapid
Enzymatic Assay (“REA”) technology enables the rapid detection of metabolites in blood and urine in assay formats
that are easy-to-use and deliver quantitative or semi-quantitative results. Products that employ REA technology are primarily
intended for pharmaceutical, nutritional and over-the-counter (“OTC”) markets. Akers has three U.S. patents for
this technology covering our Tri-Cholesterol “Check” test.
Sample
Preparation Technology
Rapid
Blood Cell Separation Technology
Akers’
Rapid Blood Cell Separation (“Separator”) Technology, marketed under the brand name seraSTAT®, further accelerates
the rate at which a test result is obtained as the often-required sample preparation step is abbreviated drastically. Conventional
methods of blood cell separation are labor-intensive and time-consuming, typically involving blood collection and laboratory personnel,
as well as electrically-powered centrifuges and other specialized equipment. The disposable Separator device requires only a small-volume
blood sample obtained from a time and cost-efficient finger stick procedure or through a venous blood draw. Akers has obtained
the appropriate US FDA regulatory clearances for seraSTAT® as a stand-alone device and the technology is currently integrated
into PIFA PLUSS PF4 devices, and will be utilized in the infectious disease products currently under development. The seraSTAT®
Rapid Blood Cell Separation Technology is currently protected by two U.S. patents and three international patents.
Product
Portfolio
Akers
is positioned as a provider of rapid diagnostic solutions that encompass the totality of the point-of-care testing process, from
sample preparation to immediate test result. In addition, we believe we are a pioneer in disposable breath condensate technology,
a testing format that has significant potential given the variety of wellness- and disease-predicting biomarkers present in an
exhaled breath sample.
At
present, Akers’ commercialized and emerging product portfolio incorporates four of the Company’s six proprietary platform
testing technologies: PIFA®, MPC Biosensor, REA and Rapid Blood Cell Separation Technology. Directly below, is a discussion
of the products within our current and emerging portfolio that will be segmented by platform.
Akers
designed its products based on single-use assay platforms with straightforward test procedures that can be completed in minutes.
In the U.S. some of the Company’s clinical laboratory products and those with medical intended uses generally require “prescription
use” Federal Drug Administration (“FDA”) 510(k) clearance prior to product marketing given that they will be
ordered or used by medical practitioners in the course of his or her professional practice. Despite this categorization, Akers’
professional use products are still designed for ease of use, can be utilized near or at the point-of-care, and do not require
the use of expensive equipment or a highly trained or specialized staff. As a result, an individual’s current health status
can rapidly be incorporated into diagnostic and treatment decisions, improving the overall efficiency of the healthcare experience
for the patient, and ultimately the payor. In addition, in the developing world, the portability and ease-of-use
of such point-of-care tests can serve to drastically improve the level of disease screening and subsequent patient care. We believe
the benefits of our technology platforms are therefore well-suited to the diagnostic demands of countries in the developing world
that seek to deliver modern medical diagnosis with limited medical infrastructure. In addition, some of our products have
received FDA 510(k) clearance for over-the-counter (“OTC”) use. Other self-tests deliver personal health information
of a non-medical nature, on-demand, and are not FDA regulated; these products are still manufactured in compliance with its ISO
13485 quality management system (“QMS-Compliant”). Akers believes that all its technology platforms and products address
the needs of the evolving healthcare delivery system that is moving patient care closer to or in the home.
The
following table sets forth our marketed and current pipeline products, identifies the appropriate “prescription use”
or “OTC” designation and whether the required clearance has been obtained or is still needed prior to product marketing.
Our
marketed and emerging products include:
Product
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Platform
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Marketed/Pipe
line
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Not
FDA-
regulated;
QMS-
Compliant
Only
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FDA
Clearance
Required
Prescription
Use/OTC
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FDA
Clearance
Status
Obtained/Needed
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Description
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BreathScan
TM
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MPC
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Marketed
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OTC
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Obtained
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Disposable
breath alcohol detector
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BreathScan®
PRO
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MPC
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Marketed
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OTC
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Obtained
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Quantitative
breath alcohol detection system
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Breath
Diabetic Ketoacidosis®
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MPC
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Pipeline
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Prescription
Use
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Needed
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Disposable
breath ketone device for diabetic monitoring
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METRON
®
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MPC
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Marketed
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Health
and wellness
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n/a
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Disposable
breath ketone device to monitor ketosis
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Breath
PulmoHealth “Check”®
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MPC
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Pipeline
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Prescription
Use
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Needed
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A
suite of breath tests for biomarkers indicating asthma, chronic obstructive pulmonary disease (COPD), and lung cancer
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BreathScan
Lync
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MPC
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Marketed
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Health
and wellness
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n/a
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Non-invasive,
quantitative measurement of biological markers for health and wellness
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Product
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Platform
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Market/Pipe
line
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Not
FDA-
regulated;
QMS-
Compliant
Only
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FDA
Clearance
Required
Prescription
Use/OTC
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FDA
Clearance
Status
Obtained/Needed
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Description
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PIFA®
Heparin/PF4 & PIFA PLUSS® PF4
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PIFA
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Marketed
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Prescription
Use
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Obtained
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Rapid
tests for Heparin/PF4 antibodies to detect an allergy to the widely used blood thinner, Heparin
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PIFA
PLUSS® Chlamydia
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PIFA
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Pipeline
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Prescription
Use
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Needed
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Rapid
tests for the most prevalent sexually transmitted disease
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seraSTAT®
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seraStat
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Marketed
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Prescription
Use
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Obtained
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Rapid
Blood Cell Separator, marketed under the brand name seraSTAT®, further accelerates the rate at which a test result is
obtained as the often-required sample preparation step is abbreviated drastically.
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Tri-Cholesterol
“Check”®
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REA
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Marketed
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OTC
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Obtained
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Rapid
test for Total and high density lipoprotein cholesterol and estimates low density lipo protein
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BreathScan
OxiCHek
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MPC
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Marketed
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Health
and wellness
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n/a
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Breath
test for oxidative stress using the Lync reader and digital app
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BreathScan
KetoChek
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MPC
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Pipeline
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Health
and wellness
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n/a
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Breath
test for ketosis using the Lync reader and digital app
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MPC
Biosensor Technology
The
Company’s MPC Biosensor breath condensate testing platform forms the basis of a number of Akers’ marketed and pipeline
products.
Breath
Alcohol Franchise
BreathScan®
originated the disposable breath alcohol detector category and was the first single-use breathalyzer to obtain the FDA 510(k)
clearance in 2006 for Over-the-Counter use required to facilitate sales to U.S. consumers; CE certification is not required
to market the product in the EU because BreathScan® results are not used to diagnose any medical conditions. The Company’s
breath alcohol detector technology was granted an Australian Standard certification trademark, which cleared the commercial pathway
for product sales in Australia, New Zealand, and South Africa.
The
Company’s disposable breath alcohol detectors are available in versions designed to detect .02%, .04%, .05% and .08%
blood alcohol concentrations (“BACs”) and provide users with a test result in two minutes. If the crystals in the
interior of the device change from yellow to aqua, the user has tested positive for the specific alcohol level. Should the crystals
remain yellow, the result is negative.
The Company’s proprietary breath alcohol
detection technology is paired with the quantitative precision of an electronic analyzer in the BreathScan® PRO alcohol detection
system. As with all BreathScan® products, the test subject exhales into a specially calibrated, BreathScan® PRO detector.
The testing coordinator then inserts the used detector into the BreathScan® PRO Digital Analyzer (the “Analyzer”).
After two minutes, the Analyzer’s sophisticated optics calculate the subject’s BAC; the detectable range spans from
0.00% to .15% BAC. Unlike other electronic breathalyzers, BreathScan® PRO never requires recalibration so it is in
“ready” mode at all times. In 2011, the Company received FDA over-the-counter clearance for the system, providing
a commercialization path in the U.S. for use by trained professionals, including those in civil and military law enforcement,
and the general public; in addition, the CE-Mark was affixed to the alcohol detection system for professional use. Finally, the
.02 Breath Alcohol Detection System has been approved to the Conforming Products List by the U.S. Department of Transportation,
and may be sold as a compliance tool to the transportation industry.
Since
the appropriate regulatory clearances have been obtained in the U.S. and other major markets requiring specific certifications
for specific devices (i.e., Australia for the Company’s single-use detectors for these products), the Company does
not anticipate needing to fund additional clinical trials to facilitate or initiate product marketing in other international regions
at this time.
Other
Emerging MPC Platform Products
The
Company’s MPC Biosensor technology is being applied to the development of products that serve the nutraceutical, fitness,
and weight loss marketplaces. As a category, these disposable screening tests are exempt from FDA 510(k) premarket clearances.
Biomarkers related to various metabolic processes can be measured in breath condensate. As a result, Akers has used its proprietary,
easy-to-use platform to design disposable breath devices that measure ketone (acid) production associated with fat-burning (METRON®
and KetoChek) and oxidative stress levels that relate to cellular damage and the development of many preventable diseases (OxiChek).
The Company believes that personalized health and wellness – and eventually personalized medicine – will become
an increasingly significant market. The Company is positioning its tests for fitness, weight loss and oxidative stress for this
market by designing a more consumer-focused reagent device, and linking this device to an application for smartphones and tablets
that can not only produce a result, but also track progress over time. Initial marketing activities have commenced for these products
and the Company is preparing for commercialization. The Company is currently assessing distribution opportunities with companies
specializing in weight loss and/or mass distribution through health-related multilevel marketing organizations. Since devices
with claims related to weight loss or nutrition are exempt from FDA oversight, a clinical program to support 510(k) submission
is not required for any of these products. Given the non-medical intended use, the Company does not believe products will be required
to hold a CE-mark prior to marketing in the EU.
Akers
is continuing its clinical development of the BreathScan Diabetic Ketoacidosis “Check” disposable breath tube for
the diagnosis of ketoacidosis in diabetics. Breath DKA “Check” is being designed to provide real-time information
that allows diabetics to determine if they have a more severe level of ketone (acid) build up in their body that can cause a life-threatening
medical emergency called ketoacidosis. The estimated 28.5 million Type I (insulin-dependent) diabetics worldwide are at particular
risk for ketoacidosis and require routine monitoring of their ketone levels. To date, the medical industry relies on blood and
urine-based ketone testing methods, which are invasive and/or inconvenient. Since breath and blood ketone levels are closely correlated,
the Breath DKA “Check” is designed to offer healthcare professionals and their patients a convenient, accurate method,
which can be completed anytime, anywhere, to quickly determine if an individual’s ketone level is approaching a dangerous
threshold requiring medical attention. Since this product requires FDA 510(k) clearance, the Company continues to develop its
technical file and complete required clinical studies to complete the regulatory submission.
The
Company is also devoting resources to the research and development of the Breath PulmoHealth “Check” suite of assays.
These disposable detectors are being designed to signal the detection of various biomarkers related to pulmonary health, namely
asthma, chronic obstructive pulmonary disease (“COPD”) and lung cancer, through convenient, rapid analysis of an individual’s
breath sample. Akers has chosen to target this trio of conditions due to their significant impact on global health:
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over
300 million people worldwide are living with asthma and up to 18% of a country’s population are undiagnosed asthmatics;
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210
million individuals are being treated for COPD but each of the 1 billion smokers worldwide are at risk for the disease; and
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more
than 1.6 million people worldwide receive the diagnosis of lung cancer annually with many more victims expected as 80% of
all lung cancers can be attributed to smoking.
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Akers
believes these statistics suggest that pulmonary conditions are under-diagnosed and under-treated and will continue to pose a
chronic strain on worldwide public health. Currently, diagnostic methods used for the detection of lung-related diseases and illnesses
are often costly as specialized medical personnel must facilitate analysis and testing, and radiologic exams or invasive surgical
procedures may be required. While Akers does not presume Breath PulmoHealth “Check” products to be replacements for
such tests in all markets, it does however have ambitions for the devices to become effective, highly cost-efficient, primary
screening tools. Their ease-of-use, portability and non-invasive nature provide healthcare professionals and public health officials
with a testing platform that can be deployed in high volume, and even in regions of the developing world. At present, the Company’s
primary development efforts are focused on configuring the clinical dossier for the asthma product.
The
Breath KetoChek and the Breath PulmoHealth “Check” suite of products will require the development of individual
clinical trial programs to facilitate eventual FDA 510(k) submissions. The Company has self-certified Breath KetoChek as
being in compliance with CE requirements in the EU, and intends to pursue the same designation for each product in the Breath
PulmoHealth “Check” trio once the appropriate technical file is assembled.
MPC
Biosensor technology is currently protected by one United States patents (8,871,521).
PIFA®
Technology
The
core products marketed under the PIFA® platform are the PIFA® Heparin/PF4 Rapid Assay, and the PIFA PLUSS® PF4.
PIFA®
Heparin/PF4 Rapid Assay and PIFA PLUSS® PF4 remain the only FDA-cleared rapid manual assays that quickly determine if a patient
being treated with the blood thinner Heparin may be developing a drug allergy. This clinical syndrome, referred to as Heparin-Induced
Thrombocytopenia (“HIT”), reverses the Heparin’s intended therapeutic effect and transforms it into a clotting
agent. Patients with HIT are at risk of developing limb- and life-threatening complications, so the timely test result provided
by Akers’ Heparin/PF4 devices is paramount to effective clinical decision making. In the U.S. alone, approximately 12 million
patients are exposed to Heparin annually and 1% to 5% of those patients receive a HIT diagnosis. The largest at-risk populations
are patients undergoing major cardiac or orthopedic surgical procedures. It is estimated that up to 50% of cardiac surgery patients
develop HIT-antibodies. Given the size of the aging baby boomer market segment and the prevalence of cardiac disease, surgeries
within this category is expected to increase, as would the potential demand for the Company’s convenient, rapid tests.
The
PIFA® Heparin/PF4 Rapid Assay improves the standard of care in HIT-testing with its result delivered in less than five minutes
after the patient sample has been prepared. Traditional methods required the use of expensive equipment, specialized laboratory
personnel and hours of technician time to complete the 20+ assay test procedure in-house. Clinicians were subjected to
a 24-to-72 hour turnaround time if the HIT-antibody determination was outsourced to a reference laboratory. Especially in the
latter scenario, the patient information obtained is retrospective in nature as the HIT-antibody result cannot be factored into
time-sensitive diagnostic and treatment decisions.
The
Company has also introduced PIFA PLUSS® PF4 to U.S. hospitals to further improve the rate at which healthcare professionals
can obtain a HIT-antibody result. This PIFA® line extension merges the ease-of-use of the PIFA testing platform with
Akers’ recently patented Rapid Blood Cell Separation Technology, marketed under the brand name seraSTAT®. The marriage
of these two technologies condenses the sample preparation and analysis procedures as the precise micro-volume of a seraSTAT®
-prepared patient specimen is delivered directly into the PIFA® cassette for immediate testing. This eliminates an additional
one-hour of sample processing time and the need for healthcare personnel to have access to a centrifuge to separate the liquid
fraction of blood from the cellular fraction. As a result, HIT-testing can be initiated and completed at or near the point-of-care,
especially in emergency and critical care departments where time-efficient diagnostic results can drastically improve patient
outcomes.
Since
the appropriate regulatory clearances have been obtained in the United States for these products, the Company does not anticipate
needing to fund additional clinical trials to facilitate product marketing domestically. In addition, the current technical file
that has been assembled for seraSTAT® and PIFA PLUSS PF4® will also be used to support Akers’ CE-marking self-certification
process to initiate product sales in the EU; the PIFA Heparin/PF4 Rapid Assay is already CE-marked. The Company’s strategy
in other foreign jurisdictions that may require additional clinical trials to support regulatory clearance is to partner with
a distributor that will fund the required clinical program in exchange for some degree of marketing exclusivity.
Other
PIFA® Platform Assays in development
The
Company can quickly apply the PIFA PLUSS® methodology to its infectious disease and emergency-related testing products to
further consolidate the test result turn-around time and eliminate the need for any specialized sample preparation personnel or
equipment. To date, the Company’s custom reagent work has focused on a variety of infectious diseases, markers of cardiovascular
disease, and blood typing tests including the following:
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Chlamydia
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Troponin
I
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ABOD
Battlefield Blood Transfusion Card
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REA
Technology
Akers’
Tri-Cholesterol “Check” test is initiated with an easy-to-obtain finger stick blood sample, and provides users with
an estimate of both their total and high density lipoprotein (“HDL”) cholesterol levels, and by a simple calculation,
approximates their low density lipoprotein (“LDL”) level. We believe that there is global demand for this category
of disposable tests given healthcare trends that identify cardiovascular disease, and related risk factors like high cholesterol,
diabetes and high blood pressure. These complications are particularly on the rise in developing nations that have gained access
to the dietary habits of the west. In fact, studies reported by Middle East Health Magazine recently conducted in various medical
centers throughout Saudi Arabia and the United Arab Emirates (“UAE”) categorized the cardiovascular health risk as
being on the edge of a potentially serious epidemic. In addition, the research revealed that half the subjects were undiagnosed
prior to participating in the study that may be indicative of insufficient healthcare resources. This regional case study has
global application as cardiovascular disease is the leading cause of death worldwide and access to healthcare remains a challenge
to much of the aggregate population. This drives home the need for rapid, straightforward screening tests that are easily accessible
to individuals for routine monitoring.
Tri-Cholesterol
“Check” has the appropriate U.S. FDA market clearances and is also CE-marked for sale in the European Union. At present,
the Company’s Tri-Cholesterol “Check” business strategy is to focus on distribution activities to the OTC and
walk-in clinic markets in the U.S. and Europe through strategic alliances, such as Alere in the U.S.
The
REA Technology is currently protected by three United States patents (8,808,639; 8,003,061; 8,425,859).
Sample
Preparation Technology
Rapid
Blood Cell Separation Technology
In
addition to the Company’s testing platforms, Akers’ recently patented Rapid Blood Cell Separation (“Separator”)
Technology, marketed under the brand name seraSTAT®, further accelerates the rate at which a test result is obtained as the
often-required sample preparation step is abbreviated drastically. Conventional methods of blood cell separation are labor-intensive
and time-consuming, typically involving blood collection and laboratory personnel, as well as electrically-powered centrifuges
and other specialized equipment. The Separator device requires only a small-volume blood sample obtained from a time- and cost-efficient
finger stick procedure.
The
required micro-volume specimen of serum or plasma is immediately extracted and introduced into a rapid assay device for real-time
analysis. The savings afforded by the Separator device can be measured in time and cost given its quick turn-around-time and straightforward,
easy-to-master procedure.
Since
the appropriate regulatory clearances have been obtained in the United States for seraSTAT® as a stand-alone device, the Company
does not anticipate needing to fund additional clinical trials to expand product marketing domestically. Currently, seraSTAT®
is integrated into PIFA PLUSS PF4 devices, and will be utilized in the infectious disease products currently under development.
Akers may consider partnerships with other medical device companies, functioning as an Original Equipment Manufacturer (“OEM”),
as the benefits of the seraSTAT® Rapid Blood Cell Separation Technology can be integrated into other assay platforms. Also,
the current technical file that has been assembled for seraSTAT® will be used to support Akers’ CE-marking self-certification
process to initiate product sales in the EU. The Company’s strategy in foreign jurisdictions that may require additional
clinical trials to support regulatory clearance is to partner with a distributor that will fund the required clinical program
in exchange for some degree of marketing exclusivity.
The
seraSTAT® Rapid Blood Cell Separation Technologies currently protected by two United States patents (7,896,167; 8,097,171)
and one international patent (JP 4,885,134).
Competition
Competitors
of Akers include other companies developing and marketing rapid, point-of-care diagnostic devices and companies with dedicated
laboratory instruments and/or automated test systems. We face intense competition from companies with dominant market positions
within the
in vitro
diagnostic testing market such as Abbott, ACON Laboratories, Inc., Alere, Diagnostica Stago, SA., Immucor,
Inc., OraSure Technologies, Inc., and Quidel Corporation.
The
Company believes the primary criteria for determining competitiveness within the rapid point-of-care sector are cost, ease-of-use,
speed, readability, accuracy and flexibility. The time required by Akers to develop a working prototype test ready for clinical
trials typically ranges from eight to twelve weeks from inception. We believe that competitors’ laboratory tests normally
require at least a year to develop to a similar point.
However,
our competitors have significantly greater financial, technical, marketing and other resources than we have and may be better
able to:
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respond
to new technologies or technical standards;
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devote
resources to the development, production, promotion, support and sale of products;
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acquire
other companies to gain new technologies or products that may displace our product lines;
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react
to changing customer requirements and expectations;
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manufacture,
market and sell products; and
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deliver
a broad range of competitive products at lower prices.
|
Our
principal competitors are able to leverage their broader product portfolios and dominant market positions in some segments by,
for example, bundling their products into specially priced packages that create strong financial incentives for their customers
to purchase their products. These practices may negate savings customers would gain from buying select products from Akers and
may deter such customers from buying Akers’ products. We expect competition in the markets in which we participate to continue
to increase as existing competitors improve or expand their product offerings.
How
we Generate Revenue
The
majority of our revenue comes from selling rapid, screening and testing products, largely through our distribution networks. Some
of our assays are used in the clinical laboratory to ultimately help healthcare professionals to diagnose a medical condition
or complication that may require treatment. Other products can be sold over-the-counter, to the general public, to help assess
an individual’s status as it relates to his/her blood alcohol or cholesterol level, to help monitor his/her progress on
a specific wellness regimen, and/or to screen for a biomarker that may be indicative of an individual’s general level of
health. Some of our revenue is associated with licensing payments that may relate to exclusive access to specific markets.
Our
Current Target Markets
Regarding
the Company’s test for the heparin drug allergy, the testing market largely resides within the clinical hospital laboratories
of medical facilities. In the U.S., the Company accesses decision makers within these institutions through profiling by its highly
trained technical sales team and collaborative prospecting with distributor sales representatives. Internationally, Akers provides
comprehensive training to its distributor partners which will enable them to implement the same selling and technical training
strategies.
The
markets for alcohol breathalyzers are reached through a network of large and small distributors. These markets include industrial
safety, education, law enforcement, social responsibility and retail.
The
health and wellness markets include MLM nutraceutical companies, fitness centers and diet and weight loss centers.
Manufacturing
and Suppliers
We
are a vertically integrated manufacturer, producing substantially all of our devices in-house. The vast majority of our products
start out as high quality, medical grade polymers and exit our facilities as fully manufactured and packaged medical devices.
As a result, we have a short supply line between our raw materials and finished goods which gives us greater control over our
product quality. The downside of our in-house manufacturing is the requirements for facilities, power, and equipment. This approach
also requires mid-to-long-term planning and the ability to predict future needs. Many of our processes are unique to us, but the
Company’s flexible manufacturing capabilities and unused current capacity generally translate into relatively short production
timelines. As demand for our products increase, additional capacities may be required to advance our evolving needs.
We
use a diverse and broad range of raw materials in the manufacturing of our products. We purchase all of our raw materials and
select items, such as packaging, from external suppliers. In addition, we purchase some supplies from single sources for reasons
of proprietary know-how, quality assurance, sole source availability, or due to regulatory qualification requirements. U.S.
medical device manufacturers must establish and follow quality systems to help ensure that their products consistently meet
applicable requirements and specifications. The quality systems for FDA-regulated products are known as current good manufacturing
practices (“cGMP’s”). cGMP requirements for devices in part 820 (21 CFR part 820) were first authorized by section
520(f) of the Federal Food, Drug, and Cosmetic Act. We work closely with our suppliers to ensure continuity of supply while maintaining
high quality and reliability. To date, we have not experienced any significant difficulty locating and obtaining the materials
necessary to fulfill our production requirements.
On
February 4, 2015, the Company’s quality management system was certified as compliant with the International Standards Organization’s
(“ISO”) 13485:2003 requirements for the design, manufacture and distribution of medical devices including in vitro
diagnostic products.
Distribution
We
distribute our products through direct and indirect channels of distribution. We have well-developed indirect distribution channels
in the U.S. with, among others, Cardinal Health 200, Inc. (“Cardinal Health”), Fisher Healthcare, a Division of Fisher
Scientific Company L.L.C. (“Fisher Healthcare”), (“Medline”), and Typenex Medical L.L.C. (“Typenex”)
for the Company’s PIFA Heparin/PF4 assays. The relationships with Cardinal Health and Fisher Healthcare provide us with
access to the majority of U.S. hospitals.
With
respect to the Company’s breath alcohol franchise, historically Akers focused its commercial attention within the on-the-job
safety/human resources sector. Access was and currently is largely achieved through designated BreathScan® distributors and
limited arrangements in which the Company serves in an OEM capacity.
Our
dedicated technical sales force works in tandem with distributor sales representatives to uncover opportunities in the clinical
laboratory marketplace. The Company facilitates direct sales for hospitals that prefer to purchase direct from the manufacturer.
Since
2012, the Company has also had a distribution relationship with Novotek Therapeutics Inc. (“Novotek”), a Beijing-based
pharmaceutical and
in vitro
diagnostic business development corporation. The multi-year distribution agreement assigns
exclusive sales and marketing rights to Novotek to make Akers’ Particle ImmunoFiltration Assay (“PIFA”) products
available in Mainland China and that market clearance has now been obtained.
In
select European countries and Australia we have distribution relationships with specialized sales and marketing organizations
for some of our products. We do not have a strong presence in many emerging markets, but are seeking to enter into agreements
to enable us to enter other international markets in the current fiscal year.
During
the year ended December 31, 2016 sales to Cardinal Health and Fisher Healthcare accounted for a significant part of the Company’s
product revenue. This concentration makes the Company vulnerable to a near-term severe impact should the relationships be terminated.
Joint
Venture
On
October 24, 2014, the Company entered into a Joint Venture Agreement (the “Joint Venture Agreement”) by and among
the Company, Hainan Savy Investment Management Ltd. (“Hainan”) and Mr. Thomas Knox, the Company’s Non-Executive
Co-Chairman, to research, develop, produce and sell certain Akers rapid diagnostic screening and testing products in China (the
“Joint Venture”). The Joint Venture is located in Haikou, the capital city of Hainan, China, and is incorporated as
Hainan Savy Akers Biosciences, Ltd (“HSAB”).
Intellectual
Property
We
rely on a combination of patent, trademark and trade secret laws in the U.S. and other jurisdictions to protect our proprietary
platform technologies and our brands. We also rely on confidentiality procedures and agreements with key employees and distribution/business
partners where appropriate, and contractual provisions to achieve the same. We do not pursue patent protection where the possibility
for meaningful enforcement is limited.
The
Akers logo is a registered trademark in the U.S. Other registered trademarks/service marks include: BreathScan®, PIFA®,
PIFA PLUSS®, seraSTAT®, HealthTest®, and Be a Hero, Get Their Keys®, and METRON®.
The
following table summarizes the U.S. and international utility patents that currently protect Akers intellectual property; the
core and emerging products to which they relate are also noted:
Description
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Jurisdiction
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|
Utility
Patent
No.
|
|
Type
of
Protection
|
|
Expiration
Date
|
|
Product(s)
To Which
They Relate
|
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breath ketone detector
|
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US
|
|
8,871,521
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Manufacture
|
|
3/8/2031
|
|
Breath
KetoChek ®
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|
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|
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breath ketone detector
|
|
Japan
|
|
6023906
|
|
Manufacture
|
|
3/8/2032
|
|
Breath
KetoChek ®
|
|
|
|
|
|
|
|
|
|
|
|
breath ketone detector
|
|
European
Union
|
|
2684025
|
|
Manufacture
|
|
3/8/2032
|
|
Breath
KetoChek ®
|
|
|
|
|
|
|
|
|
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blood separator and method of
separating fluid fraction from whole blood
|
|
US
|
|
7,896,167
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Manufacture
|
|
9/7/2026
|
|
seraSTAT®;
PIFA PLUSS® PF4; PIFA PLUSS® Infectious Diseases Rapid Assays
|
|
|
|
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blood separator and method of
separating fluid fraction from whole blood
|
|
US
|
|
8,097,171
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Manufacture
|
|
8/5/2025
|
|
seraSTAT®;
rapid blood cell separator also integrated into PIFA PLUSS® PF4 and PIFA PLUSS® Infectious Diseases Rapid Assays
|
|
|
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|
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|
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blood separator and method of
separating fluid fraction from whole blood
|
|
Japan
|
|
4,885,134
|
|
Manufacture
|
|
8/5/2025
|
|
seraSTAT®;
rapid blood cell separator also integrated into PIFA PLUSS® PF4 and PIFA PLUSS® Infectious Diseases Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
blood cell separator
|
|
European
Union
|
|
1793906
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|
Manufacture
|
|
8/5/2025
|
|
seraSTAT®;
rapid blood cell separator also integrated into PIFA PLUSS® PF4 and PIFA PLUSS® Infectious Diseases Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
blood cell separator
|
|
Hong
Kong
|
|
11004006
|
|
Manufacture
|
|
8/5/2025
|
|
seraSTAT®;
rapid blood cell separator also integrated into PIFA PLUSS® PF4 and PIFA PLUSS® Infectious Diseases Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
methods for detecting heparin
platelet factor 4
|
|
US
|
|
9,383,368
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|
Manufacture
|
|
10/4/2024
|
|
PIFA®
Heparin/PF4 Rapid Assay; PIFA PLUSS® PF4
|
|
|
|
|
|
|
|
|
|
|
|
methods and kits for detecting
heparin/platelet factor 4 antibodies
|
|
Japan
|
|
4,931,821
|
|
Manufacture
|
|
10/4/2025
|
|
PIFA®
Heparin/PF4 Rapid Assay; PIFA PLUSS® PF4
|
|
|
|
|
|
|
|
|
|
|
|
Methods and kits for detecting
heparin platelet factor 4 antibodies
|
|
Japan
|
|
577579
|
|
Manufacture
|
|
10/4/2025
|
|
PIFA®
Heparin/PF4 Rapid Assay; PIFA PLUSS® PF4
|
|
|
|
|
|
|
|
|
|
|
|
test strip card
|
|
US
|
|
8,003,061
|
|
Manufacture
|
|
5/6/2024
|
|
Tri-Cholesterol
“Check”®
|
|
|
|
|
|
|
|
|
|
|
|
test strip card
|
|
US
|
|
8,425,859
|
|
Manufacture
|
|
5/6/2024
|
|
Tri-Cholesterol
“Check”®
|
|
|
|
|
|
|
|
|
|
|
|
test strip card
|
|
US
|
|
8,808,639
|
|
Manufacture
|
|
5/6/2024
|
|
Tri-Cholesterol
“Check”®
|
Circumstances
outside our control could pose a threat to our intellectual property. For example, effective intellectual property protection
may not be available in every country in which our products are distributed. Also, the efforts we have taken to protect our proprietary
rights may not be sufficient or effective. Any significant impairment of our intellectual property rights is costly and time consuming.
Any increase in unauthorized use of our intellectual property could make it more expensive to do business and harm our operating
results.
Akers’
Tri-Cholesterol “Check”, PIFA Heparin/PF4 Rapid Assay, BreathScan PRO alcohol detection system, and the Breath
KetoChek are CE-marked for sale in the EU for professional use. The CE-mark must be affixed to a product that is intended,
by the manufacturer, to be used for a medical purpose and will be sold into EU member states as well as Iceland, Norway and Liechtenstein.
For Akers’ current and proposed “medical-purpose” products, the CE-marking process is facilitated by self-certification,
as a manufacturer must carry out a conformity assessment, perform any appropriate electromagnetic testing, create a technical
file with supporting documentation, and sign an EC declaration of conformity. The documentation is verified by the Company’s
authorized representative in the EU and must be made available to authorities upon request.
Government
Regulations
FDA
Approval/Clearance Requirements
Unless
an exemption applies, each medical device that we wish to market in the U.S. must receive 510(k) clearance. It has been the Company’s
experience thus far, that the FDA’s 510(k) clearance process usually takes from four to twelve months, but can last significantly
longer. We cannot be sure that 510(k) clearance will ever be obtained for any product we propose to market. We have obtained the
required FDA clearance for all of our current products that require such clearance.
The
FDA decides whether a device line must undergo either the 510(k) clearance or Premarket approval (“PMA”). PMA is the
FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices. Class III
devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health,
or which present a potential, unreasonable risk of illness or injury. The PMA approval process is based on statutory criteria.
These criteria include the level of risk that the agency perceives is associated with the device and a determination whether the
product is a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less
risk are placed in either Class I or II, which requires the manufacturer to submit a premarket notification (“PMN”)
requesting 510(k) clearance, unless an exemption applies. The PMN must demonstrate that the proposed device is “substantially
equivalent” in intended use and in safety and effectiveness to a legally marketed predicate device, which is a pre-existing
medical device to which equivalence can be drawn, that is either in Class I, Class II, or is a Class III device that was in commercial
distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application.
Class
I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls
for medical devices, or the General Controls, which include compliance with the applicable portions of the FDA’s quality
system regulations, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful
and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by
the FDA through the 510(k) PMN process described below. A small number of our products are Class I devices.
Class
II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure
the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through
the 510(k) PMN procedure. Pursuant to the Medical Device User Fee and Modernization Act of 2002, or MDUFMA, as of October 2002
unless a specific exemption applies, 510(k) PMN submissions are subject to user fees. Certain Class II devices are exempt from
this premarket review process. A majority of our products, encompassing all of our significant product lines, are Class II devices.
Class
III devices are those devices which have a new intended use, or use advanced technology that is not substantially equivalent to
that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the General Controls
and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety
and effectiveness and must be approved through the premarket approval process described below. Premarket approval applications
(and supplemental premarket approval applications) are subject to significantly higher user fees under MDUFMA than are 510(k)
PMNs. None of our products are Class III devices.
A
clinical trial may be required in support of a 510(k) submission. These trials generally require an Investigational Device Exemption,
or IDE, application approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant
risk device eligible for more abbreviated IDE requirements. The IDE application must be supported by appropriate data, such as
animal and laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate
institutional review boards at the clinical trial sites.
Pervasive
and Continuing FDA Regulation
A
host of regulatory requirements apply to our marketed devices, including the quality system regulation (which requires manufacturers
to follow elaborate design, testing, control, documentation and other quality assurance procedures), the Medical Reporting Regulations
(“MDR”) regulations (which require that manufacturers report to the FDA specified types of adverse events involving
their products), labeling regulations, and the FDA’s general prohibition against promoting products for unapproved or “off-label”
uses. Class II devices also can have special controls such as performance standards, post-market surveillance, patient registries
and FDA guidelines that do not apply to class I devices. Unanticipated changes in existing regulatory requirements or adoption
of new cGMP requirements could hurt our business, financial condition and results of operations.
Health
Care Fraud and Abuse
In
the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks,
bribes or other remuneration in exchange for the referral of patients or other health-related business. For example, the Federal
Health Care Programs’ Anti-Kickback Law (42 U.S.C. §1320a-7b(b)) prohibits anyone from, among other things, knowingly
and willfully offering, paying, soliciting or receiving any bribe, kickback or other remuneration intended to induce the referral
of patients for, or the purchase, order or recommendation of, health care products and services reimbursed by a federal health
care program (including Medicare and Medicaid). Recognizing that the federal anti-kickback law is broad and potentially applicable
to many commonplace arrangements, the Office of Inspector General within the Department of Health and Human Services, or OIG,
has issued regulations, known as the safe harbors, which identify permissible practices. If all of the requirements of an applicable
safe harbor are met, an arrangement will not be prosecuted under this law. Safe harbors exist for a number of arrangements relevant
to our business, including, among other things, payments to bona fide employees, certain discount arrangements, and certain payment
arrangements involving GPOs. The failure of an arrangement to fit precisely within one or more safe harbors does not necessarily
mean that it is illegal. However, conduct that does not fully satisfy each requirement of an applicable safe harbor may result
in increased scrutiny by government enforcement authorities, such as the OIG or the Department of Justice. Violations of this
federal law can result in significant penalties, including imprisonment, monetary fines and assessments, and exclusion from Medicare,
Medicaid and other federal health care programs. Exclusion of a manufacturer would preclude any federal health care program from
paying for its products. In addition to the federal anti-kickback law, many states have their own kickback laws. Often, these
state laws closely follow the language of the federal law. Some state anti-kickback laws apply regardless of whether a federal
health care program payment is involved. Federal and state anti-kickback laws may affect our sales, marketing and promotional
activities, and relationship with health care providers or laboratory professionals by limiting the kinds of arrangements we may
have with hospitals and others in a position to purchase or recommend our products.
Federal
and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third-party payors
that are false or fraudulent. For example, the federal Civil False Claims Act (31 U.S.C. §3729 et seq.) imposes liability
on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for
payment by a federal health care program (including Medicaid and Medicare). Manufacturers, like us, can be held liable under false
claims laws, even if they do not submit claims to the government, where they are found to have caused submission of false claims
by, among other things, providing incorrect coding or billing advice about their products to customers that file claims, or by
engaging in kickback arrangements with customers that file claims. A number of states also have false claims laws, and some of
these laws may apply to claims for items or services reimbursed under Medicaid and/or commercial insurance. Sanctions under these
federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under
government programs, and imprisonment.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: health care fraud and false
statements related to healthcare matters. The health care fraud statute prohibits knowingly and willingly executing a scheme to
defraud any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines,
imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with
the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result
in fines or imprisonment.
Due
to the breadth of some of these laws, it is possible that some of our current or future practices might be challenged under one
or more of these laws. In addition, there can be no assurance that we would not be required to alter one or more of our practices
to be in compliance with these laws. Evolving interpretations of current laws or the adoption of new federal or state laws or
regulations could adversely affect many of the arrangements we have with customers and physicians. Our risk of being found in
violation of these laws is increased by the fact that some of these laws are open to a variety of interpretations. If our past
or present operations are found to be in violation of any of these laws, we could be subject to civil and criminal penalties,
which could hurt our business, results of operations and financial condition.
Foreign
Regulation
Many
foreign countries in which we market or may market our products have regulatory bodies and restrictions similar to those of the
FDA. International sales are subject to foreign government regulation, the requirements of which vary substantially from country
to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval
and the requirements may differ. Companies are now required to obtain a CE Mark, which shows conformance with the requirements
of applicable European Conformity directives, prior to sale of some medical devices within the European Union. Some of our current
products that require CE Markings have them and it is anticipated that additional and future products may require them as well.
As of the date of this filing, the Company has received CE marks for eight for of its commercialized products/product components:
PIFA Heparin/PF4 Rapid Assay; Heparin/PF4 Serum Panels; Tri-Cholesterol “Check” and BreathScan PRO Detectors, Analyzer
Field Kit, Starter Kit and Blow Bags.
Third-Party
Reimbursement
Health
care providers, including hospitals, that purchase our products generally rely on third-party payors, including the Medicare and
Medicaid programs, and private payors, such as indemnity insurers and managed care plans, to cover and reimburse all or part of
the cost of the products and the procedures in which they are used. As a result, demand for our products is dependent in part
on the coverage and reimbursement policies of these payors.
CMS,
the federal agency responsible for administering the Medicare program, along with its contractors establishes coverage and reimbursement
policies for the Medicare program. In addition, private payors often follow the coverage and reimbursement policies of Medicare.
We cannot assure you that government or private third-party payors will cover and reimburse the procedures using our products
in whole or in part in the future or that payment rates will be adequate.
In
general, Medicare will cover a medical product or procedure when the product or procedure is reasonable and necessary for the
diagnosis or treatment of an illness or injury. Even if the medical product or procedure is considered medically necessary and
coverage is available, Medicare may place restrictions on the circumstances where it provides coverage. For some of our products,
our success in non-U.S. markets may depend upon the availability of coverage and reimbursement from the third-party payors through
which health care providers are paid in those markets. Health care payment systems in non-U.S. markets vary significantly by country,
and include single-payor, government managed systems as well as systems in which private payors and government-managed systems
exist, side-by-side. For some of our products, our ability to achieve market acceptance or significant sales volume in international
markets may be dependent on the availability of reimbursement for our products under health care payment systems in such markets.
There can be no assurance that reimbursement for our products, will be obtained or that such reimbursement will be adequate.
Other
U.S. Regulation
We
must also comply with numerous federal, state and local laws relating to matters such as environmental protection, safe working
conditions, manufacturing practices, fire hazard control and, among other things, the generation, handling, transportation and
disposal of hazardous substances.
Employees
We
currently employ 28 full-time equivalent employees, contractors or consultants, which include 11 in research and development,
4 in general and administrative, 4 in sales and marketing and 9 in direct and indirect manufacturing. None of our employees are
represented by a labor union or are a party to a collective bargaining agreement. We believe that we have good relations with
our employees.
Available
information
Our
website address is
www.akersbio.com
. We do not intend our website address to be an active link or to otherwise incorporate
by reference the contents of the website into this Report. The public may read and copy any materials the Company files with the
U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030.
The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
Item
1A. Risk Factors.
You
should carefully consider the risks described below, together with all of the other information included in this report, in considering
our business and prospects. The risks and uncertainties described below are not the only ones facing the Company. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The
occurrence of any of the following risks could harm our business, financial condition or results of operations.
Risks
Related to the Company and Our Business
We
have a history of operating losses and we cannot guarantee that we can ever achieve sustained profitability.
We
have recorded a net loss attributable to common stockholders in most reporting periods since our inception. Our net loss for the
years ended December 31, 2016 and December 31, 2015 were $3,303,538 and $9,311,913, respectively. Our accumulated deficit
at December 31, 2016 was $97,479,537. Losses are expected to continue for the foreseeable future. The Company expects to
continue to have development costs as it develops its next generation of products. We may never achieve profitable operations
or positive cash flow.
Our
operating expenses will increase as we make further expenditures to enhance and expand our operations in order to support additional
growth in our business and public company reporting and compliance obligations.
Historically,
we limited our investment in infrastructure; however, we expect our infrastructure investments to increase substantially to support
our anticipated growth and as a result of our becoming a public reporting company in the United States. We intend to make additional
investments in automated manufacturing systems and personnel in order to expand our operations to support anticipated growth in
our business. In addition, to be competitive and take advantage of market opportunities, we may need to make changes to our sales
model in the future. These changes may result in higher selling, general and administrative expenses as a percentage of our revenue.
We also expect to incur ongoing operating costs of being a public reporting company. As a result of these factors, we expect our
operating expenses to increase.
Due
to our dependence on a limited number of customers and the loss of any such customer would have a material adverse effect on our
operating results and prospects.
As
of December 31, 2016, we had two principal U.S. customers; Cardinal Health, Inc. (“Cardinal Health”) and Fisher
Healthcare (“Fisher”) each has the non-exclusive right to distribute PIFA Heparin/PF4 Rapid Assays within the U.S.
NovoTek Pharmaceuticals Ltd (“NovoTek”) has exclusive distribution rights to PIFA Heparin/PF4 Rapid Assays in the
Peoples Republic of China.
For
the year ended December 31, 2016, Cardinal Health, Fisher and NovoTek accounted for approximately 75% of the Company’s
product revenue.
Because
of our dependence on a limited number of key customers, the loss of a major customer (or loss of a key program with a major customer),
or any significant reduction in orders by a major customer or termination of the any of their distribution agreements would materially
affect our business, our results of operations and our financial condition. We expect that sales to relatively few customers will
continue to account for a significant percentage of our net sales for the foreseeable future, however there can be no assurance
that any of these customers or any of our other customers will continue to utilize our products or our services at current levels.
Due
to our dependence on a limited number of customers, we are subject to a concentration of credit risk.
As
of December 31, 2016, three customers accounted for 30% of our trade receivables. In the case of insolvency by one of our significant
customers, a trade receivable with respect to that customer might not be collectible, might not be fully collectible, or might
be collectible over longer than normal terms, each of which could adversely affect our financial position.
The
Company’s business would suffer if the Company were unable to acquire adequate sources of supply.
We
use a diverse and broad range of raw materials in the manufacturing of our products. We purchase all of our raw materials and
select items, such as packaging, from external suppliers. In addition, we purchase some supplies from single sources for reasons
of proprietary know-how, quality assurance, sole source availability, or due to regulatory qualification requirements and disruption
of these sources could have, at a minimum, a temporary adverse effect on shipments and the financial results of the Company. We
work closely with our suppliers to ensure continuity of supply while maintaining high quality and reliability. To date, we have
not experienced any significant difficulty locating and obtaining the materials necessary to fulfill our production requirements.
One supplier accounted for 27% of the Company’s total purchases during the year ended December 31, 2016. Any prolonged
inability to obtain certain materials or components could have an adverse effect on the Company’s financial condition or
results of operations and could result in damage to its relationships with its customers and, accordingly, adversely affect the
Company’s business.
We
may require additional capital in the future to develop new products and otherwise support our operations. If we do not obtain
any such additional financing, if required, our business prospects, financial condition and results of operations will be adversely
affected.
We
intend to invest significantly in our business; therefore, we expect cash flows from operations to be inadequate to cover our
anticipated expenses. We believe we have sufficient capital to satisfy our needs for at least the next twelve months. We may need
to obtain significant additional financing, both in the short and long-term, to make planned capital expenditures, to cover operating
expenses, upgrades to our manufacturing operations, our ongoing product development and to fund to potential acquisitions, if
any. We may not be able to secure adequate additional financing when needed on acceptable terms, or at all. To execute our business
strategy, we may issue additional equity securities in public or private offerings. If we cannot secure sufficient additional
funding we may be forced to forego strategic opportunities and/or delay, scale back or eliminate future product development which
would harm our business and our ability to generate positive cash flow in the future.
Because
we may not be able to obtain necessary regulatory clearances or approvals for some of our products, we may not generate revenue
in the amounts we expect, or in the amounts necessary to continue our business.
All
of our proposed and existing products are subject to regulation in the U.S. by the U.S. Food and Drug Administration and/or other
domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular,
we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products.
The process of obtaining required approvals or clearances varies according to the nature of and uses for, a specific product.
These processes can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities, and other costly,
time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will
grant an approval or clearance for product. Each authority may impose its own requirements and can delay or refuse to grant approval
or clearance, even though a product has been approved in another country.
The
time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of
a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase
the risk that we will not succeed in introducing or selling the subject products, and we may be required to abandon a proposed
product after devoting substantial time and resources to its development.
Changes
in domestic and foreign government regulations could increase our costs and could require us to undergo additional trials or procedures,
or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes
in government regulations may adversely affect our financial condition and results of operations because we may have to incur
additional expenses if we are required to change or implement new testing, manufacturing and control procedures. If we are required
to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development,
marketing, or other activities that are critical to our business.
We
are subject to regulations of various government agencies and if we are unable to comply with such regulations it would materially
affect our business
.
We
can manufacture and sell our products only if we comply with certain regulations of government agencies. As a U.S. manufacturer,
we must operate our production facility in accordance with the requirements established by the FDA under the Federal Food, Drug,
and Cosmetic Act (FD&C Act). As such, we have implemented a quality system that is intended to comply with applicable regulations.
Our manufacturing plant is subject to periodic inspections by the FDA, and at last inspection, the facility was found to be in
substantial compliance with current good manufacturing practice (cGMP) requirements. Although the Company is dedicated to remaining
in compliance with such practices, the cGMP requirements could change and negatively impact our ability to manufacture our products
without modifications to our operating procedures or changes to our equipment or human resource allocations which may materially
affect our business.
The
commercial success of our products will depend upon the degree of market acceptance by physicians, hospitals, third-party payors,
and others in the medical community.
Ultimately,
none of our current products or products in development, even if they receive approval, may ever gain market acceptance by physicians,
hospitals, third-party payors or others in the medical community. If these products do not achieve an adequate level of acceptance,
we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of our products,
if approved for commercial sale, will depend on a number of factors, including:
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the
efficacy and potential advantages over alternative treatments;
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the
ability to offer our products for sale at competitive prices;
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the
willingness of the target population to accept and adopt our products;
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the
strength of marketing and distribution support and the timing of market introduction of competitive products; and
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publicity
concerning our products or competing products and treatments.
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Even
if a potential product displays a favorable profile, market acceptance of the product will not be known until after it is launched.
Our efforts to educate the medical community and third-party payors on the benefits of our products may require significant resources
and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional
technologies marketed by our competitors.
If
we fail to obtain regulatory approval in foreign jurisdictions, then we cannot market our products in those jurisdictions.
We
plan to market some of our products in foreign jurisdictions, initially in China and the European Union (“EU”). Many
foreign countries in which we market or may market our products have regulatory bodies and restrictions similar to those of the
FDA. International sales are subject to foreign government regulation, the requirements of which vary substantially from country
to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval
and the requirements may differ. Companies are now required to obtain a CE Mark, which shows conformance with the requirements
of applicable European Conformity directives, prior to the sale of some medical devices within the European Union. Some of our
current products that require CE Markings have them and it is anticipated that additional and future products may require them
as well. We may be required to conduct additional testing or to provide additional information, resulting in additional expenses,
to obtain necessary approvals. If we fail to obtain approval in such foreign jurisdictions, we would not be able to sell our products
in such jurisdictions, thereby reducing the potential revenue from the sale of our products.
We
may be unable to market our products outside the United States if our products cannot meet certain requirements of the Federal
Food, Drug and Cosmetic Act requirements for exporting medical devices.
Any
medical device that is legally marketed in the U.S. may be exported anywhere in the world without prior FDA notification or approval.
Medical devices that are not FDA-cleared for marketing legally in the U.S. may be exported under section 801(e)(1) of the FD&C
Act, provided that they are intended for export only, they are class I or class II devices, and they are:
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In
accordance with the specifications of the foreign purchaser;
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Not
in conflict with the laws of the country to which they are intended for export;
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Labeled
on the outside of the shipping package that they are intended for export; and
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Not
sold or distributed in the U.S.
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We
cannot guarantee that certain current and future products will meet all of the aforementioned specifications for export which
could adversely impact our ability to market our products outside the U.S.
We
may be unable to market our products outside the United States if our products cannot meet regulatory requirements of certain
countries.
In
the European Union, a product that meets the definition of an In Vitro Diagnostic Medical Device (“IVD”) in accordance
with the European Directive (98/79/EC) must receive a regulatory approval known as a CE mark. The letters “CE” are
the abbreviation of the French phrase “Conforme Européene,” which means “European conformity.”
As such, export of these products to the European Union, and possibly other jurisdictions, without the CE mark is not possible.
Although obtaining a CE Mark is often a self-certification process, preparation and submission of the technical file to an Authorized
Representative in the EU, and their verification of a company’s compliance with the Directive, can be a lengthy process.
Some of the Company’s current and future products may fall within the IVD categorization. As of the date of this filing,
the Company has received CE marks for eight of its commercialized products and product components: PIFA Heparin/PF4 Rapid Assay;
Heparin/PF4 Serum Panels; Tri-Cholesterol “Check” and BreathScan PRO Detectors, Analyzer Field Kit, Starter Kit and
Blow Bags. An earlier version of the Breath KetoChek also bears a CE-Mark.
Further,
some foreign countries, such as Canada and India, require that a medical device company’s manufacturing facility be certified
for compliance with the ISO 13485, an international standard for quality systems management. The International Organization for
Standardization (“ISO”) is the world’s largest developer of standards with 148 member countries. The Company’s
quality management system received a certification of compliance with the ISO 13485:2003 requirements on February 4, 2015. The
failure by the Company to maintain this certification may limit Akers’ ability to obtain foreign regulatory approval on
a timely basis, if at all and to do so may cause Akers to incur additional costs or prevent Akers from marketing its products
in foreign countries, which may have a material adverse effect on its business and results of operations.
Our
products may not be able to compete with new diagnostic products or existing products developed by well-established competitors,
which would negatively affect our business.
According
to “
In Vitro Diagnostic Tests Come out of the Lab and Into the Home”
, an article published by MDDI online in
March 2013, the diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point-of-care
and is highly competitive and rapidly changing. Several companies produce diagnostic tests that compete directly with our testing
product line, including but not limited to, Abbott, ACON Laboratories, Inc., Alere, Diagnostica Stago, SA, Immucor, Inc., OraSure
Technologies, Inc., and Quidel Corporation. Many of these competitors have substantially greater financial, technical, marketing
and other resources than we do and enjoy other competitive advantages, including, greater name recognition; established relationships
with health care professionals, companies and consumers; additional lines of products and the ability to offer rebates or higher
discounts and incentives. As new products enter the market, our products may become obsolete or a competitor’s products
may be more effective or more effectively marketed and sold than ours. Although we have no specific knowledge of any competitor’s
product that will render our products obsolete, if we fail to maintain and enhance our competitive position or fail to introduce
new products and product features, our customers may decide to use products developed by our competitors, which could result in
a loss of revenue and cash flow.
In
addition, the point-of-care diagnostics industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services, some of which focus on automated systems to provide rapid results. As new technologies
become introduced into the point-of-care diagnostic testing market, we may be required to commit considerable additional efforts,
time and resources to enhance our current product portfolio or develop new products. We may not have the available time and resources
to accomplish this and many of our competitors have substantially greater financial and other resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing
these products and services to our customers, especially if rapid, manual testing products become secondary, in large markets,
to automated point-of-care systems. If these potential developments come to fruition our operating results could be materially
harmed.
Clinical
trials that may be required to support regulatory submissions in the United States and in international markets are expensive.
We cannot assure that we will be able to complete any required clinical trial programs successfully within any specific time period,
and if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will
be adversely affected.
Conducting
clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale
of any products, we must demonstrate through clinical trials the safety and effectiveness of our products. We have incurred, and
we will continue to incur, substantial expense for, and devote a significant amount of time to, product development, pilot trial
testing, clinical trials and regulated, compliant manufacturing processes. During the year ended December 31, 2016 research and
development expense totaled $1,188,868. The estimated research and development expense for the year ending December 31, 2017 is
$950,000.
Even
if completed, we do not know if these trials will produce statistically significant or clinically meaningful results sufficient
to support an application for marketing approval. Whether or not and how quickly we complete clinical trials is dependent in part
upon the rate at which we are able to advance the rate of patient enrollment, and the rate to collect, clean, lock and analyze
the clinical trial database.
Patient
enrollment in trials is a function of many factors. These include the design of the protocol; the size of the patient population;
the proximity of patients to and availability of clinical sites; the eligibility criteria for the study; the perceived risks and
benefits of the product candidate under study; the medical investigators’ efforts to facilitate timely enrollment in clinical
trials; the patient referral practices of local physicians; the existence of competitive clinical trials; and whether other investigational,
existing or new products are available or approved for the indication. If we experience delays in patient enrollment and/or completion
of our clinical trial programs, we may incur additional costs and delays in our development programs, and may not be able to complete
our clinical trials on a cost-effective or timely basis. Accordingly, we may not be able to complete the clinical trials within
an acceptable time frame, if at all. If we fail to enroll and maintain the number of patients for which the clinical trial was
designed, the statistical power of that clinical trial may be reduced, which would make it harder to demonstrate that the product
candidate being tested in such clinical trial is safe and effective. Further, if we or any third party have difficulty enrolling
a sufficient number of patients in a timely or cost-effective manner to conduct clinical trials as planned, or if enrolled patients
do not complete the trial as planned, we or a third party may need to delay or terminate ongoing clinical trials, which could
negatively affect our business.
The
results of our clinical trials may not support either further clinical development or the commercialization of our product candidates.
Even
if our clinical trials are completed as planned, their results may not support either the further clinical development or the
commercialization of our product candidates. The FDA or government authorities may not agree with our conclusions regarding the
results of our clinical trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials
will be successful, and the results from any later clinical trials may not replicate the results of prior clinical trials and
pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for
indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates.
Any delay in, or termination of, our clinical trials will delay the filing of our 510(k)’s and, ultimately, our ability
to commercialize our product candidates and generate product revenue. Each medical device marketed in the U.S. must receive a
510(k) clearance from the FDA. A 510(k) is a premarket submission made to FDA to demonstrate that the device to be marketed is
at least as safe and effective, that is, substantially equivalent (“SE”), to a legally marketed device. Companies
must compare their device to one or more similar legally marketed devices, commonly known as “predicates”, and make
and support their substantial equivalency claims. The submitting company may not proceed with product marketing until it receives
an order from the FDA declaring a device substantially equivalent. The substantially equivalent determination is usually made
within 90 days, based on the information submitted by the applicant.
In
addition, we or the FDA may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable
health risks or if the FDA finds deficiencies in the conduct of these trials. A number of companies in the biotechnology industry
have suffered significant setbacks in advanced clinical trials despite promising results in earlier trials. In the end, we may
be unable to develop marketable products.
Modifications
to our devices may require additional FDA approval which could force us to cease marketing and/or recall the modified device until
we obtain new approvals.
After
a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new 510(k) clearance or could require a Premarket approval (“PMA”).
PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices.
Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human
health, or which present a potential, unreasonable risk of illness or injury. Currently the Company does not market devices within
this Class III category nor does it intend to in the foreseeable future. However, the FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any decision. If the FDA disagrees with a manufacturer’s decision
not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval.
The FDA also can require the manufacturer to cease marketing and/or recall the modified devices until 510(k) clearance or PMA
approval is obtained. We have modified one of our prescription use, 510(k)-cleared devices, specifically the PIFA Heparin/PF4
Rapid Assay to include our seraSTAT Separator. However, we determined that, in our view, based on FDA guidance as to when to submit
a 510(k) notification for changes to a cleared device, new 510(k) clearances or PMA approvals are not required. We cannot assure
you that the FDA would agree with any of our decisions not to seek 510(k) clearance or PMA approval. If the FDA requires us to
seek 510(k) clearance or PMA approval for any modification, we also may be required to cease marketing and/or recall the modified
device until we obtain a new 510(k) clearance or PMA approval.
We
are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA
finds that we have failed to comply, the agency can institute a wide variety of enforcement actions which may materially affect
our business operations.
We
are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA
finds that we have failed to comply, the agency can institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as:
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fines,
injunctions and civil penalties;
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recall,
detention or seizure of our products;
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the
issuance of public notices or warnings;
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operating
restrictions, partial suspension or total shutdown of production;
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refusing
our requests for 510(k) clearance of new products;
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withdrawing
510(k) clearance already granted; and
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criminal
prosecution.
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The
FDA also has the authority to request repair, replacement or refund of the cost of any medical device manufactured or distributed
by us. Our failure to comply with applicable requirements could lead to an enforcement action that may have an adverse effect
on our financial condition and results of operations.
We
may not have sufficient resources to effectively introduce and market our products, which could materially harm our operating
results.
Achieving
market acceptance for our existing products such as our direct-to-consumer offerings (disposable breathalyzers) and clinical laboratory
testing solutions (Particle Immuno Filtration Assay (“PIFA”) based heparin-induced thrombocytopenia and infectious
disease rapid tests) and introducing new products (breath condensate detectors for the health & wellness categories) require
substantial marketing efforts and will require our sales account executives, contract partners, outside sales agents and distributors
to make significant expenditures of time and money. In some instances we will be significantly or totally reliant on the marketing
efforts and expenditures of our contract partners, outside sales agents and distributors. The Company has aligned its sales resources
with the regional sales segmentation of our clinical products distributors. Although this has positively impacted sales, the large
account executive territories may prove to be inefficient as we commercialize products and may hinder our revenue growth.
Because
we currently have very limited marketing resources and sales capabilities, commercialization of our products, some of which require
regulatory clearance prior to market entrance, we must either expand our own marketing and sales capabilities or consider collaborating
with additional third parties to perform these functions. We may, in some instances, rely significantly on sales, marketing and
distribution arrangements with collaborative partners and other third parties. In these instances, our future revenue will be
materially dependent upon the success of the efforts of these third parties.
Should
we determine that expanding our own marketing and sales capabilities is required, we may not be able to attract and retain qualified
personnel to serve in our sales and marketing organization, to develop an effective distribution network or to otherwise effectively
support our commercialization activities. The cost of establishing and maintaining a more comprehensive sales and marketing organization
may exceed its cost effectiveness. If we fail to further develop our sales and marketing capabilities, if sales efforts are not
effective or if costs of increasing sales and marketing capabilities exceed their cost effectiveness, our business, results of
operations and financial condition would be materially adversely affected.
We
may not have the resources to conduct clinical protocols sufficient to yield data suitable for publication in peer-reviewed journals
and our inability to do so in the future could have an adverse effect on marketing our products effectively.
In
order for our products targeted for use by hospital laboratory professionals and healthcare providers to be widely adopted, clinical
protocols that are designed to yield data suitable for publication in peer-reviewed journals should be carried out. These studies
are often time-consuming, labor-intensive and expensive to execute. The Company has not had the resources to effectively implement
such clinical programs within its clinical development activities and may not be able to do so in the future. In addition, if
a protocol is initiated, the results of which may ultimately not support the anticipated positioning and benefit proposition for
the product. Either of these scenarios could hinder our ability to market our products and revenue may decline.
Our
future performance will depend largely on the success of products we have not developed yet.
Technology
is an important component of our business and growth strategy, and our success depends to a significant extent on the development,
implementation and acceptance of new products. Commitments to develop new products must be made well in advance of any resulting
sales, and technologies and standards may change during development, potentially rendering our products outdated or uncompetitive
before their introduction. Our ability to develop products to meet evolving industry requirements and at prices acceptable to
our customers will be dependent on a number of factors including, funding availability to complete development efforts, our ability
to test and refine products, successfully conduct clinical trials and seek to obtain required FDA clearance or foreign approval/certification
for products that require such regulatory authorizations. Physician patients and third party payors and the medical community
may be slow to adopt any of our products. Moreover, there can be no assurance that the products that we are developing will receive
FDA clearance, work effectively in the marketplace or gain market acceptance. We may expend considerable funds and other resources
on the development of next-generation products without any guarantee that these products will be successful.
If
we are not successful in bringing new products to market, whether because we fail to address marketplace demand, fail to develop
viable technologies or otherwise, our revenue may decline and our results of operations could be seriously harmed.
If
we fail to establish, maintain and expand relationships with distributors, sales of our products would decline.
The
Company does not control the efforts of its distributors and its distributors are not prohibited from selling competing products.
Our ability to sell our products depends largely on the Company’s relationships with such distributors. Accordingly, we
are subject to the risk that they may not commit the financial and other resources to market and sell our products to our level
of expectation, they may experience financial hardship or they may otherwise terminate our relationship on short notice. In the
U.S. clinical laboratory marketplace, many of our existing and potential customers purchase our products through our two national
distributors, Cardinal Health and Fisher Health. Our sales account executives work in tandem with the distributor’s sales
representatives to gain access to decision makers within the majority of U.S. medical facilities. In addition, the Company relies
on its distribution network to negotiate pricing arrangements and contracts with Group Purchasing Organizations and their affiliated
hospitals and other members. For the years ended December 31, 2016 and 2015, 87% and 78%, respectively of total product revenue
from the sale of the Company’s Heparin/PF4 Assay products was generated through our U.S. distributors’ purchases,
with Cardinal Health and Fisher accounting for 63% and 65% of such sales for each year ended December 31, 2016 and 2015. In the
future, if we are unable to maintain existing relationships and/or grow to be recognized as a prominent medical device supplier
within these organizations, and/or develop new relationships with additional U.S. and international distributors, our competitive
position would likely suffer and our business would be harmed.
We
have just begun to develop formal business relationships with foreign distributors for all of our in-line products. We will therefore
be dependent upon the financial health of these organizations to further grow our business internationally. If a distributor were
to go out of business, it would take substantial time, cost and resources to find a suitable replacement and the product registrations
and certifications held by such distributor may not be returned to us or to a subsequent distributor in a timely manner or at
all. Any failure to produce foreign sales may negatively affect our profitability in the short and long-term. Since some of our
products have CE-Marks and/or are earmarked for sale in Europe where healthcare regulation and reimbursement for medical devices
vary significantly from country to country, this changing environment could adversely affect our ability to sell our products
in some European countries. In addition, the Company is working with its joint venture partner in mainland China to register several
of its products for eventual sale. Since additional clinical studies must be performed by our joint venture partner within Chinese
healthcare facilities as part of their regulatory submission, there is no guarantee that the results of their protocol will support
the successful registration of the products and permit sales activity. Failure to gain product registration in China will hinder
the Company’s ability to increase its revenue.
Our
business is vulnerable to the availability of raw materials, our ability to forecast customer demand and our ability to manage
production capacity.
Our
ability to meet customer demand depends, in part, on our production capacity and on obtaining supplies, a number of which can
only be obtained from a single supplier or a limited number of suppliers. A reduction or disruption in our production capacity
or our supplies could delay products and fulfillment of orders and otherwise negatively impact our business.
We
must accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials.
If we overestimate demand, we may experience underutilized capacity and excess inventory levels. If we underestimate demand, we
may miss delivery deadlines and sales opportunities and incur additional costs for labor overtime, equipment overuse and logistical
complexities. Additionally, our production capacity could be affected by manufacturing problems. Difficulties in the production
process could reduce yields or interrupt production, and, as a result, we may not be able to deliver products on time or in a
cost-effective, competitive manner. Our failure to adequately manage our capacity could have a material adverse effect on our
business, financial condition and results of operations.
Our
ability to meet customer demand also depends on our ability to obtain timely and adequate delivery of materials, parts and components
from our suppliers. We generally do not maintain contracts with any of our key suppliers. From time to time, suppliers may extend
lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. Supply disruptions
may also occur due to shortages in critical materials. In addition, a number of our raw materials are obtained from a single supplier.
Many of our suppliers must undertake a time-consuming qualification process before we can incorporate their raw materials into
our production process. If we are unable to obtain materials from a qualified supplier, it can take up to a year to qualify a
new supplier, assuming an alternative source of supply is available. A reduction or interruption in supplies or a significant
increase in the price of one or more supplies could have a material adverse effect on our business, financial condition and results
of operations.
Our
manufacturing facility is vulnerable to natural disasters and other unexpected losses, and we may not have adequate insurance
to cover such losses.
We
have one manufacturing facility, located in Thorofare, New Jersey, for production of all of our finished goods production. Our
facility is susceptible to damage from fire, floods, loss of power or water supply, telecommunications failures and similar events.
Since some of our raw materials and finished goods are temperature-sensitive and our facility currently does not have a back-up
generator, a moderate-to-severe disruption in power may render various levels of our inventories unusable or unsalable, resulting
in a sufficient write off of inventory and may immediately impact our ability to generate revenue.
Any
natural disaster could significantly disrupt our operations. In the event that our facility was affected by a natural or man-made
disaster, we would be forced to rely on third-party manufacturers. Our insurance for damage to our property and the disruption
of our business from casualties may not be sufficient to cover all of our potential losses and may not continue to be available
to us on acceptable terms, or at all. If we are forced to seek alternative facilities, we may incur additional transition costs
and we may experience a disruption in the supply of our products until the new facility is available and operating. In addition,
much of the machinery we use in our production process is custom-made. If such machinery is damaged, we may experience a long
lead-time before this unique machinery is replaced or rebuilt and we are able to resume production.
Our
manufacturing and distribution operations are highly dependent on our information technology systems and we do not currently have
a redundant data center. In the event of a failure of our primary data center, our manufacturing and distribution operations will
be disrupted which will adversely affect our business.
In
addition, any disruption, delay, transition or expansion of our manufacturing operations could impair our ability to meet the
demand of our customers and our customers may cancel orders or purchase products from our competitors, which could adversely affect
our business, financial condition and results of operations.
Some
of our finished goods, including our PIFA products and control materials related to PIFA Heparin/PF4 assays, are temperature-sensitive.
Proper
packaging and time in transit are critical to the stability of some of our clinical laboratory products when they are en route
to our distributors or end users. If certain specialized packaging materials cannot be obtained, and/or if our contracted common
carriers, or those of our distributors, cannot meet product-specific delivery requirements, our products may not perform as intended
and may lead to requests for product replacement. If such issues become widespread it could hurt our reputation and we could potentially
lose customers which would adversely affect our business.
Also,
given the issue of temperature sensitivity, time in transit may limit our ability to service potential markets outside of the
U.S. for those products, especially those with geographies that do not allow for shipment and customs clearance within four business
days. This could adversely affect our potential to generate revenue for some products on an international level.
We
are subject to environmental, health and safety laws, which could increase our costs and restrict our operations in the future.
Our
operations are subject to environmental, health and safety laws and regulations in each of the jurisdictions in which we operate.
These laws and regulations concern, among other things, the generation, handling, transportation and disposal of hazardous substances
or wastes, the clean-up of hazardous substance releases, and the emission or discharge of materials into the air or water. Although
we currently incur limited expenditures in connection with these environmental health and safety laws and regulations, if we fail
to comply with the requirements of such laws and regulations or if such laws changes significantly in the future, we could incur
substantial additional costs to alter our manufacturing processes and/or adjust our supply chain management. Such changes could
also result in significant inventory obsolescence. Compliance with environmental, health and safety requirements could also restrict
our ability to expand our facilities in the future.
Our
business is vulnerable to inflation.
We
are limited in our ability to raise prices for some products, particularly in the clinical laboratory marketplace where cost-containment
pressures are significant. As a result, increases in our raw materials, production and transportation costs may have a material
adverse impact on our results of operations.
Demands
of third-party payors, cost reduction pressures among our customers and restrictive reimbursement practices may adversely affect
our revenue.
Our
ability to negotiate favorable contracts with non-governmental payors, including managed-care plans or Group Purchasing Organizations
(“GPOs”), even if facilitated by our distributors, may significantly affect revenue and operating results. Our customers
continue to face cost reduction pressures that may cause them to curtail their use of, or reimbursement for some of our products,
to negotiate reduced fees or other concessions or to delay payment. Furthermore, the increasing leverage of organized buying groups
among non-governmental payors may reduce market prices for our products and services, thereby reducing our profitability. Reductions
in price increases or the amounts received from current customers or lower pricing for our products to new customers could have
a material adverse effect on the financial position, cash flows and results of operations.
Failure
to obtain medical reimbursement for our products under development, as well as a changing regulatory and reimbursement environment,
may impact our business.
The
U.S. healthcare regulatory environment may change in a way that restricts our ability to market our products due to medical coverage
or reimbursement limits. Sales of our diagnostic tests will depend in part on the extent to which the costs of such tests are
covered by health maintenance, managed care, and similar healthcare management organizations, or reimbursed by government health
payor administration authorities, private health coverage insurers and other third-party payors. These healthcare payors are increasingly
challenging the prices charged for medical products and services. The containment of healthcare costs has become a priority of
federal and state governments. Accordingly, our potential products may not be considered to be cost effective, and reimbursement
may not be available or sufficient to allow us to sell our products on a competitive basis. Legislation and regulations affecting
reimbursement for our products may change at any time and in ways that are difficult to predict and these changes may be adverse
to us.
CMS,
the federal agency responsible for administering the Medicare program, along with its contractors establishes coverage and reimbursement
policies for the Medicare program. In addition, private payors often follow the coverage and reimbursement policies of Medicare.
We cannot assure you that government or private third-party payors will cover and reimburse the procedures using our products
in whole or in part in the future or that payment rates will be adequate.
For
some of our products, our success in non-U.S. markets may depend upon the availability of coverage and reimbursement from the
third-party payors through which health care providers are paid in those markets. Health care payment systems in non-U.S. markets
vary significantly by country, and include single-payor, government managed systems as well as systems in which private payors
and government-managed systems exist, side-by-side. For some of our products, our ability to achieve market acceptance or significant
sales volume in international markets may be dependent on the availability of reimbursement for our products under health care
payment systems in such markets. There can be no assurance that reimbursement for our products, will be obtained or that such
reimbursement will be adequate.
Health
care legislation, including the Patient Protection and Affordable Care Act and the Health Insurance Portability and Accountability
Act of 1996, may have a material adverse effect on us.
The
Patient Protection and Affordable Care Act (“PPACA”) substantially changes the way healthcare is financed by government
and private insurers, encourages improvements in healthcare quality, and impacts the medical device industry. The PPACA includes
an excise tax on entities that manufacture or import medical devices offered for sale in the United States; a new Patient-Centered
Outcomes Research Institute to conduct comparative effectiveness research; and payment system reforms.
The
PPACA also imposes new reporting and disclosure requirements on device and drug manufacturers for any payment or transfer of value
made or distributed to physicians or teaching hospitals. Under these provisions, known as the Physician Payment Sunshine Act,
affected device and drug manufacturers need to begin data collection on August 1, 2013, with the first reports due in 2014. These
provisions require, among other things, extensive tracking and maintenance of databases regarding the disclosure of relationships
and payments to physicians and teaching hospitals. In addition, certain states have passed or are considering legislation restricting
our interactions with health care providers and/or requiring disclosure of many payments to them. Failure to comply with these
tracking and reporting laws could subject us to significant civil monetary penalties.
The
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created new federal statutes to prevent healthcare
fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing
a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may
result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare and Medicaid programs. The
false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items
or services. A violation of this statute is a felony and may result in fines or imprisonment or exclusion from government sponsored
programs. HIPAA also established uniform standards governing the conduct of certain electronic healthcare transactions and protecting
the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health
plans and healthcare clearinghouses.
Both
federal and state government agencies are continuing heightened and coordinated civil and criminal enforcement efforts. As part
of announced enforcement agency work plans, the federal government will continue to scrutinize, among other things, the billing
practices of hospitals and other providers of healthcare services. The federal government also has increased funding to fight
healthcare fraud, and it is coordinating its enforcement efforts among various agencies, such as the U.S. Department of Justice,
the Office of Inspector General and state Medicaid fraud control units. We believe that the healthcare industry will continue
to be subject to increased government scrutiny and investigations.
We
may fail to recruit and retain qualified personnel.
We
expect to rapidly expand our operations and grow our sales, development and administrative operations. This expansion is expected
to place a significant strain on our management and will require hiring a significant number of qualified personnel. Accordingly,
recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other
companies for qualified personnel in the areas of our activities, particularly sales, marketing and research & development.
If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our marketing
and development activities, and this could have a material adverse effect on the Company’s business, financial condition,
results of operations and future prospects.
We
may face risks in connection with potential acquisitions.
We
may look to acquire businesses that complement or expand our operations as part of our business strategy going forward. We may
not be able to successfully identify attractive acquisition candidates or negotiate favorable terms in the future. Furthermore,
our ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of our implementation
plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired
operational efficiencies. If we are unable to successfully integrate the operations of any businesses that we may acquire in the
future, our business, financial position, results of operations or cash flows could be adversely affected.
We
rely on key executive officers, and their knowledge of our business and technical expertise would be difficult to replace.
We
are highly dependent on our Vice Chairman, Raymond F. Akers, Jr., PhD because of his expertise and experience in biotechnology
and diagnostics, as well as John J. Gormally, our Chief Executive Officer. We do not have “key person” life insurance
policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key
personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which
could adversely affect our operating results.
We
may need to obtain additional licenses to patents or other proprietary rights from other parties.
To
facilitate development and commercialization of a proprietary technology base, we may need to obtain additional licenses to patents
or other proprietary rights from other parties. Obtaining and maintaining these licenses, which may not be available, may require
the payment of up-front fees and royalties. In addition, if we are unable to obtain these types of licenses, our product development
and commercialization efforts may be delayed or precluded.
We
may not be able to protect or enforce our intellectual property rights, which could impair our competitive position.
Our
success depends significantly on our ability to protect our rights to the patents, trademarks, trade secrets, copyrights and all
other intellectual property rights used in our products. Protecting our intellectual property rights is costly and time consuming.
We rely primarily on patent protection and trade secrets, as well as a combination of copyright and trademark laws and nondisclosure
and confidentiality agreements to protect our technology and intellectual property rights. However, these legal means afford only
limited protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage. Despite
our intellectual property rights practices, it may be possible for a third party to copy or otherwise obtain and use our technology
without authorization, develop similar technology independently or design around our patents.
We
cannot be assured that any of our pending patent applications will result in the issuance of a patent to us. The U.S. Patent and
Trademark Office, or USPTO, may deny or require significant narrowing of claims in our pending patent applications, and
patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the USPTO.
Our issued and licensed patents and those that may be issued or licensed in the future may expire or may be challenged, invalidated
or circumvented, which could limit our ability to stop competitors from marketing related technologies. Upon expiration of our
issued or licensed patents, we may lose some of our rights to exclude others from making, using, selling or importing products
using the technology based on the expired patents. There is no assurance that competitors will not be able to design around our
patents. We also rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights
in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products
or processes or otherwise gain access to our unpatented proprietary technology. Further, we may not be able to obtain patent protection
or secure other intellectual property rights in all the countries in which we operate, and under the laws of such countries, patents
and other intellectual property rights may be unavailable or limited in scope. If any of our patents fail to protect our technology,
it would make it easier for our competitors to offer similar products. Our trade secrets may be vulnerable to disclosure or misappropriation
by employees, contractors and other persons. Any inability on our part to adequately protect our intellectual property may have
a material adverse effect on our business, financial condition and results of operations.
Expenses
incurred with respect to monitoring, protecting, and defending our intellectual property rights could adversely affect our business.
Competitors
and others may infringe on our intellectual property rights, or may allege that we have infringed on theirs. Monitoring infringement
and misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect infringement or
misappropriation of our proprietary rights.
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property
rights and we may be unable to protect our rights to, or use of, our technology.
Some
or all of our patent applications may not result in the issue of patents, or the claims of any issued patents may not afford meaningful
protection for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and
subsequently narrowed, invalidated, found unenforceable or circumvented. Patent litigation is widespread in the biotechnology
industry and could harm our business. Litigation might be necessary to protect our patent position. Patentability, invalidity,
freedom-to-operate or other opinions may be required to determine the scope and validity of third-party proprietary rights. If
we choose to go to court to stop a third party from using the inventions protected by our patent, that third party would have
the right to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These
lawsuits are expensive and we may not have the required resources to pursue such litigation or to protect our patent rights. In
addition, there is a risk that the court will decide that our patents are not valid or that we cannot stop the other party from
using their inventions. There is also the risk that, even if the validity of these patents is upheld, the court will find that
the third party’s activities do not infringe our rights in these patents.
Furthermore,
a third party may claim that we are infringing the third party’s patent rights and may go to court to stop us from engaging
in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could
affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court
would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents.
In addition, there is a risk that a court will order us to pay the other party’s treble damages or attorneys’ fees
for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it
is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The
coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for
patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the claims of the
relevant patent and/or that the third party patent claims are invalid, and we may not be able to do this. Proving invalidity in
the United Sates, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption
of validity enjoyed by issued patents.
In
addition, changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially
diminish the value of our intellectual property or narrow the scope of our patent protection. In September 2011, the U.S. Congress
passed the Leahy-Smith America Invents Act (“AIA”) which became effective in March 2013. The AIA reforms United States
patent law in part by changing the standard for patent approval for certain patents from a “first to invent” standard
to a “first to file” standard and developing a post-grant review system. It is too early to determine what the effect
or impact the AIA will have on the operation of our business and the protection and enforcement of our intellectual property.
However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications
and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition. Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent
applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing,
and publications in the scientific literature often lag behind actual discoveries. We cannot be certain that others have not filed
patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent
the technology (pre-AIA) or first to file (post-AIA). Our competitors may have filed, and may in the future file, patent applications
covering technology similar or the same as ours. Any such patent application may have priority over our patent application and
could further require us to obtain rights to such technologies in order to carry on our business. If another party has filed a
U.S. patent application on inventions similar or the same as ours, we may have to participate in an interference or other proceeding
in the U.S. Patent and Trademark Office, or the USPTO, or a court to determine priority of invention in the United States, for
pre-AIA applications and patents. The costs of these proceedings could be substantial, and it is possible that such efforts would
be unsuccessful, resulting in a loss of our U.S. patent position with respect to such inventions. Some of our competitors may
be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater
resources.
Our
failure to secure trademark registrations could adversely affect our ability to market our product candidates and our business.
Our
trademark applications in the United States and any other jurisdictions where we may file may not be allowed registration, and
we may not be able to maintain or enforce our registered trademarks. During trademark registration proceedings, we may receive
rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections.
In addition, in the USPTO and in corresponding foreign agencies, third parties are given an opportunity to oppose pending trademark
applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our applications
and/or registrations, and our applications and/or registrations may not survive such proceedings. Failure to secure such trademark
registrations in the United States and in foreign jurisdictions could adversely affect our ability to market our product candidates
and our business.
We
may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As
is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. Although the Company has no knowledge of any
claims against us, we may be subject to claims that these employees or the Company have inadvertently or otherwise used or disclosed
trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction
to management. To date, none of our employees have been subject to such claims.
We
may not be able to adequately protect our intellectual property outside of the United States.
The
laws in some foreign jurisdictions may not provide protection for our trade secrets and other intellectual property. If our trade
secrets or other intellectual property are misappropriated in foreign jurisdictions, we may be without adequate remedies to address
these issues. Additionally, we also rely on confidentiality and assignment of invention agreements to protect our intellectual
property. These agreements may provide for contractual remedies in the event of misappropriation. We do not know to what extent,
if any, these agreements and any remedies for their breach, will be enforced by a foreign or domestic court. In the event our
intellectual property is misappropriated or infringed upon and an adequate remedy is not available, our future prospects will
likely diminish.
Additionally,
prosecuting and maintaining intellectual property, particularly patent rights, are very costly endeavors. We do not know whether
legal and government fees will increase substantially and therefore are unable to predict whether cost may factor into our intellectual
property strategy.
If
we deliver products with defects, we may be subject to product recalls or negative publicity, our credibility may be harmed, market
acceptance of our products may decrease and we may be exposed to liability.
The
manufacturing and marketing of professional and consumer diagnostics involve an inherent risk of product liability claims. For
example, a defect in one of our diagnostic products could lead to a false positive or false negative result, affecting the eventual
diagnosis. Our product development and production are extremely complex and could expose our products to defects. Manufacturing
and design defects could lead to recalls, either voluntary or required by the FDA or other government authorities, and could result
in the removal of a product from the market. Defects in our products could also harm our reputation, lead to product liability
claims, claims that inaccurate test results lead to death or injury, negative publicity and decrease sales of our products. We
have obtained $10,000,000 of product liability insurance and we have never received a product liability claim, and have generally
not seen product liability claims for screening tests that are accompanied by appropriate disclaimers. However, in the event there
is a claim, this insurance may not fully cover our potential liabilities. In addition, as we attempt to bring new products to
market, we may need to increase our product liability coverage which would be a significant additional expense that we may not
be able to afford. If we are unable to obtain sufficient insurance coverage at an acceptable cost to protect us, we may be forced
to abandon efforts to commercialize our products or those of our strategic partners, which would reduce our revenue.
If
our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect,
our operating results could fall below expectations of financial analysts and investors, resulting in a decline in our stock price.
The
preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, assumptions and judgments
that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent
from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ
from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and
investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our financial statements
include those related to revenue recognition, inventory, product warranties, allowances for doubtful accounts, stock-based compensation
expense and income taxes.
As
an emerging growth company within the meaning of the Securities Act, we will utilize certain modified disclosure requirements,
and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.
We
are an emerging growth company within the meaning of the rules under the Securities Act. We have utilized, and we plan in future
filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including
reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from
the requirement of holding a nonbinding advisory vote on executive compensation. In addition, we will not be subject to certain
requirements of Section 404 of the Sarbanes-Oxley Act, including the additional testing of our internal control over financial
reporting as may occur when outside auditors attest as to our internal control over financial reporting, and we have elected to
delay adoption of new or revised accounting standards applicable to public companies. As a result, our stockholders may not have
access to certain information they may deem important.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act which allows us to delay the adoption of compliance with new or revised accounting
standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may
therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable
to public companies. 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
could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our annual gross revenue exceeds $1 billion, (ii) the date that we become a “large accelerated filer”
as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which
we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
We
have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley
Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial
reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation
or had our independent registered public accounting firm performed an audit of our internal control over financial reporting,
material weaknesses may have been identified. For so long as we qualify as an “emerging growth company” under the
JOBS Act, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports
on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of the evaluation, documentation
or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not
otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.
Our
legal counsel has advised us that we may have violated Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits an issuer
from extending or maintaining personal loans to its directors or executive officers. As a result, we could become subject to criminal,
civil or administrative sanctions or penalties and we may also face potential private securities litigation.
On
September 14, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Mr. Thomas
J. Knox. Pursuant to the Purchase Agreement, Mr. Knox purchased, amongst other things, 10,000,000 shares of the Series A Preferred
Stock. The Series A Preferred Stock were convertible at any time into 320,512 shares of common stock. The Company requested that
Mr. Knox convert the Series A Preferred Stock, and though under no obligation to do so, on November 15, 2013, Mr. Knox converted
all 10,000,000 shares of Series A Preferred Stock into 320,512 shares of common stock pursuant to the terms of the Series A Preferred
Stock. In order to satisfy the required onetime payment of $500,000 (the “Purchase Price”) due upon conversion as
set forth in the Purchase Agreement, Mr. Knox issued a promissory note in favor of the Company for the principal aggregate amount
of $500,000 (the “2013 Knox Note”). The 2013 Knox Note required payment of the principal in full prior to maturity
date of November 15, 2014 (the “Maturity Date”) with interest on the unpaid principal balance at the rate of the thirty
day average LIBOR per annum commencing on November 15, 2013. The 320,512 shares of common stock were to be held by the Company
as collateral until all amounts owing under the 2013 Knox Note were paid in full.
We
have taken immediate steps to address the above situation by cancelling the 2013 Knox Note and seeking immediate repayment from
Mr. Knox. On December 3, 2013 the Company issued Mr. Knox 261,997 shares of common stock and cancelled the remaining shares issuable
to him under the terms of the Series A Preferred Stock in full satisfaction of the Purchase Price. Section 402 of the Sarbanes-Oxley
Act of 2002 prohibits public U.S. companies, including us, from extending or maintaining personal loans to its directors or executive
officers. The arrangements with Mr. Knox may have violated this prohibition. The potential violation of the Section 402 may cause
governmental authorities, such as the SEC or other U.S. authorities, to impose certain criminal, civil, and administrative sanctions
or penalties upon us. Similarly, private parties may also bring civil litigations against us for such violations.
Risks
Related to the Market
Recent
global economic trends could adversely affect our business, liquidity and financial results.
Recent
global economic conditions, including a disruption of financial markets, could adversely affect us, primarily through limiting
our access to capital. In addition, the continuation or worsening of general market conditions in economies important to our businesses
may adversely affect our clients’ level of spending and ability to obtain financing, leading to us being unable to generate
the levels of sales that we require. Current and continued disruption of financial markets could have a material adverse effect
on the Company’s business, financial condition, results of operations and future prospects.
Risks
Relating to our Common Stock
We
currently have a limited trading volume, which results in higher price volatility for, and reduced liquidity of, our common stock.
There
has been limited trading of our common stock in the U.S since we began trading on the NASDAQ Capital Market in January 2014. Since
2002, our shares of common stock have been listed for trading on AIM. However, historically there has been limited volume of trading
in our common stock on AIM, which has limited the liquidity of our common stock on that market. We cannot predict whether or how
investor interest in our common stock on the AIM market might translate to the market price of our common stock or the development
of an active trading market in the U.S. or how liquid that market might become.
Furthermore,
if we cease to be listed on AIM or NASDAQ, holders would find it more difficult to dispose of, or to obtain accurate quotations
as to the market value of, our common stock, and the market value of our common stock would likely decline.
If
and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly
volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired
them.
The
market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number
of factors that are beyond our control, including, but not limited to:
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variations
in our revenue and operating expenses;
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actual
or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding
our ordinary shares, other comparable companies or our industry generally;
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market
conditions in our industry and the economy as a whole;
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developments
in the financial markets and worldwide or regional economies;
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announcements
of innovations or new products or services by us or our competitors;
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announcements
by the government relating to regulations that govern our industry;
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sales
of our common stock or other securities by us or in the open market; and
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changes
in the market valuations of other comparable companies.
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In
addition, if the market for biotech stocks or the stock market in general experiences loss of investor confidence, the trading
price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading
price of our shares might also decline in reaction to events that affect other companies in our industry, even if these events
do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. In
the past, following periods of volatility in the market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention
and resources, which could materially and adversely affect our business, operating results and financial condition.
Our
common stock is listed on two separate stock markets and investors seeking to take advantage of price differences between such
markets may create unexpected volatility in our share price; in addition, investors may not be able to easily move shares for
trading between such markets.
Our
common stock is already admitted to trading on AIM and the NASDAQ Capital Market. Price levels for our ordinary shares could fluctuate
significantly on either market, independent of our share price on the other market. Investors could seek to sell or buy our shares
to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage
activity could create unexpected volatility on either exchange with respect to both our share price and the volume of shares available
for trading. In addition, holders of shares in either jurisdiction will not be immediately able to transfer such shares for trading
on the other market without effecting necessary procedures with our transfer agent. This could result in time delays and additional
cost for our shareholders. Further, if we are unable to continue to meet the regulatory requirements for listing on AIM or NASDAQ,
we may lose our listing on AIM or NASDAQ, which could impair the liquidity of our shares.
Our
stock price could fall and we could be delisted from the NASDAQ in which case U.S. broker-dealers may be discouraged from effecting
transactions in shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock
rules.
The
SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed
to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities
and Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny
stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions
in such securities is provided by the exchange or system). Our securities have in the past constituted, and may again in the future
constitute, “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements
imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock,
which could severely limit the market liquidity of such shares and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally,
an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent
to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny
stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”,
a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer
or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer
and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit
monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s
account and information with respect to the limited market in “penny stocks”.
Stockholders
should be aware that, according to SEC, the market for “penny stocks” has suffered in recent years from patterns of
fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;
and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate
in the market, management will strive within the confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
We
have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment
may be limited to potential future appreciation on the value of our common stock.
We
currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate
paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including without limitation, our financial condition, operating results,
cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not
pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price
appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as
the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment.
Investors seeking cash dividends should not purchase our common stock.
Non-U.S.
investors may have difficulty effecting service of process against us or enforcing judgments against us in courts of non-U.S.
jurisdictions.
We
are a company incorporated under the laws of the State of New Jersey. All of our directors and officers reside in the United States.
It may not be possible for non-U.S. investors to effect service of process within their own jurisdictions upon our company and
our directors and officers. In addition, it may not be possible for non-U.S. investors to collect from our company, its directors
and officers, judgments obtained in courts in such non-U.S. jurisdictions predicated on non-U.S. legislation.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding
our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline.
If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
The
requirements of being a U.S. public company may strain our resources and divert management’s attention.
As
a U.S. public company, we will be or become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended
(“Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of NASDAQ, 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. The Exchange
Act requires, among other things, that we file annual and current reports with respect to our business and operating results.
As
a result of disclosure in filings required of a public company, our business and financial condition will become 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 resources of our management
and harm our business and operating results.
We
will incur significant costs as a result of being a publicly traded company and such costs may increase when we cease to be an
emerging growth company.
As
a publicly traded company, we will incur legal, accounting and other expenses estimated to range from $250,000 to $350,000 per
year, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered
under the Exchange, as well as additional corporate governance requirements, including applicable requirements under the Sarbanes-Oxley
Act and other rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance
purposes have been increasing. We expect compliance with these public reporting requirements and associated rules and regulations
to increase our legal and financial costs, particularly after we are no longer an emerging growth company, and to make some activities
more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws
and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees or as our executive officers. Further, if we are unable
to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other
regulatory action and, potentially, civil litigation.
The
recently enacted JOBS Act reduces certain disclosure requirements for emerging growth companies, thereby decreasing related regulatory
compliance costs. We qualify as an emerging growth company. However, when we cease to be an emerging growth company, we will be
unable to take advantage of the reduced regulatory requirements and any associated cost savings.
Efforts
to comply with the applicable provisions of Section 404 of the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance
with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock.
Under
current SEC rules, beginning with our fiscal year ending December 31, 2014, we will be required to report on our internal control
over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, and related rules and regulations of the SEC; although,
as an emerging growth company, we are exempt from the requirement to provide an auditor attestation to management’s assessment
of its internal controls as required by Section 404(b) of the Sarbanes-Oxley Act. We will be required to review on an annual basis
our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal
control over financial reporting. As a result, we expect to incur additional expenses in the near term that may negatively impact
our financial performance and our ability to make distributions. This process also will result in a diversion of management’s
time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or
the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal
control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain or achieve
compliance with the applicable provisions of Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price
of our common stock may be adversely affected.