RISK
FACTORS
An
investment in our securities involves a high degree
of risk. Before deciding whether to invest in our securities, you should consider carefully the risks described
below, together with other information in this prospectus, the information and documents incorporated by reference,
and in any free writing prospectus that we have authorized for use in connection with this offering. The occurrence
of any of the following risks could have a material and adverse effect on our business, reputation, financial condition, results
of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading
price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.
Risks
Related to 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 losses
for the six months ended June 30, 2019 and 2018 were $1,711,849 and $3,927,444, respectively. Our accumulated deficit at December
31, 2018 was $115,694,881. Our strategy for the medical device business is to leverage where possible its distributor relationships,
while exploring strategies for further reducing its costs. Overall, we are working to reduce our cash burn in order to have sufficient
cash funds available to execute on a transaction which would result from our pursuit of strategic alternatives. There can be no
assurance of success in reducing our loss, becoming profitable, or having sufficient cash to complete a strategic alternative
transaction.
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 June 30, 2019, 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. For the six
months ended June 30, 2019, Cardinal Health and Fisher accounted for approximately 78% 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 June 30, 2019, two customers accounted for 76% of our trade receivables as compared to December 31, 2018, where 73% of trade
receivables are attributed to these customers. 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. 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.
During
the first half of 2018, we experienced lower yields in the process of extracting antigen from the supplier provided platelets
used to produce our PIFA Heparin product. At these yield levels, our production of this product was under target levels, which
had resulted in backorders.
We
will require additional capital in the future to support our operations or to pursue strategic alternative transactions. If we
do not obtain any such additional financing, our business prospects, financial condition and results of operations will be adversely
affected.
We
expect cash flows from our current operations to be inadequate to cover our anticipated expenses and we believe that our existing
capital resources will only be sufficient to fund our current operations for the next ten to twelve months. As such, we will need
to obtain significant additional financing, both in the short and long-term to cover operating expenses and to fund potential
acquisitions. 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 on a timely basis, we may be forced to forego strategic opportunities, delay, scale back or eliminate
future product development, and/or be forced to sell assets, perhaps on unfavorable terms, which would harm our business and our
ability to generate positive cash flows from operations needed to stay in business in the future, and ultimately could be forced
to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on
their shares.
Any
additional capital raised through the sale of equity or equity-backed securities may dilute our stockholders’ ownership
percentages and could also result in a decrease in the market value of our equity securities.
The
terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences,
superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on
the holders of any of our securities then outstanding.
In
addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees,
accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may
adversely impact our financial condition.
Because
we may not be able to maintain or obtain necessary regulatory clearances 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 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
and may not be able to maintain the necessary regulatory clearances for some of our products.
The
process of obtaining required approvals or clearances for a potential new product 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 the 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 ongoing regulations of various government agencies and if we are unable to comply with such regulations,
our products could be subject to restrictions or withdrawal from the market, which 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.
If
we fail to obtain regulatory approval in foreign jurisdictions, then we cannot market our products in those jurisdictions.
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. 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.
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 a 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 device. 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 were 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 a 510(k) clearance of new products;
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withdrawing a 510(k)
clearance already granted; and
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criminal prosecution.
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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 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, we
would have to conduct clinical protocols that are designed to yield data suitable for publication in peer-reviewed journals.
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.
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. 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 six months
ended June 30, 2019, two customers generated 44% and 34%, or 78% in the aggregate, of the Company’s revenue. For the six
months ended June 30, 2018, two customers generated 49%, and 17%, or 66% in the aggregate, of the Company’s revenue. In
the future, if we are unable to maintain existing relationships, our competitive position would likely suffer and our business
would be harmed.
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.
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.
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 prices 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, 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 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 have an adverse effect
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.
We
may fail to retain qualified personnel.
We
have substantially reduced the number of our employees in order to reduce our costs. Accordingly, retaining our remaining
personnel in the future will be critical to our success. If we fail to retain and motivate these highly skilled personnel, we
may be unable to continue our operating activities, and this could have a material adverse effect on the Company’s business,
financial condition, results of operations and future prospects.
We
rely on the key executive officer of the management team.
We
are dependent on our management team to execute against its business plan. Failure could result in delays in product development,
loss of customers and sales and diversion of management resources, which could adversely affect our operating results.
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 products or 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 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 difficult to predict
the effect or impact the AIA will have on the operation of our business and the protection and enforcement of our intellectual
property. While we believe that the AIA’s post-grant review system is less expensive than litigation should we need to
challenge a third party patent or defend our own patent, 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 to 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.
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 be at risk that our former employees may wrongfully use or disclose our trade secrets.
In
addition to patent protection, we rely heavily upon know-how and trade secret protection, as well as non-disclosure agreements
and invention assignment agreements with our employees, consultants, and third parties, to protect our confidential and proprietary
information, especially where we do not believe patent protection is appropriate or obtainable. In addition to contractual measures,
we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such
measures may not, for example, in the case of misappropriation of a trade secret by an employee, former employee, consultant,
former consultant or third party with authorized access, provide adequate protection for our proprietary information. Our security
measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor,
and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Enforcing a claim
that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome
is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse
by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated,
or if any such information was independently developed by a competitor, our competitive position could be harmed.
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.
We
currently manufacture our products at a single location. Any disruption at this facility could adversely affect our business and
results of operations.
We
currently manufacture all our products at our manufacturing plant. If our manufacturing plant were damaged or destroyed, or otherwise
subject to disruption, it would require substantial lead-time to replace or rebuild the facility for the manufacture of our products.
In such event, we would be forced to rely entirely on third-party contract manufacturers for an indefinite period of time. We
do not currently have established relationships with any back-up manufacturers. Even if we are able to establish a relationship
with a third-party manufacturer, there is no assurance that such manufacturer will be able to meet our needs from a technical,
timing, or cost effective manner.
We
are currently subject to a number of securities litigations and we may be subject to similar or other litigation in the future.
The
Company is currently subject to a number of litigations, as discussed in the “Business” section. In connection with
certain of these litigations, the Company has entered into settlements of claims for significant monetary damages. We may also
be subject to judgements or enter into additional settlements of claims for significant monetary damages for the securities litigations
that we have yet to enter into settlement agreements. Defending against the current litigations is or can be time-consuming, expensive
and cause diversion of our management’s attention.
With
respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses
we may suffer in contesting and concluding such lawsuit. Substantial litigation costs, including the substantial self-insured
retention that we are required to satisfy before any insurance applies to a claim, unreimbursed legal fees or an adverse result
in any litigation may adversely impact our business, operating results or financial condition. We believe that our directors’
and officers’ liability insurance will cover our potential liability with respect to the securities class-action lawsuit; however,
the insurer has reserved its rights to contest the applicability of the insurance to such claims and the limits of the insurance
may be insufficient to cover our eventual liability.
We
face substantial competition from other companies and our operating results may suffer if we fail to compete effectively.
Competition
among providers of rapid, point-of-care screening and testing products is intense and subject to rapid technological change and
evolving industry requirements and standards. We compete with many companies that have greater financial, product development,
sales and marketing resources and experience than we do. Furthermore, new product development and technological change characterize
the areas in which we compete. Our present or future products could be rendered obsolete or uneconomical as a result of technological
advances by one or more of our present or future competitors. We must continue to develop and commercialize new products and technologies
to remain competitive in the diagnostic testing industry. We believe that we compete primarily on the basis of our single-use
testing. Customer and clinical support, and data that demonstrate both improvement in a patient’s quality of life and a product’s
cost-effectiveness are additional aspects of competition.
We
are aware of other rapid, point-of-care screening and diagnostic testing products in the U.S., Canada, and Europe. Specifically,
Alere/Abbott, ACON Laboratories, Inc., Immucor, Inc., OraSure Technologies, Inc., and Quidel Corporation are companies that develop
rapid, point-of-care screening and diagnostic testing products and currently maintain dominant market positions within the diagnostic
testing market.
If
we market products or interact with health care practitioners in a manner that violates healthcare fraud or abuse laws, we may
be subject to civil or criminal penalties, including exclusion from participation in government healthcare programs.
We
receive payments directly from or bill directly to Medicare, Medicaid or other national or third-party payers for our current
product, U.S. federal and state healthcare laws and regulations pertaining to fraud or abuse are and will be applicable to our
business. We are subject to healthcare fraud and abuse regulation by the U.S. federal government and the states in which we conduct
our business.
The
laws that may affect our ability to operate include the federal healthcare program anti-kickback statute, which prohibits, among
other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce, or in return for, the
purchase, lease or order, or arrangement for the purchase, lease or order of any healthcare item or service reimbursable under
Medicare, Medicaid or other federally financed healthcare programs. This statute applies to arrangements between pharmaceutical
manufacturers and prescribers, purchasers and formulary managers. Although there are a number of statutory exceptions and regulatory
safe harbors protecting certain common activities, the exceptions and safe harbors are drawn narrowly, and practices that involve
remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for
an exception or safe harbor.
Federal
false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the
federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical companies
have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free product
to customers with the expectation that the customers would bill federal programs for the product, reporting to pricing services
inflated average wholesale prices that were then used by federal programs to set reimbursement rates, engaging in off-label promotion
that caused claims to be submitted to Medicaid for non-covered off-label uses and submitting inflated best price information to
the Medicaid Drug Rebate Program.
The
Health Insurance Portability and Accountability Act of 1996 also created prohibitions against 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 payers. The false statements statute immediately noted above 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.
In
addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. The ACA, through
the Physician Payment Sunshine Act of 2010, imposed new requirements on manufacturers of drugs, devices, biologics and medical
supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions)
to report annually to the Centers for Medicare and Medicaid Services (“CMS”) information related to payments or other
“transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors)
and teaching hospitals, and applicable manufacturers and group purchasing organizations to report annually to CMS ownership and
investment interests held by physicians (as defined above) and their immediate family members and payments or other “transfers
of value” to such physician owners and their immediate family members. Manufacturers are required to report such data to
the government by the 90th calendar day of each year.
The
majority of states also have statutes or regulations similar to these federal laws, which apply to items and services reimbursed
under Medicaid and other state programs, or, in several states, apply regardless of the payer. In addition, some states have laws
that require pharmaceutical companies to adopt comprehensive compliance programs. For example, under California law, pharmaceutical
companies must comply with both the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers
and the PhRMA Code on Interactions with Healthcare Professionals, as amended. Moreover, certain states mandate the tracking and
reporting of gifts, compensation and other remuneration paid by us to physicians and other healthcare providers.
Although
compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely
eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur
significant legal expenses, cause reputational harm and divert our management’s attention from the operation of our business.
Moreover, achieving and sustaining compliance with applicable U.S. federal and state laws may prove costly.
Data
security breaches may disrupt our operations and adversely affect our operating results.
Our
network security and data recovery measures and those of third parties with which we contract, may not be adequate to protect
against computer viruses, cyber-attacks, breaches, and similar disruptions from unauthorized tampering with our computer systems.
The misappropriation, theft, sabotage or any other type of security breach with respect to any of our proprietary and confidential
information that is electronically stored, including patient data, could cause interruptions in our operations, could result in
a material disruption of our business operations and could expose us to third-party legal claims. Furthermore, we could be required
to make substantial expenditures of resources to remedy the cause of cyber-attacks or break-ins. This disruption could have a
material adverse impact on our business, operating results and financial condition.
Our
business processes personal medical information. The use of this information is critical to our operations and innovation. New
and evolving regulations could bring increased scrutiny of our data management in the future. Any cyber-attacks or other failure
to protect critical and sensitive systems and information could damage our reputation, prompt litigation or lead to regulatory
sanctions, all of which could materially affect our financial condition and results of operation.
We
are subject to various internal control reporting requirements under the Sarbanes-Oxley Act. We can provide no assurance that
we will at all times in the future be able to report that our internal controls over financial reporting are effective.
As
a public company, we are required to comply with Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (“Section 404”).
In any given year, we cannot be certain as to the time of completion of our internal control evaluation, testing and remediation
actions or of their impact on our operations. Upon completion of this process, we may identify control deficiencies of varying
degrees of severity under applicable SEC and Public Company Accounting Oversight Board (U.S.) rules and regulations. Our management,
including our chief executive officer and principal financial officer, does not expect that our internal controls and disclosure
controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system
must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls
can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the
controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.
Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction
volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
In
addition, as a public company, we are required to report, among other things, control deficiencies that constitute material weaknesses
or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual consolidated financial statements will
not be prevented or detected on a timely basis. If we fail to comply with the requirements of Section 404 or if we report a material
weakness, we might be subject to regulatory sanction and investors may lose confidence in our consolidated financial statements,
which may be inaccurate if we fail to remedy such material weakness.
We
incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies,
which could harm our operating results.
As
a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, including
costs associated with public company reporting requirements. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act
of 2010, as well as rules implemented by the SEC and the Nasdaq Stock Market, impose a number of requirements on public companies,
including with respect to corporate governance practices. Our management and other personnel need to devote a substantial amount
of time to these compliance and disclosure obligations. Moreover, compliance with these rules and regulations has increased our
legal, accounting and financial compliance costs and has made some activities more time-consuming and costly. It is also more
expensive for us to obtain director and officer liability insurance.
Risks
Related to our Pursuit of Strategic Alternatives
We
are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any
strategic transaction, that any such strategic transaction will result in additional value for our stockholders or that the process
will not have an adverse impact on our business.
In
November 2018, we announced that our Board of Directors had initiated a process to evaluate strategic alternatives to maximize
shareholder value. We have not set a timetable for completion of this exploratory process and cannot provide any assurances that
the process will result in the consummation of a strategic transaction of any kind, or that we will not abandon the process. We
do not intend to discuss or disclose further developments during this process unless and until our board of directors has approved
a specific action or we otherwise determine that further disclosure is appropriate. The process of reviewing strategic alternatives
may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business,
financial condition and results of operations could be adversely affected. We could incur substantial expenses associated with
identifying, evaluating and negotiating potential strategic alternatives. 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. There can be no
assurance that any potential transaction or other strategic alternative, if consummated, will provide greater value to our stockholders
than that reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related
to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock
and may make it more difficult for us to attract and retain qualified personnel and business partners.
If
we are unable to make acquisitions and investments, or successfully integrate them into our business, our business could be harmed.
As
part of our business strategy, we may acquire other companies or businesses. However, we may not be able to find suitable acquisition
candidates, and we may not be able to complete acquisitions on favorable terms, if at all. Acquisitions involve numerous risks,
any of which could harm our business and negatively affect our operating results, including:
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difficulties
in integrating the technologies, operations, existing contracts and personnel of an acquired company;
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difficulties
in supporting and transitioning clients and suppliers, if any, of an acquired company;
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diversion
of financial and management resources from existing operations or alternative acquisition opportunities;
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failure
to realize the anticipated benefits or synergies of a transaction;
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failure
to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company or technology, including
issues related to intellectual property, regulatory compliance practices, revenue recognition or other accounting practices,
or employee or client issues;
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risks
of entering new markets in which we have limited or no experience;
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potential
loss of key employees, clients, vendors and suppliers from either our current business or an acquired company’s business;
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inability
to generate sufficient revenue to offset acquisition costs;
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additional
costs or equity dilution associated with funding the acquisition; and
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possible
write-offs or impairment charges relating to acquired businesses.
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The
Company, if it acquires a new business, or retains individuals with expertise in a new industry to pursue a strategic
alternative, will have a limited operating history in such new industry, specifically the Cannabis industry, and may not succeed.
The
Company will have a limited operating history within the Cannabis industry and may not succeed. The Company will be subject to
all risks inherent in a developing business enterprise. The Company’s likelihood of continued success must be considered
in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with manufacturing
specialty products and the competitive and regulatory environment in which the Company operates. For example, the Cannabis industry
is a new industry that, as a whole, may not succeed, particularly if the Federal government changes course and decides to
prosecute those dealing in Cannabis under Federal law. If that happens, there may not be an adequate market for the Company’s
products. As a new industry, there are not established players on whose business models the Company can follow or build upon.
Similarly, there is limited information about comparable companies available for potential investors to review in making a decision
about whether to invest in the Company. Furthermore, as the industrial hemp industry is a new market, it is ripe for technological
advancements that could limit or eliminate the need for the Company’s products. Furthermore, unanticipated expenses, problems,
and technical difficulties may occur and they may result in material delays in the operation of the Company’s business,
in particular with respect to the Company’s new products. The Company may not be able to successfully address these risks
and uncertainties or successfully implement the Company’s operating strategies. If the Company fails to do so, such failure
could materially harm the Company’s business to the point of having to cease operations and could impair the value of the
Company’s common stock to the point investors may lose their entire investment.
If
the Company acquires a business in the cannabis industry or otherwise pursues a strategic alternative, we would face additional
unique and evolving risks.
Further
legislative development beneficial to the cannabis industry is not guaranteed
If
the Company acquires a business in the cannabis industry or otherwise pursues a strategic alternative, the success of such business
would depend on the continued development of the cannabis industry and the activity of commercial business and government regulatory
agencies within the industry. The continued development of the cannabis industry is dependent upon continued legislative and regulatory
authorization of cannabis at the state level and a continued laissez-faire approach by federal enforcement agencies. Any number
of factors could slow or halt progress in this area. Further regulatory progress beneficial to the industry cannot be assured.
While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process,
including election results, scientific findings or general public events. Any one of these factors could slow or halt progressive
legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely affect
the business we may acquire or pursue. These changes may require us, should we acquire a business or otherwise pursues a strategic
alternative in the cannabis industry, to incur substantial costs associated with legal and compliance fees and ultimately require
us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result
in a material adverse effect on our operations. In addition, we cannot predict the nature of any future laws, regulations, interpretations
or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to the business
we may acquire or pursue.
The
cannabis industry could face strong opposition from other industries
We
believe that established businesses in other industries may have a strong economic interest in opposing the development of the
cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including
recreational marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals.
Many industries that could view the emerging cannabis industry as an economic threat are well established, with vast economic
and federal and state lobbying resources. It is possible that companies within these industries could use their resources to attempt
to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives
that would be beneficial to the cannabis industry could have a detrimental impact on our potential business.
The
legality of marijuana could be reversed in one or more states
There
is a substantial amount of change occurring in the U.S. regarding the use of medical and recreational marijuana products. While
federal laws prohibit the sale and distribution of most marijuana products not approved or authorized by the FDA, at least 30
jurisdictions and the District of Columbia have enacted state laws to enable possession and use of marijuana for medical purposes,
and at least ten jurisdictions for recreational purposes. However, the voters or legislatures of states in which marijuana has
already been legalized could potentially repeal applicable laws which permit the operation of both medical and retail marijuana
businesses. These actions might force our potential business to cease operations in one or more states entirely.
Banking
regulations could limit access to banking services
Since
the use of marijuana is illegal under federal law, there is a compelling argument that banks cannot lawfully accept for deposit
funds from businesses involved with marijuana. Consequently, businesses involved in the cannabis industry often have trouble finding
a bank willing to accept their business. The inability to open bank accounts may make it difficult for our potential business
to operate and our reliance on cash could result in a heightened risk of theft. Additionally, some courts have denied marijuana-related
businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the
willingness of banks to lend to us.
Insurance
risks
In
the United States, many marijuana-related businesses are subject to a lack of adequate insurance coverage. In addition, many insurance
companies may deny claims for any loss relating to marijuana or marijuana-related operations based on their illegality under federal
law, noting that a contract for an illegal transaction is unenforceable. Thus, if we acquire a business or otherwise pursues a
strategic alternative in the cannabis industry, we may have a difficult time obtaining certain insurances that are desired to
operate our business, which may expose us to additional risks and financial liabilities.
Risks
Related to our Securities and the Offering
Investors
in this offering will suffer immediate and substantial dilution in the net tangible book value per share of our common stock.
Investors
in this offering will experience immediate dilution in their net tangible book value per share to the extent of the difference
between the effective public offering price per share of common stock included in the Class A Units or issuable upon exercise
of the pre-funded warrants included in the Class B Units being offered and the “adjusted” net tangible book value
per share after giving effect to the offering. Our net tangible book value as of June 30, 2019 was $4,090,727 or approximately
$0.327 per share of common stock, based upon 12,508,958 shares outstanding as of June 30, 2019. Assuming that we issue $7,500,000
of Class A Units at an assumed offering price of $
per Class A Unit, the closing price of our common stock on the
NASDAQ on , 2019, and after deducting placement
agents fees and estimated offering expenses payable by us, our net tangible book value as of June 30, 2019, would have been
approximately $ million, or $
per share of our common stock. This calculation excludes the proceeds, if any, from the exercise of the warrants issued in this
offering. See the section titled “Dilution” below.
The
market price for our common stock may be volatile, and your investment in our common stock could decline in value.
The
stock market in general has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology
and specialty pharmaceutical companies, particularly companies like ours without product revenues and earnings, have been highly
volatile and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance
of particular companies. The following factors, in addition to other risk factors described in this section, may have a significant
impact on the market price of our common stock:
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announcements
of technological innovations or new products by us or our competitors;
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announcement
of FDA approval or disapproval of our product candidates or other product-related actions;
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developments
involving our discovery efforts and clinical studies;
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developments
or disputes concerning patents or proprietary rights, including announcements of infringement, interference or other litigation
against us or our potential licensees;
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announcements concerning
our competitors, or the biotechnology, pharmaceutical or drug delivery industry in general;
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public concerns
as to the safety or efficacy of our products or our competitors’ products;
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changes in government
regulation of the pharmaceutical or medical industry;
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changes in the reimbursement
policies of third party insurance companies or government agencies;
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actual or anticipated
fluctuations in our operating results;
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changes in financial
estimates or recommendations by securities analysts;
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developments involving
corporate collaborators, if any;
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changes in accounting
principles; and
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the loss of any
of our key scientific or management personnel.
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In
the past, securities class action litigation has often been brought against companies that experience volatility in the market
price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs and a diversion
of management’s attention and resources, which could adversely affect our business, operating results and financial condition.
Our
failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a delisting of our common stock.
The delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
Our
common stock is listed on NASDAQ. In order to maintain our listing, we must meet minimum financial and other requirements, including
requirements for a minimum amount of capital and a minimum price per share. On May 10, 2019, we received a notice from the staff
(the “Staff”) of NASDAQ that, for a period of thirty (30) consecutive business days, the bid price of our common stock
had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Rule 5550(a)(2) (the “Bid
Price Rule”).
NASDAQ
stated in its letter that in accordance with the NASDAQ Listing Rules we have been provided an initial period of 180 calendar
days, or until November 6, 2019 to regain compliance.
If
we are unable to regain compliance by November 6, 2019, we may be eligible for an additional 180 calendar day compliance period
to demonstrate compliance with the bid price requirement. To qualify, we will be required to meet the continued listing requirement
for market value of publicly held shares set forth in Market Place Rule 5550(a) and all other initial listing standards for NASDAQ
set forth in Marketplace Rule 5505, with the exception of the bid price requirement, and will need to provide written notice to
NASDAQ of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
If we do not qualify for the second compliance period or fails to regain compliance during the second 180-day period, then NASDAQ
will notify us of its determination to delist the common stock, at which point we would have an opportunity to appeal the delisting
determination to a Hearings Panel.
Although
we expect to take actions intended to restore our compliance with the listing requirements, we can provide no assurance that any
action taken by us would be successful, or that any such action would stabilize the market price or improve the liquidity of our
common stock. If we fail to continue to meet all applicable NASDAQ requirements, NASDAQ may determine to delist our common stock.
If our common stock is delisted for any reason, it could reduce the value of our common stock and its liquidity.
If
our common stock is delisted as a result of our failure to comply with the Bid Price Rule or any other NASDAQ continued listing
requirement, we would expect our common stock to be traded in the over-the-counter market, which could adversely affect the liquidity
of our common stock. Additionally, delisting would substantially impair our ability to raise additional funds to fund our operations,
to meaningfully advance the development of our products, and we could face other significant material adverse consequences, including:
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a limited availability of market quotations
for our common stock;
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a reduced amount of news and analyst coverage
for us;
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reduced liquidity for our stockholders;
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potential loss of confidence by employees
and potential future partners or collaborators; and
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loss of institutional investor interest and
fewer business development opportunities.
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If
we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, our
stock price may decline.
We
may from time to time issue additional shares of common stock at a discount from the current market price of our common stock.
As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at
such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future,
including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible
or exercisable into common stock, our common stockholders would experience additional dilution and, as a result, our stock price
may decline.
We
will have broad discretion in how we use the net proceeds of this offering. We may not use these proceeds effectively, which could
affect our results of operations and cause our stock price to decline.
We
will have considerable discretion in the application of the net proceeds of this offering, including for any of the purposes described
in the section entitled “Use of Proceeds.” We intend to use the net proceeds from this offering for working capital
and other general corporate purposes. As a result, investors will be relying upon management’s judgment with only limited
information about our specific intentions for the use of the balance of the net proceeds of this offering. We may use the net
proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their
use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
An
active trading market for our common stock may not be sustained.
Although
our common stock is listed on the NASDAQ, the market for our shares has demonstrated varying levels of trading activity. There
has been limited trading of our common stock in the U.S since we began trading on NASDAQ in January 2014. Furthermore, the current
level of trading may not be sustained in the future. The lack of an active market for our common stock may impair investors’
ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the fair
market value of their shares and may impair our ability to raise capital to continue to fund operations by selling shares and
may impair our ability to acquire additional intellectual property assets by using our shares as consideration.
We
do not anticipate paying dividends on our common stock and, accordingly, stockholders must rely on stock appreciation for any
return on their investment.
We
have never declared or paid cash dividends on our common stock and do not expect to do so in the foreseeable future. The declaration
of dividends is subject to the discretion of our board of directors and limitations under applicable law, and will depend on various
factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board
of directors. You should not rely on an investment in our company if you require dividend income from your investment in our company.
The success of your investment will likely depend entirely upon any future appreciation of the market price of our common stock,
which is uncertain and unpredictable. There is no guarantee that our common stock will appreciate in value.
Future
sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline,
even if our business is doing well.
Sales
by our stockholders of a substantial number of shares of our common stock in the public market could occur in the future. These
sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could
reduce the market price of 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.
Holders of the pre-funded warrants or warrants will not have rights of common stockholders until such pre-funded warrants or warrants
are exercised.
Until
holders of pre-funded warrants or warrants acquire shares of our common stock upon exercise of the pre-funded warrants or warrants,
holders of pre-funded warrants or warrants will have no rights with respect to the shares of our common stock underlying such
pre-funded warrants or warrants. Upon exercise of the pre-funded warrants or warrants, the holders will be entitled to exercise
the rights of a common stockholder only as to matters for which the record date occurs after the exercise.
There
is no public market for the pre-funded warrants or warrants being offered in this offering.
There
is no established public trading market for the pre-funded warrants or warrants being offered in this offering, and we do
not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants or warrants on any
national securities exchange or other nationally recognized trading system, including The Nasdaq Capital Market. Without an active
trading market, the liquidity of the pre-funded warrants and warrants will be limited.
We
are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which
could make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act. For as long as we continue
to be an “emerging growth company”, we may take advantage of exemptions from various reporting requirements that are
applicable to other public reporting companies that are not emerging growth companies, including not being required to comply
with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in our periodic reports. We expect to cease to be an “emerging growth company” on December
31, 2019, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.07 billion, if we
issue more than $1.0 billion in non-convertible debt in any three-year period or if the market value of our common stock held
by non-affiliates exceeds $700.0 million as of any June 30th, in which case we would no longer be an “emerging growth company”
as of the following December 31st. We cannot predict if investors will find our securities less attractive because we may rely
on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market
for our securities and the price of our securities may be more volatile.
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.
BUSINESS
Medical
Device Business
On
October 8, 2018, we announced that following a review of the Company’s commercial and product development strategies, the
Board of Directors has determined that it is in the best interests of the Company to focus primarily on the commercialization
of its Particle Immuno-Filtration Assay (PIFA®) Technology platform. PIFA® technology is a patented immunoassay method
which rapidly and accurately detects target antigens or antibodies. It is the technology platform utilized in the Company’s
core commercialized products, the PIFA® Heparin/PF4 and PIFA® Pluss/PF4 rapid assays, which test for an allergic reaction
to Heparin. These products account for the significant majority of the Company’s current revenues.
Through
June 30, 2019, we continued to manufacture BreathScan Alcohol Detectors (based on the Company’s Micro Particle Catalyzed
(MPC®) Biosensor technology platform) and Tri-Cholesterol products (based on the Company’s Rapid Enzymatic Assay (REA™)
technology platform). In September 2019, we have determined that it is no longer economically appropriate to offer our Tri-
Cholesterol product. Furthermore, we have determined that it is not economically appropriate to further develop or pursue
approval of the PIFA PLUSS Chlamydia Rapid Assay device. As of September 30, 2019, the Company’s marketed products consist
only of its PIFA® Heparin/PF4, PIFA PLUSS® PF4 and BreathScan Alcohol Detectors.
All
of our rapid, single-use tests are performed in vitro (outside the body) and are designed to enhance patient well-being and reduce
the cost of healthcare. The Company’s current product offerings focus on delivering diagnostic assistance in a variety of
healthcare fields/specialties, including diagnostic rapid manual point-of-care tests for the detection of allergic reactions to
Heparin, and for on- and off-the-job alcohol safety initiatives.
We
believe that low-cost, single-use testing not only saves time and money, but allows for more frequent, near-patient testing which
may save lives. We believe that our FDA-cleared rapid diagnostic tests help facilitate targeted diagnoses and real-time treatment.
We also believe that our 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 a medical condition can be performed on 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
result in 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; and
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need
for easy to use, accurate at-home tests for individuals to monitor their personal health and wellness
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Strategy
Our
strategy for the medical device business is to leverage where possible its distributor relationships, while exploring strategies
for further reducing its costs.
We
have developed and currently maintain strategic relationships with established companies in the following key market segments:
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Clinical
Laboratories;
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Physicians’
Office and Urgent Care Clinics; and
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Retail;
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Current
Testing Platform Technologies
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 or serum) 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.
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 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.
Current
Sample Preparation Technology
Rapid
Blood Cell Separation Technology
Our
Rapid Blood Cell Separation (“Separator”) Technology, labeled 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. 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 through a venous blood draw. We have 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. The seraSTAT
® Rapid Blood Cell Separation Technology is currently protected by two U.S. patents and three international patents.
Current
Product Portfolio
We
are positioned as a provider of rapid diagnostic solutions.
At
present, our commercialized product portfolio incorporates the three aforementioned proprietary platform testing and sample preparation
technologies: PIFA ®, MPC Biosensor and Rapid Blood Cell Separation Technology.
The
following table sets forth our marketed products, identifies the appropriate “prescription use” or “OTC”
designation and the required clearance that has been obtained.
Our
marketed and emerging products include:
Product
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Platform
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|
Marketed/Pipe
line
|
|
FDA
Clearance
Required
Prescription
Use/OTC
|
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FDA
Clearance
Status
Obtained/Needed
|
|
Description
|
BreathScan
TM
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MPC
|
|
Marketed
|
|
OTC
|
|
Obtained
|
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Disposable
breath alcohol detector
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PIFA
® Heparin/PF4 & PIFA PLUSS ® PF4
|
|
PIFA
|
|
Marketed
|
|
Prescription
Use
|
|
Obtained
|
|
Rapid
tests for Heparin/PF4 antibodies to detect an allergy to the widely used blood thinner, Heparin
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seraSTAT
®
|
|
seraSTAT
|
|
Marketed
|
|
Prescription
Use
|
|
Obtained
|
|
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.
|
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 we
are aware of that can 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 our Heparin/PF4 devices is paramount to effective clinical decision making.
The largest at-risk populations are patients undergoing major cardiac or orthopedic surgical procedures. Given the size of the
aging baby boomer market segment and the prevalence of cardiac disease, surgeries within this category are 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 our 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 plan
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 ® also is expected to be used to support
our CE-marking self-certification process for potential sales in the EU; the PIFA Heparin/PF4 Rapid Assay is already CE-marked.
MPC
Biosensor Technology
Breath
Alcohol Products
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 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.
Sample
Preparation Technology
Rapid
Blood Cell Separation Technology
In
addition to the Company’s testing platforms, our 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
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.
Currently,
seraSTAT ® is integrated into PIFA PLUSS PF4 devices. We have modified one of our prescription use, 510(k)-cleared
devices, specifically the PIFA Heparin/PF4 Rapid Assay to include our seraSTAT device. 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 were 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. The seraSTAT ® Rapid Blood Cell Separation Technologies is currently protected by two United
States patents (7,896,167; 8,097,171) and one international patent (JP 4,885,134).
Competition
Competitors
of ours 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 Alere/Abbott, ACON Laboratories, Inc., 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.
That
said, 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.
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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 us and may
deter such customers from buying our 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
Our
revenue comes from selling rapid, screening and testing products, largely through our distributor networks. Most 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.
Our
Current Markets
Regarding
the Company’s test for the heparin drug allergy, the testing market largely resides within the clinical hospital laboratories
of medical facilities.
The
markets for alcohol breathalyzers are reached through a network of large and small distributors. These markets include industrial
safety, education, social responsibility and retail.
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, personnel, 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.
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.
Effective
February 2, 2018, the Company’s quality management system was certified as compliant with the International Standards Organization’s
(“ISO”) 13485:2016 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 indirect distribution channels in the U.S.
with, among others, Cardinal Health, Inc. (“Cardinal Health”) and Fisher Healthcare, a Division of Thermo Fisher Scientific
Inc. (“Fisher Healthcare”) for the Company’s PIFA Heparin/PF4 assays. The relationships with Cardinal Health
and Fisher Healthcare provide us with access to most U.S. hospitals.
The
Company’s PIFA Heparin/PF4 assays are also sold direct to certain hospitals and buying groups.
With
respect to the Company’s breath alcohol product, we have focused our 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.
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.
Our
logo is a registered trademark in the U.S. Other registered trademarks/service marks include: BreathScan ®, PIFA
®, PIFA PLUSS ®, seraSTAT ®.
The
following table summarizes the U.S. and international utility patents that currently protect our intellectual property for actually
marketed products:
Description
|
|
Jurisdiction
|
|
Utility
Patent No.
|
|
Type
of
Protection
|
|
Expiration
Date
|
|
Product(s)
To Which
They Relate
|
blood
separator and method of separating fluid fraction from whole blood
|
|
US
|
|
7,896,167
|
|
Manufacture
|
|
9/7/2026
|
|
seraSTAT
® ; PIFA PLUSS ® PF4; PIFA PLUSS ® Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
blood
separator and method of separating fluid fraction from whole blood
|
|
US
|
|
8,097,171
|
|
Manufacture
|
|
8/5/2025
|
|
seraSTAT
® ; rapid blood cell separator also integrated into PIFA PLUSS ® PF4 and PIFA PLUSS ®
Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
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 ®
Rapid Assays
|
|
|
|
|
|
|
|
|
|
|
|
blood
cell separator
|
|
European
Union
|
|
1793906
|
|
Manufacture
|
|
8/5/2025
|
|
seraSTAT
® ; rapid blood cell separator also integrated into PIFA PLUSS ® PF4 and PIFA PLUSS ®
Rapid Assays
|
Description
|
|
Jurisdiction
|
|
Utility
Patent No.
|
|
Type
of
Protection
|
|
Expiration
Date
|
|
Product(s)
To Which
They Relate
|
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
|
|
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
|
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.
The
PIFA Heparin/PF4 Rapid Assay is 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.
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; 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 healthcare fraud and abuse, anti-kickback,
false claims, HIPAA, environmental protection, safe working conditions, manufacturing practices, fire hazard control and, among
other things, the generation, handling, transportation and disposal of hazardous substances.
Exploration
of Strategic Alternatives
On
November 7, 2018, we announced that our board of directors had initiated a process to evaluate strategic alternatives to maximize
shareholder value. This process will consider a range of potential strategic alternatives including, but not limited to, business
combinations, while simultaneously supporting the Company’s management and employees in the execution of the Company’s
current business activities. On November 19, 2018, the Company further announced that in its evaluation of strategic alternatives
it will consider a range of potential strategic alternatives including, but not limited to, business combinations in sectors different
than that currently engaged in, including cannabis related industries. The Board of Directors may also pursue a strategic alternative
in one of the aforementioned industries by retaining individuals that have expertise in those industries.
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 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.
Employees
We
currently employ 11 full-time equivalent employees, contractors or consultants, which include four in general and administrative,
three in regulatory compliance and six 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.
Legal
Proceedings
Pulse
Health LLC v Akers Biosciences, Inc. No.: 3:16-cv-01919-HZ
On
October 17, 2016, the Company was served with a notice that Pulse Health LLC (“Pulse”) filed a lawsuit against the
Company on September 30, 2016 in United States Federal District Court, District of Oregon, alleging a breach of contract under
the settlement agreement entered into by the Company and Pulse on April 8, 2011 which settled all claims and disputes between
the Company and Pulse arising from a previously executed Technology Development Agreement entered into by the Company and Pulse
and damages resulting from said alleged breach. Additionally, Pulse alleged false advertising and unlawful trade practices in
connection with the Company’s sales activities related to the Company’s OxiChek™ products.
The
Company filed a series of motions with the Court seeking (1) to dismiss the Pulse complaint for lack of jurisdiction or, in the
alternative, transfer the matter to the District Court for the District of New Jersey, Camden Vicinage and (2) to dismiss the
unfair competition claims for failure to state a claim on which relief could be granted. Oral arguments on these motions were
heard by the Court on March 10, 2017.
The
Court decided by order dated April 14, 2017 in favor of the Company and dismissed with prejudice the claims brought by Pulse for
unfair competition (both federal and state counts). The court decided against the Company in its motions for transfer of venue
and for lack of jurisdiction. As such, the case proceeded in the District Court of Oregon.
The
Company filed a Motion for Summary Judgment on January 24, 2018. On June 21, 2018, the Court ruled in favor of the Company on
some issues and determined that other issues warranted a trial. The Court further determined that equitable relief, such as an
injunction, “may be warranted.” Following such rulings, the Company discovered certain deficiencies in its discovery
responses and took appropriate steps to supplement the record and correct these deficiencies.
On
September 17, 2018, the Company and Pulse entered into a settlement. Pursuant to the settlement reached between Pulse and the
Company, on October 9, 2018 the Company paid $930,000 to Pulse. The Company has also agreed to a permanent injunction and not
to make, use, sell or offer to sell the BreathScan OxiChek™ product, any product that detects aldehydes or oxidative stress
in exhaled human breath or breath condensate using either basic fuchsin or sodium metabisulfite or any form, analog or equivalent
thereof, and the BreathScan Lync device, or any equivalent thereof, as part of a test for aldehydes or oxidative stress in human
exhaled breath or breath condensate. There was no material impact on our revenues as a result of the withdrawal of the BreathScan
OxiChek™ product from sale . The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility
by any of the parties.
Faulkner
v. Akers Biosciences, Inc., No. 2:18-cv-10521 (D.N.J.) and Gleason v. Akers Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.)
On
June 13, 2018, Plaintiff Tim Faulkner filed a class action complaint alleging securities violations against the Company, John
J. Gormally, and Gary M. Rauch (“Individual Defendants”) (together with the Company, “Defendants”) on
behalf of all persons and entities who purchased publicly traded Akers securities from May 15, 2017 through June 5, 2018 (the
“Faulkner Action”). The complaint alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all
Defendants, and violations of Section 20(a) of the Exchange Act against the Individual Defendants. In particular, the complaint
alleged that Defendants made false and/or misleading statements and/or failed to disclose in its first, second, and third quarter
2017 10-Qs and its 2017 10-K that: (1) Akers was improperly recognizing revenue for the fiscal year ended December 31, 2017; and,
(2) Akers had downplayed weaknesses in its internal controls over financial reporting and failed to disclose the true extent of
those weaknesses. On June 20, 2018, Plaintiff David Gleason filed a class action complaint under the caption Gleason v. Akers
Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.) based on the same allegations and causes of action (the “Gleason Action”).
On November 21, 2018, the Faulkner and Gleason Actions were consolidated under the Faulkner Action docket. The parties conducted
a mediation on January 10, 2019, and agreed to a settlement in principle disposing of the consolidated action as to all Defendants,
including the Individual Defendants. On March 8, 2019, the parties signed a settlement agreement, subject to approval by the Court,
whereby the Company agreed to pay $2,250,000 in exchange for full releases and discharge of all claims against the Company. On
the same day, Plaintiffs Tim Faulkner and David Gleason filed a motion for preliminary approval of the settlement and to establish
notice procedures. On July 3, 2019, the Court granted the motion for preliminary approval and scheduled a final settlement hearing
for November 8, 2019. On or about July 24, 2019, the Company’s D&O insurer sent the settlement payment of $2,250,000
to the settlement agent for the class. On September 20, 2019, the Court granted the parties’ request to adjourn the final
settlement hearing and scheduled a final settlement hearing for December 20, 2019, at 11:00 a.m. On October 11, 2019, Plaintiffs
Tim Faulkner and David Gleason filed motions for final approval of the proposed settlement and award of attorneys’ fees,
reimbursement of expenses, and award to Plaintiffs Tim Faulkner and David Gleason to be heard at the final settlement hearing
on December 20, 2019.
Watts
v. Gormally, et al., No. 2:18-15992 (D.N.J.) and Chan v. Gormally, et al., No. 2:19-cv-4989 (D.N.J.)
On
November 9, 2018, Cale Watts (“Watts Plaintiff”) filed a verified shareholder derivative complaint alleging violations
of the Securities Exchange Act of 1934, breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on alleged
material weaknesses in controls, management, and documentation (the “Watts Action”). On January 14, 2019, the parties
reached an agreement in principle to settle the Watts Action that included corporate reforms and a payment of attorneys’
fees of $200,000. The parties finalized a Stipulation of Settlement on March 4, 2019. On February 7, 2019, Tiffany Chan, Jasmine
Henderson, and Don Danesh (“Chan Plaintiffs”) filed a verified shareholder derivative complaint alleging violations
of Section 14(a) of the Exchange Act and SEC Rule 14a-9, breach of fiduciary duty, unjust enrichment, and waste of corporate assets
based on the same circumstances as the Watts Action (the “Chan Action”). The Chan Action further alleged that the
Company should not have settled the Watts Action because the Watts Action plaintiffs lacked standing and the settlement would
cause irreparable harm to the Company and its shareholders. On March 22, 2019, the Watts Plaintiff filed a motion for preliminary
approval of the proposed settlement, approving the proposed form and method of providing notice of the settlement, scheduling
a hearing for final approval of the settlement (“Watts Motion for Preliminary Approval”). On April 1, 2019, the Chan
Plaintiffs filed an Opposition to the Motion for Preliminary Approval and a Motion to Intervene and Stay Proceedings (“Motion
to Intervene and Stay”). After multiple extensions of the Watts Motion for Preliminary Approval and the Chan Motion to Intervene
and the defendants’ opposition to the Motion to Intervene, the Watts Plaintiff, Chan Plaintiffs, and the defendants reached
an agreement in principle to settle the Watts and Chan Actions that included corporate reforms and a payment of attorneys’
fees of $325,000. On October 2, 2019, the Watts Plaintiff filed an Unopposed Motion for Preliminary Approval of the Settlement
(the “Omnibus Motion for Preliminary Approval”). The court set a motion date for the Omnibus Motion for Preliminary
Approval of November 4, 2019.
Typenex
Medical, LLC v. Akers Biosciences, Inc., JAMS Ref. No. 1450005929
On
November 15, 2018, Typenex Medical LLC (“Typenex”), a telemarketing entity with whom the Company had entered into
a marketing and commission agreement dated September 30, 2016 (the “Marketing Contract”), filed an arbitration against
the Company before JAMS ADR (the “Arbitration”), and an arbiter was appointed to the Arbitration on December 14, 2018.
In the Arbitration, Typenex stated that it was seeking “at least” $220,500 based on the allegation that the Marketing
Contract entitles Typenex to a commission on sales of certain of the Company’s heparin-related products in the period two
years from the Marketing Contract’s expiration, and in the alternative, Typenex was seeking relief for breach of the implied
covenant of good faith and fair dealing, and/or unjust enrichment. On July 19, 2019, the Company and Typenex executed a settlement
agreement. Pursuant to the settlement agreement, the Company agreed to pay Typenex $50,000 in cash and to issue 40,000 shares
of the Company’s common stock.
NovoTek
Therapeutics Inc. and NovoTek Pharmaceuticals Limited v. Akers Biosciences, Inc.
On
June 21, 2019, the Company received a complaint, filed by Novotek Therapeutics Inc., and Novotek Pharmaceuticals Limited (collectively,
“Novotek”), Beijing-based entities, in the United States District Court for the District of New Jersey, alleging,
among other things, breach of contract. Novotek is seeking, among other things, damages in the amount of $1,551,562, plus interest,
disbursements and attorneys’ fees. The Company vigorously disputes the allegations in the complaint and has retained counsel
to defend it. On September 16, 2019, the Company filed a partial motion to dismiss the complaint which is returnable on November
4, 2019. The Company is not yet able to determine the amount of the Company’s exposure, if any.
Neelima
Varma v. Akers Biosciences, Inc. and St. David’s Healthcare Partnership, L.P., LLP CAUSE NO: D-1-GN-19-004262
On
July 25, 2019, the Company was notified that on July 23, 2019, a complaint was filed by Neelima Varma, against the Company and
St. David’s Healthcare Partnership, L.P., LLP (“St. David’s”), in the district court of Travis County,
Texas, alleging, among other things, negligence, gross negligence and strict product liability, breach of express warranty, breach
of implied warranty and fraudulent misrepresentation and omission, with respect to a medical device which the Company had sold
through one its distributors to St. David’s. Ms. Varma is seeking aggregate monetary relief from the Company and St. David’s
in excess of $1,000,000. On September 20, 2019, the Company filed the original answer to plaintiff’s original petition and
on October 1, 2019, the Company received from plaintiff their first interrogatories and request for production of documents.
The Company carries product liability insurance. The insurance carrier has provided notice that it has reserved certain rights.
The Company and its insurance carrier will contest this complaint vigorously. The Company believes that its product liability
insurance coverage will be adequate to cover the potential exposure for this matter.
Douglas
Carrara v. Akers Biosciences, Inc., John Does 1-10, and XYZ Corp. 1-10, Docket No. ESX-L-5272-19 (N.J. Super. Ct., Essex County):
Douglas
Carrara, a former executive, has sued the Company over the termination of his employment. The executive seeks contractual severance
pay in the amount of $200,000. The executive asserts that the termination was without cause within the meaning of his employment
agreement, which provides for severance of one year’s salary in the event of termination without cause. The executive also
seeks indemnification for approximately $10,000 in attorneys’ fees that he contends he incurred in regard to company business.
On August 29, 2019, the Company filed an answer to the second amended complaint. With regard to both claims, the executive seeks
to recover his attorneys’ fees under a fee-shifting provision in his employment agreement.
Other
A
former executive has threatened to sue the Company over the termination of the executive’s employment. The executive contends
that the termination was in retaliation for complaints to the employer protected under the California whistleblower protection
laws. The executive also contends that the Company failed to pay a bonus in violation of an employment contract. The Company’s
management and legal counsel believes it is too early to determine the probable outcome of this matter.