lhdx-10k_20201231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-39976

 

Lucira Health, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-2491037

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1412 62nd Street

Emeryville, California 94608

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (510) 350-8071

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

LHDX

 

Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  NO 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES  NO 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES NO 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES  NO 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  NO 

The registrant did not have a public float on the last business day of its most recently completed second fiscal quarter because there was no public market for the registrant’s common equity as of such date.

 

The number of shares of registrant’s common stock, par value $0.001 per share outstanding as of March 1, 2021 was 38,534,923.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 


 

Table of Contents

 

 

 

Page

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

46

Item 1B.

Unresolved Staff Comments

104

Item 2.

Properties

105

Item 3.

Legal Proceedings

105

Item 4.

Mine Safety Disclosures

105

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

106

Item 6.

Selected Financial Data

107

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

108

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

123

Item 8.

Financial Statements and Supplementary Data

124

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

157

Item 9A.

Controls and Procedures

157

Item 9B.

Other Information

157

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

158

Item 11.

Executive Compensation

164

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

182

Item 13.

Certain Relationships and Related Transactions, and Director Independence

184

Item 14.

Principal Accounting Fees and Services

188

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

190

Item 16

Form 10-K Summary

193

 

 

i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations or financial condition; business strategy and plans; and objectives of management for future operations, including our statements regarding the benefits and timing of the roll out of new technology, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:

 

the extent and duration of the COVID-19 pandemic and our expectations regarding customer and user demand for our COVID-19 test kit;

 

our expected future growth;

 

our ability to obtain and maintain regulatory approval for our test kits, including our existing Emergency Use Authorization, or EUA, for our COVID-19 test kits;

 

the size and growth potential of the markets for our test kits, including the COVID-19 diagnostic testing market, and our ability to serve those markets;

 

our ability to accurately forecast demand for our test kits;

 

the rate and degree of physician and market acceptance of our test kits;

 

the expected future growth of our sales and marketing organization;

 

coverage and reimbursement for our test kits;

 

the performance of, and our reliance on, third parties in connection with the commercialization of our test kits, including Jabil Inc., or Jabil, and our single-source suppliers;

 

our ability to accurately forecast, and Jabil’s ability to manufacture, appropriate quantities of our COVID-19 test kit to meet commercial demand;

 

regulatory developments in the United States and foreign countries;

 

our research and development for our influenza test kit and any future test kits;

 

the development, regulatory approval, and commercialization of competing products;

 

our ability to retain and hire senior management and key personnel;

 

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

 

our ability to develop and maintain our corporate infrastructure, including our internal controls;

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our financial performance and capital requirements; and

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our test kits, as well as our ability to operate our business without infringing the intellectual property rights of others.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed with the Securities and Exchange Commission as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.


iii


SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to numerous risks and uncertainties that you should consider before investing in our company. These risks are described more fully under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K. These risks include, but are not limited to, the following:

 

We have incurred losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, which could harm our future business prospects.

 

We have refocused our near-term business strategy on responding to the COVID-19 pandemic, for which the diagnostic testing market is new and rapidly developing, making it difficult to evaluate our business and future prospects. Our focus on a new and rapidly developing market could make it difficult to succeed and achieve our goals and could harm our future business prospects.

 

We recently received an EUA from the Food and Drug Administration, or FDA, for our COVID-19 test kit. If the FDA revokes or terminates our EUA application after issuance, such as when the federally-declared COVID-19 public health emergency ends, we will be required to stop commercial distribution of our COVID-19 test kit immediately unless we can obtain FDA clearance for our COVID-19 test kit under a traditional regulatory pathway, which is lengthy and expensive, which could harm our future business prospects.

 

Our existing EUA for our COVID-19 test kit is for an indication for POC and prescription at-home use. We also intend to seek FDA authorization for OTC use of our COVID-19 test kit in a future submission. The pathway to obtain such authorization remains uncertain. We may not be able to timely obtain OTC authorization, if at all, which would adversely impact our ability to market our COVID-19 test kit in the United States.

 

Our near-term success is highly dependent on the successful commercialization of our COVID-19 test kit, which will initially be dependent upon physicians, healthcare providers, businesses and consumers adopting our test kit, which will be informed, in part, by the convenience and accuracy of our COVID-19 test kit. The accuracy of our COVID-19 test kit could be impacted by novel strains of SARS-CoV-2 with genetic variations from viral mutation over time. Our COVID-19 test kit may not be successful in detecting future variant strains, which could significantly impact the accuracy and usefulness of our test kit and materially harm our business and prospects.

 

The production and widely administered use of an efficacious vaccine or other treatment for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not develop or substantially grow.

 

We are allocating substantially all of our resources to the development, manufacturing and commercialization of our COVID-19 test kit for the foreseeable future, and our long-term business success could be negatively impacted by our diversion of resources from our legacy business of diagnostic testing for influenza.

 

Our near-term success is highly dependent on the successful commercialization of our COVID-19 test kit, and it may not attain or maintain market acceptance or be successfully commercialized in the United States, which could negatively impact our business.

 

We are an early-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance. If we do not successfully manage the development and launch of our COVID-19 test kit and any future test kits, our financial results could be adversely affected.

 

We rely substantially on Jabil, for the manufacturing, quality-testing, assembly and shipping of our COVID-19 test kit. Any termination or loss of significant rights under the Manufacturing Services

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Agreement, dated September 10, 2020, or the Jabil MSA, with Jabil would harm our commercialization of our COVID-19 test kit. In addition, Jabil may fail to obtain and maintain regulatory approval for its facilities, fail to provide us with sufficient quantities of our COVID-19 test kit or fail to do so at acceptable quality levels or prices.

 

The diagnostic testing market, particularly with respect to COVID-19 diagnostic tests, is highly competitive, and many of our competitors are larger, better established and have greater technical and marketing capabilities and financial and other resources than we have. In addition, we expect competition with respect to testing solutions for COVID-19 to continue to increase and our success will depend on widespread market acceptance of our COVID-19 test kit.

 

The results of our earlier research and development and clinical trials for our influenza test kit may not be replicable in an influenza test kit or in a combination COVID-19 and influenza test kit, and may not be sufficient to support FDA approval.

 

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

 

We may be unable to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for our test kits.

 

We have a history of recurring losses and we expect to continue to incur losses for the foreseeable future. If we do achieve profitability, we may not be able to sustain it.

 

We depend on intellectual property licensed from Eiken Chemical Co., Ltd., or Eiken, and the termination of our license could result in the loss of significant rights, which would harm our business.

 

Intellectual property rights do not necessarily address all potential threats, and limitations in intellectual property rights could harm our business, financial condition and results of operations.

 

Concentration of ownership of our common stock among our executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

 

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PART I

Item 1. Business.

Overview

We are a medical technology company focused on the development and commercialization of transformative and innovative infectious disease test kits. We have developed a testing platform that produces centralized-laboratory-accurate molecular testing in a single-use and consumer-friendly test kit that is powered by two AA batteries and fits in the palm of a hand. We designed our test kits to provide accurate, reliable and on-the-spot molecular test results anywhere and at any time. We believe the novel coronavirus, or COVID-19, pandemic has shown the infectious disease testing infrastructure in the United States was not designed to accommodate the immediate demands of infectious disease control on a mass-population scale. The testing options today are too expensive, inaccurate, or are inaccessible due to slow time to results or complexity. Mass-population infectious disease testing requires a testing platform that can provide accurate and clinically relevant results on-the-spot, be affordably mass produced, portable and easy-to-use anywhere. Our LUCIRA COVID-19 All-In-One Test Kit used in the point-of-care, or POC, and prescription at-home settings and pending OTC EUA authorization, if received, for the LUCIRA CHECK IT COVID-19 Test Kit used in the over-the-counter, or OTC, setting, utilize identical components and are referred to as test kit or COVID-19 test kit.  Our test kit is designed to provide a clinically relevant COVID-19 result within 30 minutes from sample collection. We believe, at scale, it will be an affordable, mass-population testing solution. Our initial focus is within respiratory diseases, starting with COVID-19 and influenza A and B virus indications.

Our first clinical trial was conducted among symptomatic individuals and demonstrated the molecular accuracy of our COVID-19 test kit as comparable to the known high sensitivity Hologic Panther Fusion SARS-CoV-2 assay, or Hologic Panther Fusion, was initiated in September 2020 and supported our first Emergency Use Authorization, or EUA. The Hologic Panther Fusion is a high sensitivity molecular assay due to its low Limit of Detection, or LoD as labeled in its U.S. Food and Drug Administration, or FDA, EUA. In this clinical trial, we collected samples from 101 subjects, tested the samples head-to-head against the Hologic Panther Fusion and achieved 94.1% positive percent agreement (96.0% with discrepant testing) and 98.0% negative percent agreement. Our strong clinical performance was enabled by our LoD of 900 copies per mL of viral transfer media equivalent, or cps / mL VTM equivalent, which allows our COVID-19 test kit to detect viral genetic material in orders of magnitude better than antigen tests. In addition, our COVID-19 test kit is easy-to-use. Specifically, 100% of patients successfully performed self-testing at home using our COVID-19 test kit in less than two minutes in a human usability study we conducted with 398 users at research facilities in Sunnyvale and Fresno, California. The measure for successful performance was the ability to collect a nasal specimen and start the test running on the first try, either without having to look back at the directions or with only one look back. On November 17, 2020, we received an EUA, from the FDA for (1) prescription at-home use with self-collected nasal swab specimens in individuals aged 14 and older who are suspected of COVID-19 by their healthcare provider and (2) use at the POC, with self-collected nasal swab specimens in individuals aged 14 and older, and in individuals aged 13 and under when the specimen is collected by a healthcare provider at the POC. Our test kit was the first FDA-authorized, under an EUA, COVID-19 test that allows patients to test themselves and receive results at home.  Our prescription at-home use indication does not require healthcare provider telehealth or video observation.

In December 2020, we initiated a follow-on clinical trial among asymptomatic individuals to support both a new EUA submission for OTC non-prescription use, as well as an EUA amendment to our initial EUA to expand the indicated population to include asymptomatic individuals.  We refer to our clinical trial among symptomatic individuals and our follow-up clinical trial among asymptomatic individuals as our Community Testing Studies.  The asymptomatic study enrolled a total of 303 individuals, including 81 asymptomatic positives, and again utilized the Hologic Panther Fusion as the comparator. Results of the follow-on asymptomatic study showed no statistical difference in our test performance compared to the first study among symptomatic individuals. Hence, simply increasing the sample and confidence in our molecular accuracy as compared to the known high sensitivity Hologic Panther Fusion assay.  Our accuracy across both Community Testing Studies as compared to the Hologic Panther Fusion was 96% across all 404 samples. Our sensitivity, or positive percent agreement (PPA), was 92% across all 132 positive samples.  Excluding samples with very low levels of virus that possibly were no longer

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infectious, our sensitivity, or PPA was 97%. Our specificity, or negative percent agreement (NPA) across both studies was 98%.

We submitted EUA applications to the FDA for the expansion of our current EUA to include asymptomatic individuals and OTC use in February 2021.  Both of these submissions are pending authorization as of the date of this filing.  If we receive these additional EUAs, our indicated population will expand to include individuals with and without symptoms, as well as in the prescription at-home and OTC non-prescription indication to include children aged two to 13 with adult collected samples. If we receive an additional EUA for OTC, our COVID-19 test kit product will be one of the first single-use molecular tests that provides polymerase chain reaction, or PCR, quality molecular accuracy pending FDA authorization. Further, pending EUA authorization, to facilitate public health reporting for OTC users, we have developed a text based secure web portal to provide verified test results back to a user’s phone, as well as transmit results to relevant public health authorities.  We believe our portal is easy to use and it can be accessed without downloading an app.    

We plan to develop a combination COVID-19 and influenza A and B viruses test kit for prescription at-home use and later a separate influenza A and B viruses test kit, or our influenza test kit, for OTC use.

Infectious diseases are caused by pathogenic microorganisms, like viruses and bacteria, that enter the body. These diseases can spread from either person-to-person through direct or indirect contact, such as airborne particles from coughing or sneezing, or through a vector such as an animal or insect. Outbreaks of highly contagious infectious diseases, that spread from person-to-person, require immediate, mass-population testing in order to mitigate the spread of the disease. COVID-19 is an infectious disease caused by SARS-CoV-2 that was first identified in December 2019 in Wuhan, Hubei, China, and has resulted in an ongoing global pandemic. As of March 20, 2021, more than 122 million cases have been reported worldwide with more than 2.7 million deaths. The world economy has been significantly impacted and the World Bank noted that the COVID-19 pandemic is expected to plunge most countries into recession in 2021 with per capita income contracting in the largest fraction of countries globally since 1870 with advanced economies projected to shrink approximately 7%. COVID-19 diagnostic testing volume in the United States grew rapidly to approximately 250 million tests in 2020.  First quarter 2021 testing volume is estimated at approximately 150 million tests. As of the date hereof, the world continues to struggle with monitoring and containing the outbreak of COVID-19. COVID-19 molecular testing accounts for approximately one-third of all COVID-19 tests conducted, which translates into a current market spend of approximately $6.0 billion for molecular COVID-19 testing.

From December 2020 through February 2021, the FDA issued EUAs for three COVID-19 vaccines; however, we believe the need for ongoing detection and monitoring will continue given the ongoing COVID-19 pandemic. We also believe COVID-19, like influenza, will remain endemic for the foreseeable future and people suspected of influenza-like illness, or ILI, may want to purchase a combination COVID-19 and influenza test kit to confirm their diagnosis in order to receive timely and appropriate treatment and quarantine themselves if and as needed. We believe that to successfully combat infectious diseases such as COVID-19 and influenza, vaccines, therapeutics, testing, and public health measures such as mask wearing and social distancing all need to be deployed. We believe there will especially be an increased need for COVID-19 negative verification testing as we start to experience COVID-19 as an endemic disease and begin to spend both more time in public spaces with large numbers of people such as sporting events, large employers and traveling; as well as seeking to spend more time gathered with family and friends who may be older or health compromised.  We believe our test kit is well suited to play a role in reopening and the mitigation of COVID-19 spread.

Influenza, commonly known as “the flu,” is an infectious respiratory disease caused by several influenza viruses. The U.S. Centers for Disease Control and Prevention, or CDC, estimates that influenza has been responsible for between approximately 12,000 and 61,000 deaths in the United States annually since 2010. In the United States, seasonal influenza is estimated to result in a total average annual economic cost of over $11.0 billion, with direct medical costs estimated to be over $3.0 billion annually. According to industry estimates, a future influenza pandemic could cause hundreds of billions of dollars in direct and indirect costs. Approximately 174 million influenza vaccine doses were distributed in the United States in the 2019-2020 influenza season, and for the 2020-2021 season, vaccine manufacturer projections range from approximately 194 million to 198 million doses. We believe this rising demand for influenza vaccines, coupled with the inability to definitively determine based on symptoms alone whether a person has COVID-19 or influenza or another viral infection, translates to greater interest

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in products to diagnose and treat ILI. We estimate that the total potential market spend for OTC influenza testing could be in excess of $800 million based on current testing volumes, and the total addressable market could be up to approximately $4.0 billion based on an estimate that approximately 200 million people per year purchase treatments for the symptoms of ILI, according to Nielsen Corporation figures from October 2019, and an estimated OTC retail price of approximately $20 per test kit, assuming that all people who purchase treatments for the symptoms of ILI would purchase an OTC influenza test.

Traditional infectious disease testing options have been limited in their accessibility and effectiveness largely due to their spoke and wheel framework whereby sample specimens are collected away from the lab testing hub.  This framework creates complex and expensive sample transport logistics, and ultimately, limited clinical relevance during infectious disease outbreaks due to slower, multi-day time to results. There are several different testing modalities or techniques that are employed to determine the presence of a target disease or a proxy of the target disease. Each modality provides different clinically useful information due to its inherent differences and testing limits. The large categories of infectious disease tests generally fall into one of three categories: molecular tests, antigen tests and antibody tests. Molecular tests have the lowest LoD of the testing modalities and therefore can identify contagious people earlier. Having a lower LoD is better because it allows the test to detect the presence of lower amounts of viral genetic material. We believe the current molecular testing infrastructure in the United States does not meet the immediate demands of infectious disease management on a mass-population scale as it relies on centralized testing that involves complex sample transportation, logistics, and throughput bottlenecks. These tests have traditionally required complex instrumentation to accomplish the chemical amplification and detection needed. The majority of these molecular tests occur within centralized laboratory settings where it can take from two to 14 days to return a result, which does not include the sample acquisition and delivery times. Further, many of these tests require highly trained and specialized technicians to operate the laboratory equipment. More recently, some benchtop instruments have been developed in the POC setting with the capability to perform these complex and sensitive molecular tests, but these tests still require a trained operator, an electrical outlet and a separate dedicated instrument which limits their portability. These POC instruments typically have limited throughput, capable of processing only a single sample at a time.

Antigen tests have emerged as a category of stopgap tests that address the needs for portability and affordability, but they do not generally provide a balanced level of accuracy across identifying both positives and negatives. They have a more limited ability to detect active infection across the full spectrum of illness, including at and before symptom onset. Therefore, they tend to be of limited use to people until several days after symptom onset and often require a follow-on confirmatory molecular test. Antigen tests often miss early positives due to this lack of sensitivity which is insufficient for reliable infectious disease monitoring. Antibody tests have limited clinical relevance because they do not test for active infection and therefore do not indicate whether a person is actively contagious. We designed our test kits to mitigate the shortcomings of both molecular lab-based and antigen testing.

We believe providing an easy-to-use COVID-19 test kit with PCR-quality molecular accuracy that allows people both with and without symptoms to test themselves anywhere, especially in the safety of their own homes, is one of the best ways to help mitigate the spread of infectious diseases like COVID-19. Decentralized use of these consumer-friendly test kits can transform the way society mitigates the spread by testing infectious people anywhere, especially at home, and avoiding exposure to others in the community. However, outbreaks of highly contagious diseases, like COVID-19, require immediate, mass-population testing which traditional testing infrastructure within the United States is not historically designed to support. With our platform, we are reimagining current infectious disease testing through innovative test kits that deliver on-the-spot testing with molecular accuracy in a portable, affordable and easy-to-use format. Our platform is designed to produce assays that combine the accuracy and reliability of molecular tests and the accessibility and ease of use of antigen tests to mitigate the spread of COVID-19. Our molecular test kits are designed to be diagnostically definitive, unlike the antigen tests on the market today. Importantly, our test also provides a platform for both symptomatic and asymptomatic individuals to easily check their COVID-19 infection status in 30 minutes or less, thus providing a practical testing solution that can be utilized at high scale as we begin navigating a new normal living with COVID-19 as an endemic disease.

We designed our proprietary platform from the ground up to be able to provide accurate, consumer-friendly, affordable and convenient infectious disease test kits, and our COVID-19 test kit can provide a clinically relevant COVID-19 result within 30 minutes. Our platform has four key attributes: (1) robust target identification, (2) colorimetric assay, (3) consumer-friendly test kit and (4) flexible assay architecture. We use our expertise in

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infectious disease, virology and bioinformatics in support of our target identification efforts. Our colorimetric assay design provides for accurate and cost-effective viral detection. Our consumer-friendly “swab, stir, detect” sequence eliminates complicated workflow steps such that 100% of patients successfully performed self-testing at home using our COVID-19 test kit in less than two minutes in a human usability study we conducted with 398 users at research facilities in Sunnyvale and Fresno, California. The measure for successful performance was the ability to collect a nasal specimen and start the test running on the first try, either without having to look back at the directions or with only one look back. Furthermore, our platform is designed with a flexible assay architecture in which we can largely leverage all these components to accelerate the development of new test kits for additional indications, including other infectious diseases such as sexually transmitted infections, or STIs, and respiratory syncytial virus, to market with minimal changes.

Our proprietary platform enabled us to refocus our near-term business strategy to develop our COVID-19 test kit, pictured below with its box and instructions for use.

 

 

Our COVID-19 test kit is designed to provide a clinically relevant COVID-19 result within 30 minutes from sample collection, and we believe, at scale, it will be an affordable, mass-population testing solution. We believe our platform provides the following competitive benefits:

 

Molecular accuracy. Accurate testing, which we measure using LoD, is paramount in mitigating the spread of infectious diseases. LoD is the defining measure of an assay’s ability to reliably detect the presence of a specific target, such as viral RNA or protein. Tests with a lower LoD are more sensitive because they can detect positive samples with low viral load. All the FDA EUA authorized high sensitivity molecular assays have an LoD of 1,000 cps / mL VTM equivalent or lower, which is significantly better than antigen tests. These molecular tests can be used reliably among symptomatic and asymptomatic individuals, unlike antigen tests which can be limited to use among symptomatic individuals in their first seven days of symptoms. Molecular tests are diagnostically definitive, whereas antigen tests are not. We perform routine surveillance of emerging SARS-CoV-2 strains by periodically evaluating in silico reactivity against sequence databases. While our evaluations of the variants in the United Kingdom, South Africa, Brazil and

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Southern California have shown that these four variants are reactive to our COVID-19 test kit, we cannot currently definitively confirm that our COVID-19 test kit will be successful in detecting these strains. We anticipate performing testing to confirm detection with these strains once they become commercially available.

 

Simple, intuitive test kit. We designed our test kits to be used anywhere and at any time. Our test kits have a simple, intuitive, three-step “swab, stir, detect” sequence. In our usability studies, approximately 97% of users said our COVID-19 test kit met or exceeded their expectations with regard to ease of use, whereas many molecular tests require specialized equipment and trained personnel for operation.

 

Portable ‘swab-to-result’ within 30 minutes. Our COVID-19 test kit was designed to provide a clinically relevant COVID-19 result within 30 minutes, with the potential for a positive COVID-19 result in as few as 11 minutes. We believe this is highly beneficial when dealing with infectious diseases as it allows people to quickly determine if they are infected and enables them to appropriately quarantine, mitigate the spread and reduce infection rates. Molecular tests completed in centralized laboratories can take days or weeks to report results, at which point the tests are less clinically relevant.

 

Affordable. Rapidly deploying millions of tests per month requires the tests to be relatively inexpensive. We have purpose-built and designed our test kits to not have additional instrument costs and be a single, portable unit that can be manufactured and affordable at scale.

 

Flexible with potential for broad applicability. We built our platform to be flexible and applicable to additional assays using the same core test kit. As an example of our platform’s agility and robustness, we leveraged over half a decade of research and development of our test kit and expertise in target identification and assay development for influenza into a test kit for COVID-19. We intend to pursue additional indications in the future, including other infectious diseases such as STIs and respiratory syncytial virus, and believe this component of our strategy and business model will be a core value driver for us over the long term.

Our proprietary platform enables us to develop a pipeline of infectious disease test kits. Our current focus is on our COVID-19 test kit. The following chart outlines our test kit portfolio, categorized by the prescription or OTC commercialization channel and the anticipated year of FDA submission, based on our current estimates and belief. The footnotes in the chart below describe our anticipated regulatory approval pathway.

 

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Timeline represents anticipated FDA submission dates. The pathway to obtain an EUA for influenza or combination COVID-19 and influenza test kits remains uncertain. We may not pursue an amended or additional EUA, and we may need to seek 510(k) clearance or approval of a de-novo application from the FDA for our COVID-19, influenza, and combination COVID-19 and influenza test kits. Furthermore, the FDA may require us to initiate one or more additional clinical trials. The estimated timing or scope of any such future clinical trials is not definitively ascertainable.

(1)

Represents our COVID-19 test kit. We received an EUA from the FDA on November 17, 2020, for prescription at-home and POC use in people who are suspected of COVID-19 by their healthcare provider (people who are symptomatic or are thought to have been exposed to COVID-19).

(2)

Represents our COVID-19 test kit. We submitted an EUA application in February 2021 expanding our indication from prescription at-home and POC use in people who are suspected of COVID-19 by their healthcare provider (individuals who are symptomatic or are thought to have been exposed to COVID-19) to also include asymptomatic individuals. Our EUA authorization is pending as of the date of this filing and we cannot be certain that it will be received.

(3)

Represents our COVID-19 test kit. We submitted an EUA application in February 2021 for OTC use of our COVID-19 test kit. Our EUA authorization is pending as of the date of this filing and we cannot be certain that it will be received

(4)

Represents our combination COVID-19 and influenza test kit, which we plan to develop. We anticipate submitting a new EUA application with the FDA or seeking 510(k) clearance or approval of a de-novo application for prescription at-home use of our combination COVID-19 and influenza test kit, once developed. As of March 2021, we have not submitted an application to the FDA.

(5)

Represents our influenza test kit. We anticipate seeking 510(k) clearance or approval of a de-novo application for OTC use of our influenza test kit. As of March 2021, we have not submitted an application to the FDA pursuant to our anticipated regulatory approval pathway.

We intend to commercialize our COVID-19 test kit within POC and prescription at-home settings through partnerships with customers, such as hospital networks, payors, corporate senior living facilities and large employers. We completed an additional clinical trial to expand our indication from people who are suspected of COVID-19 to include asymptomatic people and submitted an application in February 2021 for an expanded EUA for this indication as well as a new EUA application for OTC use of our COVID-19 test kit.  We plan to invest in clinical activities to develop a combination COVID-19 and influenza test kit for prescription at-home as well as an influenza test kit for OTC. We have commenced manufacturing activities to support our planned 2021 commercial launch of our COVID-19 test kit, and our goal is to achieve increased manufacturing output by the second half of 2021.

What Sets Us Apart

Our goal is to reimagine infectious disease testing by enabling accurate, on-the-spot molecular testing with a consumer-friendly test kit that can be used anywhere and at any time. Our proprietary, single-use COVID-19 test kit has been designed to provide a clinically relevant COVID-19 test result within 30 minutes with a comparable LoD to highly accurate molecular PCR assays run in centralized laboratories. Our simple and intuitive test kit is powered by two AA batteries, fits in the palm of a hand and can be reliably used by individuals with and without symptoms. We believe the following competitive advantages set us apart:

 

First mover advantage for an innovative, single-use, consumer-friendly molecular testing platform designed to provide clinically relevant COVID-19 results for individuals both with and without symptoms within 30 minutes anywhere.

 

Molecular accuracy. In our head-to-head Community Testing Studies, our COVID-19 test kit performed comparably to the Hologic Panther Fusion, one of the current market-leading high-sensitivity PCR assays performed in centralized laboratories given its low LoD. This technical achievement was possible due to our platform which uses loop-mediated isothermal amplification, or LAMP, combined with our proprietary colorimetric detection technology to yield an LoD of 900 cps /mL VTM. Importantly, our test’s ability to detect both active infection and rule out the absence of infection differentiates it compared to rapid antigen tests. Specifically, our COVID-19 test kit’s LoD is significantly more sensitive than the LoDs of antigen tests, thus significantly reducing the potential for false negatives compared to antigen tests.  In a December 2020 Journal of Clinical Microbiology publication evaluating the analytical sensitivity of an antigen test indicated for prescription at-home use, the positive percent agreement of the antigen test as compared to the Hologic Panther Fusion was 83%. We believe that, if used on the subjects tested in the aforementioned study, our COVID-19 test kit would have achieved a 98% positive percent agreement as compared to the Hologic Panther Fusion, which is 15 percentage points higher than the evaluated antigen test, assuming that

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our COVID-19 test kit would have performed consistently with the results of our Community Testing Studies.

 

Single-use, intuitive design. We designed our test kits to be single-use and intuitive with a simple three-step “swab, stir, detect” sequence. Our test kit comes with simple instructions and all required components, including two AA batteries, and fits in the palm of a hand. The results are displayed clearly in a light-up display. The single-use design eliminates the need to purchase and maintain a separate instrument or reader, unlike other molecular tests, and eliminates the need for testing slowdown for reuse. 100% of patients successfully performed self-testing at home using our COVID-19 test kit in less than two minutes in a human usability study we conducted with 398 users at research facilities in Sunnyvale and Fresno, California. The measure for successful performance was the ability to collect a nasal specimen and start the test running on the first try, either without having to look back at the directions or with only one look back.

 

‘Swab-to-result’ within 30 minutes. Along with molecular accuracy, we designed our COVID-19 test kit to provide a clinically relevant COVID-19 result within 30 minutes, with the potential for a positive COVID-19 result in as few as 11 minutes. Providing an on-the-spot test result is important in infectious disease testing because it allows for positive results to be delivered quickly and for a person to quarantine earlier, thereby mitigating the spread. We believe our ability to deliver on-the-spot test results sets us apart from centralized laboratory molecular tests that can take days or even weeks to deliver a result.

 

Affordable. We believe at initial OTC launch, if we receive EUA authorization, we will be at a better price point than the at-home nasal self-collection kits being sold by labs.  These mail-in self collection kits require users to mail back their nasal swab samples for lab testing, with result reporting taking up to several days.  We expect our OTC price, if authorized, to be nearly equivalent to our current POC test pricing. While our POC pricing is presently at a premium to other POC tests, we believe there will be segments within POC—such as pre-procedural testing and urgent care triage—where the portability of our test kit will differentiate us from our competitors.

 

Robust platform with flexible hardware and multiplexed target identification capabilities designed to allow development of and testing for multiple assays. We designed our test kits with the capacity for multiplexing, meaning that multiple assays can be easily tested on a single test kit. Our flexible platform allows us to target a potentially wide range of infectious diseases through disease-specific assay-containing pellets contained within independent reaction chambers. As an example of our platform’s agility and robustness, we leveraged over half a decade of research and development in our test kit and expertise in target identification and assay development for influenza into a test kit for COVID-19. We believe our platform has the potential to be applied to additional infectious diseases in the future.

 

Rigorous product development processes and scalable infrastructure. We have developed significant internal capabilities notably around research and development, product design, and supply chain management. All of our core technology, such as the multiplexed biological assay device and the colorimetric detection method, were developed in-house by our experienced research and development team. We have also partnered with a U.S.-based, global manufacturing services company in order to have access to immediate and scalable manufacturing. We believe the design of our platform, and the supply chain we have built to capture low-cost economies of scale, are an advantage for us.

 

Comprehensive and broad intellectual property portfolio. As of December 31, 2020, we owned four issued U.S. patents, seven pending U.S. utility patent applications, two issued foreign patents and 34 pending foreign patent applications. Three currently issued filings and associated technology enable our highly accurate platform. We have protected our intellectual property rights through our patent portfolio and have maintained and executed on deliberate innovation areas to sustain the continued growth of our patent portfolio. Furthermore, we own trade secrets and research and development know-how supporting our ability to create the assays used in our platform.

 

Experienced senior management team and directors with deep industry experience. Our senior management team and directors consist of seasoned medical device professionals, with a wide array of

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experience including marketing healthcare consumer products, diagnostic chemistry, running clinical trials, navigating regulatory pathways, manufacturing, automation and supply chain management.

Growth Strategy

We intend to build a transformational infectious disease testing company delivering on a broad test menu for infectious diseases over time. To achieve our growth plan, we plan to employ several core strategies:

 

Commercialize our COVID-19 test kit through a staged regulatory approval approach first in POC and prescription at-home use and then expanding to OTC, pending EUA authorization. Initially, we pursued POC and prescription at-home EUA authorizations for our COVID-19 test kit. We received an EUA from the FDA on November 17, 2020 for these indications for the detection of SARS-CoV-2 in nasal swab samples from people suspected of COVID-19. In February 2021, we submitted EUA applications to the FDA to expand our initial prescription indication to include individuals both with and without symptoms and for OTC use. Our expanded POC and prescription at-home and OTC use EUAs are pending as of the date of this filing and we cannot be certain we will receive them.  

 

Expand and automate production capabilities to better address market demand while capturing economies of scale. With the ongoing COVID-19 pandemic, the demand for COVID-19 testing has increased significantly across all stakeholder groups. COVID-19 diagnostic testing volume in the United States grew rapidly to approximately 250 million tests in 2020.  First quarter 2021 testing volume is estimated at approximately 150 million tests.  Similar to influenza, we believe there will be a continued need for COVID-19 testing even after an effective vaccine has been widely distributed and compliantly administered. To better meet the significant market demand, a key part of our growth strategy includes expanding our current production capacity and automating our manufacturing process. Our test kits have been designed for automated production. Eventually, we could expand manufacturing to additional locations around the world to further our manufacturing capacity and reach.

 

Develop and launch additional test kits in the prescription at-home channel, beginning with a combination COVID-19 and influenza test kit as well as OTC test kits for influenza. Our flexible platform enables us to quickly develop and deploy assays for other infectious diseases as well as multiplex for combination tests. Capitalizing on the flexibility of our platform is a key pillar to our strategy and will enable us to focus on other large markets, including influenza A and B viruses. The influenza assay has been clinically tested and showed sensitivity and specificity comparable to other FDA-authorized influenza assays, and we believe with additional work could be combined with our current COVID-19 assay into a multiplex assay. We plan to conduct new clinical trials in the 2021-2022 influenza season and anticipate the FDA submission of this combination COVID-19 and influenza test kit to be in 2022. We believe this combination test kit would be the preferred assay for prescription at-home use. We additionally will work with the FDA to obtain regulatory approval for our influenza test kit to be sold OTC subsequently.

 

Continue to promote awareness of our test kits among patients, healthcare providers, and key opinion leaders, or KOLs. Building on our usability studies and EUA indications, we plan to leverage our clinical work to publish key research and articles to increase awareness and build credibility for our technology platform among healthcare providers and KOLs. Further, pending EUA OTC authorization, we are planning to conduct a consumer marketing campaign with advertisements to raise broad awareness of our test kit.

 

Expand internationally with our COVID-19 and influenza test kits. We believe our COVID-19 and influenza test kits, if authorized, will provide us initial opportunities to license our platform technology to international partners. Based on incoming interest from countries within Asia and Europe, we eventually plan to pursue direct sales in our international expansion.

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Infectious Diseases Overview

Infectious diseases are caused by pathogenic microorganisms, like viruses and bacteria, and can be spread from person-to-person or through a vector such as an animal or insect. One method of person-to-person spread is direct contact, in which the virus or bacteria is directly transferred from one person to another through touch, coughing or sneezing. Indirect contact is another method of transmission and occurs when an infected person touches an inanimate object, leaves behind pathogens, and another person touches the object and picks up the pathogens that were left behind. Airborne transmission occurs when pathogens from an infected person are expelled into the air, remain suspended and then infect another person. COVID-19 and influenza are infectious respiratory diseases that are caused by viruses and are transmitted from person-to-person.

COVID-19

COVID-19 is an infectious disease caused by the SARS-CoV-2 virus. It was first identified in December 2019 in Wuhan, Hubei, China, and has resulted in an ongoing global pandemic. As of March 20, 2021, more than 122 million cases have been reported worldwide with more than 2.7 million deaths. The CDC’s current and non-exhaustive list of symptoms includes fever or chills, cough, shortness of breath or difficulty breathing, fatigue, muscle or body aches, headache, new loss of taste or smell, sore throat, congestion or runny nose, nausea or vomiting and diarrhea. While most people have mild symptoms, some people face more serious consequences, such as acute respiratory distress syndrome, or ARDS, possibly precipitated by cytokine storm, multi-organ failure, septic shock, blood clots and death. The typical incubation period can range from two to 14 days.

This virus is spread primarily via small droplets from coughing, sneezing and talking. It is believed that the point at which people are most contagious is early in the course of their illness, particularly when they are beginning to experience symptoms. According to the CDC, a patient is potentially contagious until 10 days following symptom onset, resolution of fever for at least 24 hours and improvement of other symptoms, although viral spread is possible before symptoms appear, and from people who are asymptomatic. In April 2020, the World Health Organization reported that according to preliminary data people might be more contagious within the first three days from the onset of symptoms. Longer-term damage to organs (in particular lungs and heart) has also been observed, and there is concern about a significant number of patients who have recovered from the acute phase of the disease but continue to experience a range of effects including severe fatigue, memory loss and other cognitive issues, low grade fever, muscle weakness, breathlessness and other symptoms for months afterwards.

The World Bank noted that the COVID-19 pandemic is expected to plunge most countries into recession in 2021 with per capita income contracting in the largest fraction of countries globally since 1870 with advanced economies projected to shrink approximately 7%. We believe COVID-19 will be endemic.  The recent string of events has highlighted the necessity for decentralized widespread accurate diagnostic testing to mitigate the health and economic turmoil resulting from the spread of the disease.

Influenza Virus A and B

Influenza, commonly known as “the flu,” is an infectious respiratory disease caused by an influenza virus. Symptoms can be mild to severe (including death) and commonly include high fever, runny nose, sore throat, muscle and joint pain, headache, coughing, and feeling tired. These symptoms typically begin two days after exposure to the virus and most last less than a week. The cough, however, may last for more than two weeks. Complications of influenza may include viral pneumonia, secondary bacterial pneumonia, sinus infections, and worsening of previous health problems such as asthma or heart failure. There are currently four known types of influenza viruses. Two of these are the most common among human infections; influenza A and B viruses. Seasonal influenza is caused by influenza A and B viruses, while pandemic influenza occurs when a novel influenza strain appears. Usually, the virus is spread through the air from coughing or sneezing. A person may be infectious to others both before and during the time they are showing symptoms.

Influenza-related costs include direct costs such as lost productivity and associated medical treatment, as well as indirect costs of preventive measures. The CDC estimates that influenza has been responsible for between 12,000 and 61,000 deaths in the United States annually since 2010. In the United States, seasonal influenza is estimated to result in a total average annual economic cost of over $11.0 billion, with direct medical costs estimated

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to be over $3.0 billion annually. According to industry estimates, a future influenza pandemic could cause hundreds of billions of dollars in direct and indirect costs. We believe current testing infrastructure is equally ill-equipped to support the testing needs of a future influenza pandemic.

Market Opportunity

COVID-19 Market

As we begin living in a world with endemic COVID-19, we believe there is an opportunity for us to be the brand that provides accurate and easy-to-use COVID-19 testing to the OTC market, pending EUA authorization.  Due to COVID-19’s asymptomatic invisible spread, we believe there will be continued and increased need for COVID-19 negative verification testing as people begin to gather again in both large public spaces, as well as smaller gatherings with friends. Additionally, we believe there is a significant opportunity for POC, especially prescription at-home testing of infectious diseases.

COVID-19 diagnostic testing volume in the United States grew rapidly to approximately 250 million tests in 2020. First quarter 2021 testing volume is estimated at approximately 150 million tests. Molecular testing accounts for approximately one-third of all COVID-19 tests conducted, and Centers for Medicare & Medicaid Services, or CMS, POC reimbursement is approximately $50 per test. Testing volumes are based on the traditional testing infrastructure as there are currently no COVID-19 tests widely offered in the prescription at-home or OTC settings. This represents a current market spend of approximately $6.0 billion for molecular COVID-19 testing. The POC reimbursement rate is the amount that a provider receives and does not represent our actual revenue per test kit. We intend to evaluate our test kit pricing on a channel-specific basis, factoring in market dynamics and believe our revenue per test kit will vary over time. In the future, we anticipate the percentage of molecular tests to grow due to the continued awareness of its clinical relevancy, increased performance, ease of use and expanded availability in the POC, prescription at-home and OTC settings. According to some estimates, approximately 30% of all COVID-19 tests are conducted for symptomatic patients. We estimate our total available COVID-19 test kit market to be in excess of this as our pending EUA authorizations, if received, for our COVID-19 test kit are indicated for people who are both asymptomatic and who are suspected of COVID-19. Pending EUA authorizations, we believe our total available COVID-19 test kit market would increase to include the remainder of the testing opportunity and potentially expand this opportunity as more routine applications for testing would become available. Ellume Limited, or Ellume, received an EUA from the FDA for OTC use of its COVID-19 test; however, it is an antigen test and as seen in Ellume’s FDA labeling, healthcare professionals are advised that negative results and positive results in asymptomatic people should be considered presumptive and additional testing with a highly sensitive molecular COVID-19 test may be necessary. In March 2021, the FDA issued an EUA to Cue Health Inc., or Cue, for its OTC molecular COVID-19 test. From December 2020 through February 2021, the FDA issued EUAs for three COVID-19 vaccines; however, we believe the need for ongoing detection and monitoring will continue to be high even after effective vaccines have been widely distributed and compliantly administered given the ongoing COVID-19 pandemic. We also believe COVID-19, like influenza, will remain endemic for the foreseeable future and people suspected of ILI may want to purchase a combination COVID-19 and influenza test kit to confirm their diagnosis in order to receive timely and appropriate treatment and quarantine themselves if and as needed. We believe that to successfully combat infectious diseases such as COVID-19 and influenza, testing, vaccines and therapeutics all need to be deployed. We believe our testing platform is well suited to provide accurate, decentralized testing.

We plan to develop a combination COVID-19 and influenza test kit for the POC and prescription at-home markets. We additionally believe there to be demand for an OTC COVID-19 test kit for which we plan to commercially launch in the first half of 2021, pending EUA authorization, at a price point primarily consistent with our current POC test pricing. Long term, we believe that an OTC COVID-19 test kit would eventually need to be at a consumer-appropriate retail price which, based upon our analysis of the consumer healthcare market, is approximately $20 per test kit.

Influenza Market

The CDC estimates that approximately 35.5 million people in the United States were sick with influenza during the 2018-2019 influenza season; however, only an estimated 16.5 million patients visited a healthcare

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provider for the treatment of influenza, suggesting there is a large potential market for at-home influenza testing across the broader population. We believe there is an unmet medical opportunity and potentially greater demand for influenza testing given the hurdles to accessibility in the traditional influenza testing infrastructure at the POC and in centralized laboratories. According to Nielsen Corporation figures from October 2019, approximately 70% of U.S. households, representing approximately 230 million people, purchased cough or cold-related medicines throughout the year, which we believe highlights the willingness of consumers to purchase products to treat the symptoms of ILI. Of this population, we believe it is likely that only a small percentage of people actually have influenza, but a larger population suspects they have it and would be candidates for testing. In addition, according to CDC figures from the peak of the influenza season in the United States (November 2019 to March 2020), the influenza positivity rate was approximately 20%. With approximately 40 million influenza tests performed annually in laboratory and POC settings in the United States, a 20% influenza positivity rate during influenza season, but approximately 230 million people purchasing products to treat the symptoms of ILI, we believe there is an unmet medical need from an undiagnosed population who could benefit from rapid at-home testing. If an influenza test was available in an OTC setting, we believe the total potential market spend could be in excess of $800 million based on current testing volumes and a retail price of approximately $20 per test kit. We believe the total addressable market could be up to approximately $4.0 billion based on an estimate that approximately 200 million people per year purchase treatments for the symptoms of ILI, according to Nielsen Corporation figures from October 2019, and an OTC retail price of approximately $20 per test kit, assuming that all people who purchase treatments for the symptoms of ILI would purchase an OTC influenza test. While Ellume and Cue have announced that they are developing an influenza at-home test, there are no FDA-approved influenza testing products available in the prescription at-home or OTC settings. We believe there is significant demand for accurate, affordable, consumer-friendly and accessible testing options. We believe the impact of the COVID-19 pandemic will result in an increased desire to test when ILI symptoms present, as many influenza symptoms are similar to COVID-19 symptoms. Furthermore, there were more than 150 million influenza vaccine doses administered in the United States in each of the last three influenza seasons, and the influenza vaccine is only approximately 50% effective in adults, which we believe contributes to the continued need for influenza testing.

While we are initially focused solely on the U.S. opportunity, we believe there is a substantial market opportunity internationally. Further, we plan to conduct additional research and development activities to explore the potential of our platform to be used in additional indications, including other infectious diseases such as STIs and respiratory syncytial virus.

Infectious Disease Testing Industry Overview

Diagnostic tests and procedures are used to assist in the detection, monitoring and treatment of diseases and medical conditions through the examination of substances across various specimen types including nasal, saliva, blood, urine, and tissue, among others. The results of such tests can assist in the evaluation of health status, the detection of conditions or pathogens, treatment of disease and prevention of spread of disease. There are a number of different testing modalities and settings of care; which all serve to provide information to support clinical decision making. Traditional testing modalities were designed to be highly accurate for non-infectious diseases that do not require immediate results, such as diabetes, heart disease and cancer. As such, these testing modalities are not designed to support mass-population testing such as is required during outbreaks of highly contagious infectious diseases. The current centralized laboratory testing environment provides test results in two to 14 days and has not yet evolved to providing immediate, on-the-spot results.

Given the limitations of the current testing infrastructure, rapid antigen tests have emerged as an affordable stopgap in the POC setting. However, they lack the sensitivity to reliably identify active infection and often require follow-up confirmatory molecular testing.

Typical Patient Journey

People affected by infectious diseases can be either asymptomatic, not showing symptoms, or symptomatic, showing symptoms. Currently, there is not a widespread COVID-19 or influenza testing protocol for asymptomatic people due the general lack of convenient and accurate testing options. In order to begin testing of asymptomatic people, such as screening at airports, sporting events or restaurants, we believe it would require consumer-friendly, accurate testing that can deliver a result on-the-spot.

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Prior to the COVID-19 pandemic, the overwhelming majority of people exhibiting ILI symptoms did not seek medical treatment during early symptom onset. As an example, CDC data from the 2013-2014 influenza season showed that approximately 70% of people experiencing ILI symptoms did not go to the doctor for at least three to five days, which placed them outside the required 48-hour treatment window necessary for anti-viral treatment to be effective. In contrast, according to Nielsen Corporation figures from October 2019, approximately 70% of U.S. households, representing approximately 230 million people, purchased cough or cold medicines throughout the year; which we believe highlights the willingness of people to purchase products to treat the symptoms of ILI. We believe being able to provide an at-home testing opportunity would allow for testing to be conducted sooner after symptom onset and with the potential to mitigate the spread, as people self-isolate after learning of a positive result and receive appropriate treatment. We believe the need for ongoing detection and monitoring will continue to be high given hyper-sensitivity to ILI symptoms and broader awareness as a result of the COVID-19 pandemic.

Testing Setting Overview

Current settings of care for the most common diagnostic testing include centralized high or medium-complexity laboratories, near-patient or POC, and at-home settings. These care settings range in their current testing capabilities due to several factors including cost, time to results, and expertise and instrumentation required to run the test.

Centralized High or Medium-Complexity Laboratories

In centralized high or medium-complexity laboratory testing, a sample must be obtained and delivered to centralized facilities for processing. The patient sample is collected at a physician’s office or at a third-party collections site where the infectious person comes into contact with healthcare providers and poses a threat of spread. The sample goes into a sample transport medium (to preserve the sample) and is physically delivered, by mail or courier, to a centralized facility where it can be processed and analyzed. Some laboratories use high throughput technology that employs automated processing of more than 200 specimens a day. The results are then either sent electronically to the POC, where the physician provides the results, or directly to the patient. The high-complexity laboratory approach typically has the longest turnaround time ranging from 24 hours to two weeks or longer depending on factors including the time to acquire the sample, sample delivery times, facility testing queue, processing time and delivery of results to the physician or patient.

 

Remote Sample Collection: Outside of a physician’s office or at a third-party collections site, a person can also collect a sample in his or her own home, but the sample must still be sent to another location, usually a centralized laboratory, for processing. Recently, to address the limitations in mass-population testing, remote sample collection has emerged as another option to acquire additional samples. These tests do not produce an immediate result but rather require the patient to wait several days for the result and they still require specialized infrastructure at centralized laboratories for processing. Remote sample collection is typically seen in senior care facilities or large companies where bulk testing of a closed population is required.

Point-of-Care

POC testing refers to near-patient testing and typically occurs at the time of consultation with a medical professional. POC testing can occur at hospitals, physicians’ offices, urgent care clinics and retail clinics, which poses a threat of spread given the presence of infectious people in those settings. Patient samples are collected in-person and the sample is usually transported to a nearby specialized instrument. These specialized instruments usually have a streamlined workflow that makes the test less complicated to run and allows for a broader set of instrument users. However, these tests may still require a trained person to collect the sample and perform the test, which can produce results in anywhere from 15 minutes to a few hours assuming the instrument is ready to be used and there is no queue or maintenance needed. Depending on processing time and proximity of the lab, test results can be communicated as early as the time of consultation but typically require additional time and may be provided up to several days later. The potentially infectious person may still come into contact with healthcare providers and pose a threat of spread.

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There are a variety of FDA-approved molecular and antigen COVID-19 tests in the POC setting. Our goal is to be an entrant in the on-the-spot molecular POC setting.

Prescription At-home Testing

The goal of prescription at-home testing is to allow people to administer the test and obtain results without needing a trained person to assist. These tests are typically designed to be intuitive and easy-to-use with minimal workflow steps to minimize user error. They usually have simple sample collection mechanics such as nasal or saliva swabs or urine collection sticks and are usually able to produce easily interpreted results in under 60 minutes. Prescription at-home tests can be delivered to the patient’s home, meaning the test can be performed without the patient leaving his or her home. When patients can conduct a test and obtain an accurate, on-the-spot result in the convenience of their home, they can immediately self-isolate and reach out to a healthcare provider, thereby mitigating the spread of disease.

While there are FDA-authorized tests for remote or at-home sample collection, ours is the first FDA-authorized, under an EUA, COVID-19 test kit that can be fully self-administered and provide results at home.

OTC Testing

OTC testing refers to test kits available for purchase at retail and ecommerce locations such as drug stores, grocery stores, or other large retailers. OTC testing does not require a prescription and does not typically qualify for reimbursement. At-home pregnancy tests are an example of OTC testing.

Currently there is only one FDA-authorized molecular test that is available OTC for COVID-19 and we are not aware of FDA-approved influenza testing products available OTC. In February 2021, we submitted an application for OTC EUA authorization. The OTC EUA authorization is pending as of the date of this filing. We anticipate working toward OTC approval in the United States for our influenza test kit.

Infectious Disease Testing Modalities

There are a number of different testing modalities, or techniques, that are used to determine the presence of a pathogen or a proxy of the infectious disease. Each modality provides different clinically useful information due to its inherent differences and testing limit. A large number of infectious disease tests usually fall into one of three categories: molecular tests, antigen tests and antibody tests. Molecular tests have the lowest LoD of the testing modalities, which is better because it allows the test to detect the presence of lower amounts of viral genetic material and may allow it to identify contagious people earlier. Antigen tests have emerged as a category of stopgap tests that address the needs for portability and affordability, but they do not generally provide a balanced level of accuracy across identifying both positives and negatives. Antibody tests have limited clinical relevance because they do not test for active infection and therefore do not indicate whether a person is actively contagious.

Limit of Detection

LoD is the defining measure of an assay’s ability to reliably detect the presence of a specific target, such as viral RNA or protein. It is defined as the lowest target concentration at which the assay is able to generate a positive result 95% of the time. Tests with lower LoDs are more sensitive than tests with higher LoDs as the former can detect positive samples with low viral load. Typically, molecular tests have a much lower LoD compared to other testing modalities given their ability to amplify a target. There is not a standard way to measure LoD, but the predominant industry measure is cps / mL VTM equivalent. Among the current best performing molecular assays, the LoD is 1,000 cps / mL VTM equivalent or lower. In contrast, antigen tests, which do not amplify the target, are inherently less sensitive than molecular tests and thus are not considered diagnostically definitive, often requiring follow-on molecular confirmatory testing.

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As of December 31, 2020, the table below generally summarizes the different characteristics across the three testing modalities in the prescription market.

 

 

Molecular

 

 

 

Lucira

COVID-19

Test Kit(1)

Typical

POC Tests

Typical

Centralized

Laboratory

Tests

Antigen

Antibody

Intended

Use

POC,

Prescription

At-home

POC

Centralized

Laboratory

POC

POC, Moderate,

High Complexity

Laboratory

Device

Format

Single-use

Instrument +

disposable

cartridge

Specialized

equipment, multiple

steps and batch process

Instrument +

disposable

cartridge,

single-use

Single-use

Detection

Target

Viral RNA

Viral Proteins

Human Antibodies

Detects

Active

Infection?

Yes, through molecular amplification which can

detect viral presence better and earlier in the disease

process (compared to antigen and antibody tests)

Yes, but limited to

detecting only

viral proteins and

does not

have amplification

No

Window of

Detection

+1 day after infection

4-5 days after

infection usually

coinciding with

symptom onset

Post-infection

Limit of Detection

(cps / mL of

VTM

equivalent)

900(2)

Highly accurate assays have

an LoD at or below 1,000;

over half of FDA EUA assays have

an LoD greater than 1,000

Approximately

40,000 median(3)

N/A

Sensitivity(4)

>95%

80-98%

Approximately

60% within 6 days

of PCR positive

Processing

Time

<30 min

<30 min

Approximately

2.5 hours

<15 min

<15 min

Time to

Results(5)

Immediate

Hours to

Days

Days to Weeks

Hours to Days

Hours to Days

Indication

People suspected of having COVID-19, with or

without symptoms(6)

Limited to people

within first four days

of symptoms

Anybody

 

(1)

We received an EUA from the FDA on November 17, 2020 for our COVID-19 test kit.

(2)

Equivalent to 2,700 copies per swab and 0.12 TCID50 / mL of VTM equivalent.

(3)

Equivalent to approximately 5.52 TCID50 / mL of VTM equivalent.

(4)

Sensitivity is a measure of PPA between a test and a reference comparator. High sensitivity shows a well matched comparator but does not reflect an assay’s LoD

(5)

Indicates approximate time for results to reach the patient or healthcare provider. It is currently expected to take anywhere from a few hours to one day to receive our COVID-19 test kit.

(6)

In February 2021, we submitted an EUA application to expand our indication of our prescription at-home and POC EUA from the FDA, to include (1) prescription at-home use in individuals with or without symptoms aged 14 and older (with self-collected swabs) and in children aged two to 13 (with adult collected swabs) and (2) POC for individuals with our without symptoms aged 14 and older (self-collection), and in individuals aged 13 and under (healthcare provider collected). Our EUA is pending authorization as of the date of this filing and we cannot be certain it will be received.  [

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Molecular Tests

Molecular tests target the viral genetic material (DNA or RNA) and are considered to be the most reliable due to high accuracies afforded by molecular amplification technologies, such as PCR, and LAMP. For COVID-19, molecular tests have a median LoD of 1,000 cps / mL VTM equivalent which makes them highly accurate. As a result of this high accuracy, molecular tests are able to detect diseases earlier in their incubation periods and are considered diagnostically definitive. Traditional infectious disease molecular tests require target amplification and fluorescence detection which necessitates specialized equipment that is expensive and complex. The need for specialized instrumentation also necessitates trained personnel, equipment maintenance and suitable infrastructure. These factors traditionally require the test be conducted in centralized locations such as high or medium-complexity laboratory environments and more recently in a POC setting such as a medical office or in emergency rooms. The closer to the patient the test is performed, generally the faster the result due to reduced sample transit logistics. However, large centralized laboratory testing instruments have historically provided more accurate results than POC instruments. The total turnaround time from sample collection to result may take up to two weeks. Traditionally the localization of these tests due to their complexity does not make them conducive to decentralized, mass-population testing.

Antigen Tests

These tests target the viral protein proxies of the target pathogen instead of the viral genetic material themselves. Given that there is no amplification in antigen tests, they have a high LoD and low sensitivity and as a result can produce false negative results. The utility of this test is limited to highly infectious people who are already exhibiting apparent symptoms. Antigen tests do not capture the earlier stage of infection when people are most contagious and may not be showing obvious symptoms. While antigen tests can be used to detect a certain band of infectious people, they are unlikely to catch the full spectrum of infectious people given their lack of sensitivity. We believe antigen tests have become a stopgap measure for mass-population testing because they are rapid, low-cost and portable. They are not considered diagnostically definitive, however, like molecular tests and are often followed up by molecular confirmatory testing.

Antibody Tests

These tests target human antibodies which are produced after the body has encountered and responded to a pathogenic threat. Antibodies can exist in the blood at varying amounts and times depending on the individual immune response and the specific pathogen. The existence of antibodies usually occurs well after a person is infectious and thus antibody tests confirm whether, not when, there has been exposure to a certain pathogen. Furthermore, there are current indications that certain people may develop antibodies in response to COVID-19 that begin to greatly diminish shortly after an initial infection, thereby allowing for the possibility of reinfection and diminished immunity. As such, antibody tests are not conducive for infectious disease control because they do not detect active infection or, in the case of COVID-19, accurately predict immunity.

Current Testing Approaches and their Limitations

Decentralized, mass-population testing for infectious diseases including COVID-19 and influenza is necessary to mitigate the spread of infectious disease, but implementing mass-testing with traditional testing approaches has significant limitations. Mass-population testing requires tests that offer on-the-spot test results with molecular accuracy in a portable, affordable and easy-to-use format.

Traditional testing modalities were designed to be highly accurate for non-infectious diseases that do not require immediate results, such as diabetes, heart disease and cancer. Even for seasonal infectious diseases, such as influenza, our current testing paradigm is not effective to mitigate spread. Most people do not visit a physician until they have had symptoms for three to five days, at which point they likely have already been contagious and spread the disease. Further, studies have shown that anti-viral influenza treatments are most effective within 48 hours of symptom onset. Traditional testing options were not designed to support mass-population testing such as what is required during outbreaks of highly contagious diseases. As evidenced by the rapid spread of the current COVID-19 pandemic and the inability to control its spread without the use of blunt and prolonged social controls such as lockdowns and social distancing, the current testing paradigm has failed to be an effective tool due to a number of factors.

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Traditional infectious disease testing modalities have been limited by and made inaccessible to the consumer by one or more of the following attributes:

 

Complexity. Molecular tests and some antigen tests (both in centralized laboratory or POC settings) require special instrumentation and trained personnel for processing samples. Samples must typically be placed in sample transport medium and carefully preserved while being transported to facilities that process these tests.

 

Time to result. Due to complex workflows and sample transportation needs, time to results can range from a few days to weeks despite actual testing times ranging from less than 15 minutes to a few hours.

 

Limited clinical relevance. The critical answer sought in infectious disease testing is whether or not a person is infectious. This is important both from a control perspective (to avoid spread) and treatment perspective, such as in influenza, where treatments are effective within the first 48 hours after symptom onset. From an infectious disease control standpoint, antigen tests have limited clinical relevance given the narrow window in which they return a positive result and potentially miss an active infection, producing a false negative result. Antibody tests do not detect active infection but rather say whether, not when, a person was infected. These tests have value, but they are not effective in accurate identification of infection and mitigating the spread of infectious diseases. We believe immediate, on-the-spot testing is needed to help mitigate the spread during outbreaks of highly contagious diseases.

 

Expensive and inaccessible. Centralized laboratory tests are expensive. For COVID-19, molecular tests in high throughput laboratories are currently reimbursed at $100 per test if results are returned within two days and $75 if results are returned after two days. Non-high throughput tests are reimbursed at approximately $51. Many of these tests can cost over $50 and require a significant upfront cost to purchase specialized instrumentation, making them cost-prohibitive for retail stores and people seeking at-home testing. Furthermore, most current testing options require patients to physically go to a testing center or visit a medical professional for sample collection. This frictional cost prevents many people who should be tested from being tested in time due to the unavailability of the care provider or person. The expense and inaccessibility of testing are significant barriers to mass-population testing.

Our Solution

The U.S. healthcare system’s current testing infrastructure was designed and built around addressing non-infectious diseases, and it does that very well; however, we believe it was not designed to test large populations quickly, safely, accurately and affordably. Outbreaks of highly contagious diseases, such as COVID-19 and influenza, require immediate, mass-population testing. COVID-19’s asymptomatic spread also presents opportunities for ongoing negative verification testing.  We believe that our solution not only addresses these systemic issues within the United States but has the potential to be applied globally as well.

Providing an accurate and easy-to-use test kit that allows potentially infectious people to test themselves anywhere, including in the safety of their own homes, is one of the best ways to help mitigate the spread of infectious diseases. We believe decentralized use of our consumer-friendly test kits can transform the way we mitigate the spread by testing contagious people at home and avoiding exposure to others in the community. Our platform can also provide a convenient way for large and small populations to perform negative verification testing, such as for sporting events, workplaces, travel and indoor gatherings.

With our platform, we aim to respond to the limitations of the current infectious disease testing infrastructure through proprietary technology that delivers on-the-spot results with molecular accuracy in a portable and consumer-friendly test kit. Our platform is designed to combine the accuracy and reliability of molecular tests and the speed and affordability of antigen tests to mitigate the spread of COVID-19 and influenza. Additionally, as a molecular test, our COVID-19 test kit is more sensitive than antigen tests on the market today.  We believe our platform gives us the ability to potentially provide mass-population testing for COVID-19 and influenza anywhere and at any time.

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We designed our platform from the ground up to be able to provide accurate, easy-to-use, affordable and convenient infectious disease test kits, and our COVID-19 test kit can provide a clinically relevant COVID-19 result within 30 minutes. Our platform has four key attributes: (1) robust target identification, (2) colorimetric assay, (3) consumer-friendly test kit and (4) flexible assay architecture. We use our expertise in infectious disease, virology and bioinformatics in support of our target identification efforts. Once a target has been identified, we develop assays to amplify and detect the target through a combination of LAMP and proprietary colorimetric detection chemistry. These assays are then stabilized and packaged in the consumer-friendly design of our test kits. Our COVID-19 test kit was designed for high usability and high accuracy while also being purpose-built for low-cost manufacturing. Under the POC and prescription at-home EUA we received, our COVID-19 test kit is eligible for reimbursement in POC settings as a molecular POC test, and we are working with the Centers for Medicare and Medicaid Services, or CMS, to determine the reimbursement pathway for prescription at-home use. Unlike other testing modalities currently in the market, our test kits are consumer-friendly, accurate and can be used anywhere.

COVID-19 Test Kit

Our COVID-19 test kit is easy-to-use with three steps and provides ‘swab-to-result’ within 30 minutes. Our platform is designed to address needs that other testing solutions do not. Our COVID-19 test kit provides the accuracy and reliability of a centralized laboratory, but in an affordable, portable, convenient and easy-to-use test kit that could fill the need for mass-population COVID-19 testing.

The following picture depicts our COVID-19 test kit.

 

Our COVID-19 test kit contains everything needed to perform one COVID-19 test, including: (1) quick reference instructions that provide step-by-step instructions for use, (2) one sterile nasal swab for self-collection of a nasal specimen in the lower nostrils, (3) one sample vial that contains liquid buffer into which the swab is stirred, (4) one test unit base that contains the chemistry and displays the result, (5) two AA batteries to power the test unit base and (6) one disposal bag to dispose of the test kit in regular waste.

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Fundamentally, our platform has the following four key attributes:

1. Robust target identification.

 

The first step of the development process is identification of the genetic target. The target is a small stretch of the pathogen’s genetic material that will be amplified and detected by our colorimetric assay. We have developed robust, proprietary in-house capabilities for identifying such targets for a broad range of pathogens. Through our innovative platform, we are able to identify and test potential targets against large databases of available sequences of the pathogen of interest.

2. Colorimetric assay.

 

Amplification: Once targets have been identified, we can begin to design assays that allow for amplification and detection of these targets in patient samples. Amplification chemistry is the process by which a single copy of the target is copied to “amplify” its abundance, and the process helps detection chemistries identify the pathogenic target of interest in a sample. We use a form of amplification called LAMP. LAMP allows for target amplification powered by just two AA batteries, unlike other amplification methods which require more power.

 

Detection: Unlike most assay chemistries, which rely on the use of fluorescent signals to detect amplification, we use our proprietary colorimetric chemistry for detection. This eliminates the need for complex and expensive instrumentation. Using colorimetric detection, as amplification proceeds the color of the reaction changes and is monitored using inexpensive LEDs and photosensor elements.

3. Consumer-friendly test kit.

 

Usability: Our test kit brings centralized laboratory accuracy in an intuitive, consumer-friendly design that uses a simple, three-step “swab, stir, detect” sequence and comes with clear instructions and all the necessary components (including two AA batteries) to operate it. Furthermore, our test kit displays a clear result that users can correctly identify, thus eliminating the subjectivity of user confirmation. This minimalist design and workflow is intended to ensure high usability and broad accessibility, with the goal of enhancing our test kit’s appeal for decentralized, mass-population testing.

 

Designed for automated, low-cost manufacturing: Our test kits were specifically designed for low-cost production at scale. This was enabled by intentional design choices that allow for low-cost hardware by eliminating the need for pumps and valves. Colorimetric uses inexpensive LEDs, and photosensors. As we reach threshold production volume, our test kits were designed to be manufactured at costs low enough to be sold profitability to consumers, at a price point attracting significant OTC consumer purchase demand. Our purpose-built supply chain is expected to allow us to cost-effectively address mass-population infectious disease testing needs.

4. Flexible assay architecture.

 

In support of our goal to design and provide a platform with broad applicability, we designed our platform to allow us to adapt the test unit bases into which chemistries are run to the development of new assays addressing additional infectious diseases. We anticipate that our colorimetric detection in our test unit base can be used in a broad range of applications and that the test unit bases can be applied to other indications with minor modifications and an indication-specific disease pellet. Our platform is further capable of expanding the number of independent reaction chambers that in turn increases our ability to multiplex.

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We believe the elements comprising our platform create test kits that, if approved, are capable of bringing accurate, reliable, on-the-spot infectious disease testing anywhere, at any time. We received an EUA from the FDA for our COVID-19 test kit in the POC, prescription at-home setting.

Benefits of our Platform

We believe our platform addresses historical challenges and unlocks the ability to provide mass-population infectious disease testing anywhere and at any time. Because our platform is designed to be portable and easy-to-use, people will be able to take the test anywhere, including at home. This would greatly reduce the burden and risks placed on public health facilities when people would otherwise travel to them for testing. Since our easy-to-use platform has been designed to provide results quickly, people will also quickly know if they are potentially infectious and can immediately begin avoiding contact with others to mitigate disease spread.

We believe our platform combines the benefits of accuracy and reliability of a centralized laboratory test with the speed, ease of use and affordability of an antigen test. According to many virologists, the most important time to mitigate the spread of infectious disease is early in its infectious period, but in a typical influenza scenario, a patient generally waits to get tested until a few days after symptom onset. We believe that testing both suspected cases and asymptomatic people, accurately detecting infection early and giving people an opportunity to isolate and treat early provides a critical opportunity to mitigate the spread of infectious disease. With our platform’s proprietary technology, we designed our test kits to detect infections early, therefore mitigating the spread of an infectious disease and filling an important gap in the current testing infrastructure. Our test kits’ portability and ability to deliver on-the-spot results make it possible to administer in places not equipped for POC testing. Eventually, we expect our test kits, if approved, to become widely available for testing at other high-traffic locations, such as large venues, airports, train stations, malls and museums. We also anticipate employers, local governments, school districts, businesses and travelers can use our test kit, if approved, to frequently and affordably test themselves and others before engaging in large gatherings, travel and in-person school and office work.

We believe our platform is designed to benefit stakeholders through a testing platform that has the following characteristics:

 

Molecular accuracy. Accurate testing, which we measure using LoD, is paramount in mitigating the spread of infectious diseases. A test’s ability to detect if someone is infectious is dependent on the test’s LoD: a measure of how much virus is required for the test to generate a positive result. With an LoD of 900 cps / mL VTM equivalent, our COVID-19 test kit has a comparable LoD to other known high sensitivity PCR assay tests, including those offered in centralized laboratories. In contrast, antigen tests are not as sensitive and will only yield positive results for people with a high viral load, meaning they can return negative results even in people at the start of infection who may be contagious. This is why antigen tests are often limited to use among individuals in their first seven days of symptoms and include labeling guidance that antigen tests are not diagnostically definitive and may require follow-on confirmatory molecular testing. Achieving the right level of sensitivity is important: at the beginning of an infection, a high enough sensitivity is needed to accurately pinpoint when a person is contagious despite having a lower viral load, and later in infection a low enough sensitivity is needed to avoid assigning a positive result to a person who has long recovered and stopped being contagious. Unlike other tests on the market, our COVID-19 test kit is designed to deliver a reliable result across the entire disease spectrum with the potential to provide a public health benefit of accurate results at the critical early stages of infection.

 

Simple, intuitive test kit. We designed our test kits to have a consumer-friendly, three-step “swab, stir, detect” sequence and come with clear, one-page instructions and all the necessary components, including two AA batteries, to operate the test and obtain the result. Our proprietary colorimetric technology and proprietary buffer display the result in a light-up display that is clear and easy to read. Further, the single-use nature of our test kit eliminates the need for clean-up and testing slowdown often associated with centralized laboratory or POC tests. In our usability studies, approximately 97% of users said our COVID-19 test kit met or exceeded their expectations with regard to ease of use, whereas many molecular tests require specialized equipment and trained personnel for operation.

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Portable ‘swab-to-result’ within 30 minutes. Our COVID-19 test kit is approximately 2” x 2” x 2” and fits in the palm of a hand. It was designed to produce a clinically relevant COVID-19 result within 30 minutes, with the potential for a positive COVID-19 result in as few as 11 minutes. Portability and a quick time to result is beneficial when dealing with infectious diseases like COVID-19 and influenza as it allows people to take the test anywhere, quickly determine if they are infected, quarantine if needed and thereby reduce infection rates. One of the critical issues with testing during the COVID-19 pandemic has been the time required to receive results – our COVID-19 test kit is designed to address this challenge by providing a clinically relevant result within 30 minutes. Molecular tests completed in centralized laboratories can take days or weeks to report results, and antigen tests often require follow-on confirmatory tests, making their time to results slower and less clinically relevant.

 

Affordable. We have purpose-built and designed our test kits to not have additional instrument costs and be a single, portable unit that can be manufactured and affordable at scale. At initial OTC launch, pending EUA authorization, we believe we will be able to offer a test kit at a price that is nearly equivalent to our current POC test pricing. Eventually, if we achieve scaled production, we believe we will be able to economically produce our COVID-19 test kits at a cost that enables us to be at a consumer appropriate retail price. Our POC pricing is priced at a modest premium to other POC tests, and we believe our test kit will differentiate us from our POC competitors.

 

Flexible with potential for broad applicability. Our goal was to design and provide a robust testing platform with broad applicability for mass-population testing for infectious diseases. While our initial focus is within respiratory diseases, namely COVID-19 and influenza, we built our platform to be flexible and applicable to additional assays using the same core test kit. Specifically, our platform is capable of multiplexing, meaning multiple assays can be put on a single test kit. As an example of our platform’s agility and robustness, we leveraged over half a decade of research and development of our test kit and expertise in target identification and assay development for influenza into a test kit for COVID-19. We intend to pursue additional indications in the future, including other infectious diseases such as STIs and respiratory syncytial virus, and believe this component of our strategy and business model will be a core value driver for us over the long term.

Clinical Performance and Data

We have conducted a number of clinical trials to support our clinical performance as well as aggregate real-world patient data in order to support our initial FDA EUA application, which we filed on October 22, 2020, and our initial EUA for our COVID-19 test kit, which we received from the FDA on November 17, 2020. Subsequently, we completed a follow-on Community Testing study under the same protocol as the prior study used to submit our first EUA to include asymptomatic individuals. This data was submitted to FDA to support the expansion of our POC and prescription at-home EUA to include asymptomatic individuals and was also used to support a new EUA submission for OTC non-prescription use. Based on our clinical work completed to-date, we believe that our COVID-19 test kit shows the following key attributes:

 

Real world data supporting on-the-spot testing, portability and clinical utility.

 

Molecular accuracy performance on-par with known high sensitivity PCR centralized laboratory tests.

 

High usability across a broad population set including age.

Real World Data Supporting On-The-Spot Testing, Portability and Clinical Utility

Community Testing Studies

We have now completed two clinical trials, which we call our Community Testing Studies, to establish the clinical performance of our COVID-19 test kit under the intended use conditions. The first Community Testing Study was conducted among symptomatic individuals and was used to support the our first EUA submission.  The second Community Testing Study was conducted as a follow-on study among asymptomatic individuals and was

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used as a basis to support the most recent EUA submissions.  In the symptomatic study, we enrolled COVID-19 known positive patients as well as symptomatic people not experiencing fever so long as they were experiencing at least three CDC COVID-19 symptoms and at least one symptom was either cough, shortness of breath and/or new loss of taste or smell. In the asymptomatic study, only asymptomatic subjects were enrolled.  Across both studies, subjects were tested outside their residence, and in the asymptomatic study, some tests were performed at a pop-up study clinic. All enrolled subjects independently collected their nasal swab samples and ran our test. All subjects then collected a second nasal swab sample that was run in Sutter Health Shared Labs and the results were compared to the Hologic Panther Fusion.

A total of 404 subjects were enrolled across both of our Community Testing Studies. Our COVID-19 test kit achieved 92% (121/132) positive percent agreement, or PPA as compared to the Hologic Panther Fusion across all samples, and a 96% PPA (49/51) with discrepant testing.  Excluding samples with very low levels of virus that possibly no longer represented active infection (10 samples with cycle thresholds greater than 37.5 Ct), we achieved a 97% (118/122) PPA.  The Ct value is the number of cycles required to detect the viral target, and running more cycles (a higher Ct value) reflects detection of a lower amount of viral material. The 95% confidence intervals, or CI, for the total PPA were 85.5% to 98.4%.

Our negative percent agreement, or NPA, was 98%. The 95% CI for the total NPA were 89.4% to 99.9%. There was one invalid result in this trial (0.99%) that resulted in a retest, and two additional retests (1.98%) that were due to user errors where study staff prematurely provided a second test kit prior to letting the test complete to a possible invalid result. The following table summarizes the results of our Community Testing Studies using the Hologic Panther Fusion as a comparator:

 

 

 

 

 

 

 

 

 

Total Subjects

Subjects with Ct ≤ 37.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPA

NPA

Accuracy

PPA

NPA

Accuracy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Symptomatic

94%

(48/51)

98%

(49/50)

96%

(97/101)

100%

(45/45)

98%

(49/50)

99%

(94/95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asymptomatic

90%

(73/81)

98%

(218/222)

96%

(291/303)

95%

(73/77)

98%

(218/222)

97%

(291/299)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

92%

(121/132)

98%

(267/272)

96%

(388/404)

97%

(118/122)

98%

(267/272)

98%

(385/394)

 

 

 

 

 

 

 

 

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The graph below depicts our PPA summary from our Community Testing Studies comparing our COVID-19 test kit head-to-head to our FDA EUA authorized high sensitivity comparator, the Hologic Panther Fusion. The graph below shows Ct values of reference positive samples from our Community Testing Studies. Green color is used to show that our test result matched the Hologic Panther Fusion positive result. Grey color is used to show that our test result did not match the Hologic Panther Fusion reference test result. Ct values are shown in ascending order.

 

 

Clinical Usability Data from our Community Testing Studies

Our Community Testing Studies also included usability measures in both their case reporting form to record swabbing attributes, as well as a patient questionnaire to assess overall usability and instructions clarity. Usability results from both our Community Testing Studies demonstrate that our COVID-19 test kit is easy to use and that 100% of enrolled subjects have been able to successfully run our COVID-19 test kit. Our Community Testing Study usability data is in line with our prior human usability study results, where approximately 96% of subjects stated that our COVID-19 test kit was “Easier or About What They Expected” and approximately 92% of subjects stated our instructions manual was “Extremely or Very Clear and Understandable.”

Performance Summary

Results from our Community Testing Studies were submitted to support our FDA EUA applications for our COVID-19 test kit. The Community Testing Studies, which utilized the Hologic Panther Fusion as a comparator assay, achieved a 92% (121/132) PPA calculated across all samples and 97% (118/122) PPA achieved among all samples at or below the Ct value of 37.5. These results exceeded the FDA template objective of greater than 80% PPA for prescription at-home and POC use and greater that 90% PPA for OTC use. While our 98% (267/272) NPA was slightly below the FDA template of 99% NPA objective, the result is comparable to the reported NPA for many other EUA-authorized assays.

Moreover, all clinical data for our COVID-19 test kit were gathered in prospective trials conducted outside of clinical settings, which simulated the real-world use conditions. Therefore, the performance data obtained in these clinical trials are expected to be representative of the assay performance in the field.

Further, the Community Testing Studies demonstrated that our COVID-19 test kit can easily and successfully be used by untrained users in a home and non-laboratory setting. With the exception of three senior living residents over the age of 80, all of the enrolled subjects in the Community Testing Studies used our COVID-19 test kit on their own, using our instructions manual provided with our COVID-19 test kit. In our symptomatic

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study, many of these users were noticeably symptomatic and not feeling well and all of them conducted this test standing outside their residence. In addition, we have worked with nearly 1,000 users to optimize our COVID-19 test kit workflow and instructions manual.

We had also begun a study with Sutter Health, or the Sutter Health Trial, prior to initiating the first symptomatic Community Testing Study, but enrollment was negatively impacted by the California wildfires and it was not possible to complete the study objectives within the authorized study timeframe.  Because the first Community Testing Study provided sufficient data for our first FDA EUA submission, the time frame for the Sutter Health Trial was not extended. The Sutter Health Trial only enrolled 2 COVID-19 positive subjects before it was closed out and both samples matched the test result provided by the Hologic Panther Fusion.

Cleveland Clinic Clinical Trial

The Cleveland Clinic Clinical Trial is near completion and we expect to close out this study in the second quarter of 2021. Our COVID-19 test kit was compared to the CDC SARS-CoV-2 assay in this clinical trial. Our data for this clinical trial, summarized in the table below, are through March 1, 2021 and are interim in nature.  There have been three invalids in the Cleveland Clinic Clinical Trial.

 

 

Comparators

 

Our COVID-19 Test Kit

Positive

Negative

Total

 

Positive

58

2

60

 

Negative

2

29

31

 

Total

60

31

91

 

Positive Percent Agreement (PPA)

 

 

97%

 

Negative Percent Agreement (NPA)

 

 

94%

 

 

Molecular Accuracy Performance On-Par with Centralized Laboratory Tests

Limit of Detection—Analytical Sensitivity

As previously described, LoD is the defining measure of an assay’s ability to reliably detect the presence of a specific target, such as viral RNA or protein. It is defined as the lowest target concentration at which the assay is able to generate a positive result more than 95% of the time. Molecular assays tend to have lower LoD, which equates to higher sensitivity resulting from their nucleic amplification. This provides a significant sensitivity or LoD advantage compared to antigen tests which do not amplify or multiply the viral sample.

The chart below shows the distribution of LoDs among 185 FDA-authorized molecular assays on a cps / mL VTM equivalent basis. The most accurate molecular assays have an LoD of 1,000 or less cps / mL VTM equivalent basis. While our COVID-19 test kit utilizes a direct swab method whereby the swab goes directly into the sample vial and does not require VTM, our LoD is 900 cps / mL VTM equivalent, placing it among one of the most accurate molecular assays currently available. Our LoD, like other high-performing, known high-sensitivity

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molecular assays, is also significantly more sensitive than antigen assays. Plot points higher in the graph are lower LoD which is more sensitive and considered more accurate.

 

 

(1)

The FDA’s EUA regulatory environment for COVID-19 tests is rapidly changing. This chart references data as of November 2020 with the exception of the addition of prescription at-home and OTC sample-to-result tests authorized through March 15, 2021.

To support our LoD for our FDA EUA submission, we followed the FDA’s template guidance for calculating LoD. Quantified heat-inactivated SARS-CoV-2 virus was serially diluted in a natural nasal swab matrix, 35 µL was pipetted onto a fresh, unused nasal swab and run on two test kit lots. The LoD for the test kit was determined by testing three target concentrations on each lot of test kits. For each lot, each concentration was tested in replicates of seven test kits by three unique operators, for a total of 21 replicates per concentration. The LoD for each lot was separately determined as the lowest concentration of genome copy equivalents per swab that yielded greater than 95% positive results. The preliminary LoD for the test kit was defined as the highest LoD of the two lots.

The following table summarizes our LoD data submitted to the FDA:

 

Genome

Equivalent / Swab

(per reaction)

 

Positive/Total Valid

Percent Positive

 

 

 

 

Preliminary

Lot 1

Preliminary

Lot 2

Confirmatory

Preliminary

Lot 1

 

Preliminary

Lot 2

 

Confirmatory

 

2,700(1)

 

20/21

20/21

20/20

95.2%

 

95.2%

 

100%

 

 

1,350

 

18/21

20/21

85.7%

 

95.2%

 

 

 

(1)

2,700 cp / swab is determined as LoD and is equivalent to 900 cps / mL of VTM equivalent assuming 100% elution of the swab in 3 mL of VTM.

The LoD for Lot 1 was determined to be 2,700 copies per swab, while Lot 2 was 1,350 copies per swab. As such, 2,700 copies per swab was reported as the preliminary LoD. The LoD was confirmed by testing 20 replicates at the preliminary LoD concentration on a single lot. All 20 of 20 test kits at this concentration were positive.

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High Usability Across a Broad Population Set

Overview and Methodology

In addition to our Community Testing Studies, we conducted an FDA EUA human usability study among a total sample of 398 healthy, non-symptomatic users to evaluate the ability of various ages, ethnicities and education levels to successfully run our COVID-19 test kit. This usability work was completed across two clinical trials as a second trial to include parent-assisted collections of minors was added after reviewing the FDA template published on July 29, 2020.

Prior to these usability studies, we conducted extensive usability work involving nearly 500 people in five locations and three states (California, North Carolina, and Ohio) in the beginning of 2020. These prior studies provided an opportunity to optimize our COVID-19 test kit workflow and instructions manual prior to conducting the FDA EUA human usability study to support our EUA for our COVID-19 test kit.

Results

Overall, we achieved the FDA EUA submission human usability study endpoints among all English-speaking subjects aged 14 and older. The only age cohort that did not sufficiently meet the desired length of time swabbing during self-collection endpoint were younger teens aged 12 to 13, and this age cohort was not included in the first EUA indicated population for self-collection for prescription at-home use.

Usability Endpoint 1: Ability to Follow the Instructions to Start Our COVID-19 Test Kit

Our human usability study showed 100% of users aged 14 and above were able to follow the instructions to start the test running (successfully perform our COVID-19 test kit from beginning to end), exceeding the 95% endpoint objective. These results demonstrate our COVID-19 test kit can be performed by untrained users of a broad range of ages. These results are further corroborated by additional ease of use and instructions clarity data with respect to our proposed instructions manual as follows:

 

97% (340/352) rated their experience as “Easier or About What They Expected”.

 

Nearly 100% of users rated the overall test kit instructions (351/352) as sufficient to be able to understand how to perform the test.

 

94% of users (330/352) rated the instructions as “Extremely or Very Clear” and only one 12-year old user (1/352) rated the instructions as “Not Very or Not At All Clear” (bottom two scores on a 1-5 scale).

 

After using our COVID-19 test kit, 100% (352/352) of users across all age cohorts expressed confidence they could run the test at home on their own.

Usability Endpoint 2: Test Results Interpretation

We conducted test results interpretation among adults only. Teens were not asked to interpret results as we expected that parents or guardians would be involved in the interpretation of the test results for minors. For this portion of the usability study, users were shown all three possible test results—positive, negative and invalid—in randomized order and asked to interpret each result. An invalid result is the term to describe a result that cannot be interpreted as being either “positive” or “negative.” Invalid results occur when a sample cannot be read or interpreted. They do not mean that a device has malfunctioned or failed, but rather are events that are known and expected to occur with in-vitro diagnostic tests. When an invalid result occurs, the patient needs to have a new sample tested.

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The image below shows the display sample we asked our subjects to interpret. We achieved 100% test results interpretation accuracy.

 

 

Usability Endpoint 3: Quality Nasal Swab Self-Collection

We studied two objectives related to our third endpoint – obtaining a quality nasal swab self-collection. The first objective was related to swabbing both nostrils. Our usability study results showed 99% of adults aged 18 and older, 98% of parents collecting on their children and 95% of teens aged 14 to 17 achieved the first objective of this endpoint.

The second objective was related to swabbing time. Adults aged 18 and older exceeded this objective of having a total swabbing time in both nostrils of at least 10 seconds, with 92% of adults having a swabbing time of at least 11 seconds and a median swabbing time of 18 seconds. Teens aged 14 to 17 were very close on this endpoint with 92% of older teens having a swabbing time of 9 seconds and a median swabbing time of 17 seconds. Parents also were very close on this endpoint with 90% of parents having a child collection swabbing time of 9 seconds and a median swabbing time of 13 seconds.

This swabbing data which shows that users were successfully able to self-collect a nasal swab sample is further corroborated by the following additional usability study data:

 

99% of users rated the swab step instructions (348/352) as sufficient to be able to understand how to do the swab step.

 

95% of users rated the swab step as “Not Very or Not At All Hard” (easiest two responses on a 1-5 scale).

Our most recent FDA OTC EUA submission includes adult collections in children ages two to 13.  We had provided this parent collection data to FDA with the Company’s first EUA submission in November 2020. However, we did not seek an adult/parent collection indication in children with our first prescription at-home EUA. The FDA views our parent collection usability data as sufficient to support the adult/parent collection in children ages two to 13 in our OTC EUA submission and did not require any additional usability study data beyond what was included in our initial FDA EUA submission. Our usability study demonstrated that parents were successfully able to collect a nasal swab sample among the 52 parents enrolled in our usability study as described above.

Previous Clinical Development

In the fall of 2019, we submitted to the FDA a dual 510(k) and Clinical Laboratory Improvement Amendments, or CLIA, waiver submission for an influenza test kit based on clinical trials conducted in June 2018 in Santiago Chile and during the 2018 to 2019 influenza season in the United States. Applying discrepant analysis, both studies showed strong assay performance with specificity and sensitivity for influenza A and B viruses at or above 95%. However, there were two issues that led us to eventually withdraw our submission. First, the comparator did not detect influenza virus A as well as our assay did, thus negatively and artificially lowering our influenza virus A specificity to 92% in the study. When applying discrepant resolution, our influenza virus A specificity improved to 97%. Running this study with a single comparator that did not correctly identify at least 35 specimens as true

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positives hindered our ability to obtain a CLIA waiver clearance because the FDA threshold for specificity is 95%. Second, there was a higher than anticipated rate of invalids at nearly 10%. Root cause analysis showed greater than half of the invalids were related to prototype manufacturing quality issues and, importantly, were not related to fundamental assay performance. We believe these issues have since been resolved and our influenza assay’s invalid rate is now less than 5%. After receiving an additional information letter from the FDA in January 2020 primarily regarding these issues, we withdrew our submission and turned our focus to COVID-19 assay development.

The following table shows our influenza clinical data from our 2018 and 2019 clinical trials in Chile and the United States.

 

 

Quidel Solana Comparator

 

 

2018 Chile

 

2018/19 US(1)

 

Enrolled

n=470, 6 sites

 

n=1,102, 23 sites

 

Influenza Virus A Sensitivity

95%

 

98%

 

Influenza Virus A Specificity

95%

 

97%(2)

 

Influenza Virus B Sensitivity

97%

 

100%(3)

 

Influenza Virus B Specificity

98%

 

98%

 

 

(1)

This column shows the final performance taking into account discrepant resolution and data from additional banked influenza B specimens.

(2)

This analysis does not include false positives that discrepant testing confirmed were actual true positives.

(3)

63 additional banked samples tested.

We have not yet commenced our clinical work relating to our combination COVID-19 and influenza test kit.

Sales and Marketing

If we receive EUA OTC authorization, we believe we will have a first mover advantage as one of the first single-use molecular COVID-19 test kits authorized by the FDA under an EUA, and we deliver PCR quality accuracy in 30 minutes or less. Pending EUA authorization, we intend to leverage this position with a strong direct to consumer launch campaign beginning in the second quarter of 2021. Our OTC launch will focus on driving broad brand awareness and usage across U.S. households supported by national television advertising and a multi-channel marketing program. We will initially launch in the ecommerce channel and we expect to add retail distribution by the second half of 2021.  We also see business to business, or BTB, partnerships such as professional sports teams, travel and leisure companies and employer programs emerging as an important sales channel. Pending EUA authorization, we expect the OTC business to develop as a cash pay business.  Our OTC launch, if authorized, will be supported by experienced agencies who have deep expertise in driving brand awareness and revenues across both digital and retail channels.

Alongside OTC, pending EUA authorization, we will continue to develop the POC and prescription at-home business.  Where our COVID-19 test kit is being used in a large healthcare setting, it is being used with high satisfaction.  Additionally, we will be selling direct to physicians on our website.  We believe there is ample opportunity to provide a COVID-19 testing solution both to large healthcare networks and directly to physician practices.  The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, provides a basis for reimbursement for all COVID-19 diagnostic testing, when medically appropriate.  Our COVID-19 test kit, when used in POC settings, is presently reimbursed under the rapid molecular test category.

Further, we plan to place our COVID-19 test kit into national pharmacy distribution by the second quarter of 2021 so that any physician can prescribe it for prescription at-home use.  The CARES Act, as noted, provides a basis for reimbursement for all COVID-19 diagnostic testing, when medically appropriate.  This establishes a basis for prescription at-home use of our test kit to be reimbursed, although prescription at-home use is not yet reimbursed by CMS. Our sales team currently consists of a Vice President of Sales to lead our OTC and POC efforts. During the remainder of 2021, we expect to hire additional sales representatives to support anticipated OTC national accounts, OTC BTB partnerships, and large healthcare providers and payors. Our direct to physician sales will be supported by an inside sales telehealth team and our customer support team.

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Subsequently, we plan to launch an added value combination COVID-19 and influenza test kit into the prescription at-home and POC channels. We are still evaluating alternatives for international expansion and we may decide to either partner through a distributor or go direct.

COVID-19

If we receive OTC EUA authorization, we intend to market and sell our COVID-19 test kit in the OTC channel in both ecommerce and retail distribution.  Being one of the first FDA EUA authorized single-use molecular test with PCR quality molecular accuracy provides us with an opportunity to establish a leadership position in anyplace, anywhere testing.  We plan to drive broad brand awareness and usage through a multi-channel media program that includes both national television advertising and coop programs with national retailers.  We will also cultivate partnerships in the professional sports, travel & leisure and employer segments where ongoing COVID-19 negative verification testing demand is expected to grow.  We expect to hire three to four additional sales reps to support our national retail, ecommerce and BTB business.

Additionally, we will continue to market and sell our test kit in the POC setting through partnerships with healthcare systems, national payors, and direct to physician sales.  Importantly, our test kit is the first COVID-19 test with an FDA EUA that allows patients to test themselves and receive results for COVID-19 at home. We expect to hire an additional two sales reps to support our POC and prescription at home business.  Our direct to physician sales will be supported by our internal sales team.  

We plan to continue conducting additional clinical trials which provide strong commercial claim support in two areas: (1) establishing our COVID-19 test kit as the COVID-19 test relied on and preferred by doctors in hospitals; and (2) to further differentiate our strengths compared to antigen tests. We expect to hire experienced marketing professionals to lead our brand development and support our brand development on ecommerce platforms.  

Influenza

We plan to eventually apply directly for OTC approval for influenza and expand into influenza with the efficiency of a line extension leveraging our then existing customer relationships.

Research and Development

As of December 31, 2020, our research and development, or R&D, team consisted of 20 people conducting research and product development activities. Our R&D team has been working on developing our platform over the last seven years and have optimized the device design, performance and usability over the course of several clinical and pre-clinical studies. Our R&D team is focused on three core areas: creation of new products for existing markets and unmet needs, advancing our innovation pipeline to further advance our differentiated platform product offerings, and sustaining engineering and cost reduction initiatives that continually improve device performance and lower our cost to manufacturer product. We have strong capabilities such as mechanical and electrical engineering, fluidics and software design in our engineering team and assay development, biochemistry, microbiology and bioinformatics in our assay development team.

Our main priorities are the continued development of additional indications, including other infectious diseases such as STIs and respiratory syncytial virus and initially focusing on a combination COVID-19 and influenza test kit. We are in the early stages of determining our platform’s applicability for other respiratory diseases.

Manufacturing and Supply

We leverage a combination of internal and external manufacturing capabilities to manufacture the various components of our finished test kit. We have chosen to partner with Jabil, a leading global manufacturing solutions provider offering capacity expansion, sourcing expertise, and automation capabilities. We plan to make additional investments to increase capacity through automation and expansion of our manufacturing footprint

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through our outsourced manufacturer. We created an equipment and process platform with the capability to be systematically replicated in a short time period to expand manufacturing capacity. Our primary manufacturing locations for the test unit base and sample vial production are in California as well as in Jabil’s facilities in Michigan with further expansion plans currently underway to enable significant scale up including in the Dominican Republic in the second quarter of 2021. In the future we intend to primarily rely on third-party suppliers to manufacture our test kits. Outsourcing to third parties provides us expertise and capacity necessary to scale up or down based on demand for our test kits. We have begun manufacturing activities with Jabil with a goal of establishing increased scale by the second half of 2021. We continue to investigate opportunities to enhance manufacturing capacity and efficiency to align with anticipated demand.

We have an established supply chain, based primarily in the United States. Many of the critical components are dual sourced with alternate suppliers identified and qualified. We have sourced and will continue to source test kit components, molds, reagents and other test kit materials from a limited number of suppliers or, in many cases, a single supplier. For example, our molds and many of our reagents are sole-sourced. In addition, we rely solely on Promega Corporation and New England BioLabs, Inc. for the supply of our current enzymes and primers. We intend to put in place framework agreements with certain of our single-source suppliers, including Promega Corporation and New England BioLabs, Inc., under which third-party contract manufacturers and/or suppliers will generally provide us with necessary quantities of such materials based on our development and commercial needs. As we advance our COVID-19 test kit through development, we are considering our lack of redundant supply for our current enzymes and primers in particular to protect against any potential supply disruptions. Our modular manufacturing approach coupled with our agile supply chain would provide us the flexibility to scale in-house with any partner.

Our manufacturing process and Jabil’s facilities and manufacturing processes are designed to comply with FDA’s Quality Systems Requirements and enable us to market our COVID-19 test kit into the clinical diagnostics and testing markets. Jabil operates its facilities in conformance with a variety of International Organization for Standardization, or ISO, certifications, with most of our healthcare facilities’ quality management systems meeting ISO 13485. We are licensed by the State of California to manufacture and distribute our test kits.

Manufacturing Services Agreement with Jabil

On September 10, 2020, we entered into a manufacturing services agreement, or the Jabil MSA, with Jabil, pursuant to which Jabil will manufacture, test, pack and ship certain electronic assemblies and systems in accordance with our specifications. Jabil may not subcontract any of its manufacturing services under the Jabil MSA without our prior written consent. We are obligated to provide, on a monthly basis, a rolling 12-month forecast to Jabil as well as 12-months of historical aggregate end customer demand at the finished product level, which will be used to constitute written purchase orders from us, and we are obligated to purchase the quantity of products that is required by the first four months of each forecast. Jabil is entitled to reject any purchase orders that are not placed in accordance with the forecast.

We are obligated to pay Jabil upon issuance of a purchase order based on a volume pricing matrix, pursuant to which Jabil will review the actual purchases during the then-ending quarter and compare against the forecasted orders in the upcoming quarter. If Jabil determines that the actual purchases correspond to a different pricing band in the volume pricing matrix, Jabil will either issue (a) a credit for any excess price paid by us if the actual price is lower than the invoiced price or (b) an invoice for any shortfall if the actual price is higher than the invoiced price. Jabil may adjust the volume pricing matrix to reflect changes in costs on the first anniversary of its notice to us that production qualification can commence, or after the addition of new equipment or labor.

The agreement is for an initial term of three years and automatically renewed for successive periods of one year, subject to either party’s notice of intent not to renew, delivered at least 180 days prior to the expiration of the then-current term. The Jabil MSA may be terminated at any time upon the mutual written consent of the parties. In addition, the agreement may be terminated by either party (a) at will upon at least 180 days’ written notice to the other party, (b) for cause based on a material breach by the other party, subject to a 30-day cure period and (c) for certain bankruptcy or insolvency events enumerated under the agreement.

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Technology Services Agreement with Jabil

On September 10, 2020, we also entered into a technology services agreement, or the Jabil TSA, with Jabil, pursuant to which Jabil will use commercially reasonable efforts to perform certain technical services related to the development of components, assemblies and systems in relation to each project under the agreement as set forth in one or more statement of work, which may include our COVID-19 test kit and any of our future product candidates.

We are obligated to pay Jabil all amounts as set forth in each statement of work, which will specify the timeline and schedule for the performance of each service, the compensation to be paid by us to Jabil and other relevant terms and conditions.

After the initial term of three years, the Jabil TSA will automatically be renewed for successive periods of one year unless a party provides the other party with notice of its intention not to renew the agreement at least 180 days prior to the expiration of the then current term. Either party may terminate the Jabil TSA at any time upon the mutual written consent of both parties. In addition, the agreement may be terminated by either party (a) at will upon at least 180 days’ written notice to the other party, (b) for cause based on a material breach by the other party, subject to a 60-day cure period and (c) for certain bankruptcy or insolvency events enumerated under the agreement.

Reporting

In order to facilitate the rapid and thorough public health response to the COVID-19 pandemic, the CARES Act requires every laboratory that performs or analyzes a test that is intended to detect SARS-CoV-2 or to diagnose a possible case of COVID-19 to report the results from each such test to the Secretary of the U.S. Department of Health and Human Services, or HHS. The CARES Act also authorized the HHS Secretary to identify the form and manner, as well as the timing and frequency, of such reporting. Based on subsequent guidance issued by the HHS on June 4, 2020, all laboratories, including testing locations operating as temporary overflow or remote locations for a laboratory, and other facilities or locations performing testing at POC or with at-home specimen collection related to SARS-CoV-2, will report data for all testing completed, for each individual tested, within 24 hours of results being known or determined, on a daily basis to the appropriate state or local public health department based on the individual’s residence.

In the POC setting and with our prescription at-home product, health care providers will be responsible for test results reporting to public health agencies according to federal, state and local regulations.  To facilitate this reporting, we expect to provide two methods to facilitate such reporting, including through an on-package photo guide that would allow users to upload results to secure physician portals and through a dedicated physician HIPAA compliant web-based test results reporting portal.

For OTC, pending EUA authorization, we have developed a secure portal named LUCI that is a text-based interface that is designed to allow users to easily receive a verified test result (LUCI Pass) on their phone and transmit their test result to the relevant public health authorities.

Reimbursement

Coverage and reimbursement for our COVID-19 test kit will vary by setting of care, payor type, and region. In the United States, healthcare providers that purchase our COVID-19 test kits will likely look to various third-party payors, such as Medicare, Medicaid, private commercial insurance companies, health maintenance organizations, accountable care organization, or ACOs, and other healthcare-related organizations, to cover and pay for the COVID-19 test kits. Sales volumes and prices of our COVID-19 test kits will depend in large part on the availability of coverage and reimbursement from such third-party payors.

The CARES Act provides coverage for FDA EUA authorized COVID-19 tests when such tests are medically appropriate and ordered by a healthcare provider. Presently, COVID-19 testing coverage exists for tests run in clinical labs and POC settings. Under the EUA we received, our COVID-19 test kit is eligible for reimbursement in POC settings as a molecular POC test. While a coverage and reimbursement pathway is not yet in

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place for prescription at-home use, the CARES Act provides a basis for coverage by health plans and group health insurers in this channel. We are working with CMS to establish a reimbursement pathway for prescription at-home use.

CMS covers medically appropriate COVID-19 testing and currently reimburses $100 for high throughput laboratory tests to detect the SARS-CoV-2 virus if they return results within two days, $75 for such high throughput laboratory tests that take longer than two days to return results, $51 for such tests when not performed in high throughput laboratories (which would include our COVID-19 test kit) and around $42 for antibody tests. However, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to ensure profitability. We have active engagement with the relevant federal agencies regarding reimbursement status of our test. We continue to explore and enhance our coverage efforts with public and private payors.

For our POC indication, we expect to receive payment directly from POC customers and to not directly bill any third-party payors. For POC use, the success of our COVID-19 test kits will depend substantially on the extent to which the costs of our COVID-19 test kits will be covered by third-party payors, such as government health programs, commercial insurance and management healthcare organizations. These third-party payors decide which products will be covered and establish reimbursement levels for those products.

Reimbursement will play a less important role in the success of our product sold through our OTC indication, if we receive EUA authorization. Furthermore, if we achieve automation at scale, it would allow us to achieve a cost structure that will eventually optimize value to the consumer at OTC, pending EUA authorization.

Competition

The diagnostic testing industry, especially for COVID-19, is highly competitive, and given the significant interest and growth in COVID-19 related diagnostic tests, we expect ongoing intense competition from different sources, including from manufacturers and producers of diagnostic tests, vaccines and therapeutic treatments.

In diagnostic testing, we anticipate facing competition from companies that have or are developing molecular tests (including centralized laboratory and POC tests) as well as antigen and antibody tests. In March 2021, the FDA issued an EUA to Cue for its OTC molecular COVID-19 test. Antigen tests in particular are a source of competition because they are rapid and are already in use across the United States for mass-population testing. For example, In December 2020, the FDA updated the Abbott BinaxNOW COVID-19 Ag Card antigen test to include prescription at-home use among people suspected of COVID-19 by their healthcare provider within the first seven days of symptom onset. In March 2021, the FDA issued an EUA to Quidel for its QuickVue COVID-19 antigen test to be used in the prescription at-home setting among people suspected of COVID-19 by their healthcare provider within the first six days of symptom onset.  In December 2020, the Ellume COVID-19 Home Test received an EUA from the FDA for OTC use; however, it is an antigen test and as seen in Ellume’s FDA labeling, healthcare professionals are advised that negative results and positive results in asymptomatic people should be considered presumptive and additional testing with a highly sensitive molecular COVID-19 test may be necessary. We face competition from companies developing at-home influenza tests, like Ellume, however we are currently not aware of FDA-approved influenza testing products available OTC. We also face competition from companies developing combination COVID-19 and influenza tests, including Quidel Corporation’s antigen combination test and a molecular combination test from Quest Diagnostics, Inc. We face potential competition from many sources, including academic institutions, public and private research institutions and governmental agencies. Competitors with diagnostic testing platforms include but are not limited to private and public companies, such as Abbott Laboratories, Cue, Danaher Corp., Bio-Rad Laboratories, F. Hoffman-La Roche Ltd., Becton, Dickinson and Company, Thermo Fisher Scientific, Inc., Siemens AG., BioMerieux SA, GenMark Diagnostics Inc., Qiagen, Sherlock Biosciences, Mammoth Biosciences, Everlywell, Inc., the CDC, Mesa Biotech, Inc., Quidel Corporation, Talis Biomedical Corporation, Visby Medical, Ginkgo Bioworks, Helix OpCo, LLC and Fluidigm Corporation. Large lab companies like Quest Diagnostics, Inc. and Laboratory Corporation of America have also expanded beyond centralized laboratory testing into home sample collection.

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In addition to competition from diagnostic testing companies, there are companies developing vaccines and therapeutic treatments for COVID-19 and influenza. From December 2020 through February 2021, the FDA issued EUAs for three COVID-19 vaccines. If existing or future vaccines are widely distributed and compliantly administered or if therapeutic treatments are identified and become widely used, then our testing opportunities and market interest may lessen or disappear.

We believe key competitive factors affecting our success in the POC rapid diagnostic market include pricing and reimbursement levels, time to result, ability to meet consumer demand, evidence of clinical performance and support by KOLs. We believe our portable, ‘swab-to-result’ molecular test kit that provides accurate, on-the-spot COVID-19 results within 30 minutes distinguishes us from our competitors.

Many of the companies against which we currently are competing or which we may compete with in the future have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical and clinical development, obtaining regulatory approvals and marketing approved test kits than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and enrolling subjects for our clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

We expect competition to continue to increase as other established and emerging companies enter the market, as customer requirements evolve, and as new products, services and technologies are introduced. Moreover, the entrance of new competitors is being encouraged by governmental authorities, which are offering significant funding to support development of testing solutions for COVID-19. Some of our existing or new competitors may have strong relationships with current and potential customers, including governmental authorities, and, as a result, may be able to respond more quickly to new or changing regulatory requirements, new or emerging technologies, and changes in customer requirements. Our COVID-19 test kit may not compete favorably, and we may not be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.

Our success is contingent in part upon the successful development and commercialization of our COVID-19 test kit and our other assays from our platform that prove to be more effective and convenient than competing products in our target indications. We could see a reduction or elimination of our commercial opportunity if our competitors develop and commercialize products that are faster, more convenient or are less expensive than our COVID-19 test kit or any other test kits that we may develop. Our competitors also may be quicker and/or more successful than us in obtaining FDA or other regulatory approvals for their products, which could result in our competitors establishing a strong market position before we are able to enter the market.

Intellectual Property

Our commercial success depends in part on our ability to obtain and maintain patent and other proprietary protection for our commercially important technology, inventions and know-how, including our COVID-19 test kit and our influenza test kit, as well as our LAMP technology and any of our future test kits; to defend and enforce our patents; to operate without infringing, misappropriating or violating the proprietary rights of others; and to prevent others from infringing, misappropriating or violating our proprietary rights. We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. We also rely on know-how and continuing technological innovation to develop and maintain our competitive position. Notwithstanding these efforts, we cannot be sure that patents will be granted with respect to any patent applications we have filed or may license or file in the future, and we cannot be sure that any patents we own or license or patents that may be licensed or granted to us in the future will not be challenged, invalidated, or circumvented or that such patents will be commercially useful in protecting our test kits and technology. For more information regarding the risks related to our intellectual property, please see Part I. Item 1A, “Risk Factors—Risks Related to Our Intellectual Property” in this Annual Report.

As of March 15, 2021, we owned four issued U.S. patents, seven pending U.S. utility patent applications, three issued foreign patents and 34 pending foreign patent applications. Our molecular diagnostic

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platform is covered by three issued U.S. method and device patents, which include claims directed at methods and compositions for carrying out the molecular diagnostic assays on our platform and device claims covering our molecular diagnostic platform device. Additionally, we owned seven pending U.S. patent applications covering aspects of the device and composition used to run our molecular diagnostic assays, including those for COVID-19 and influenza. The term of individual patents depends on the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a nonprovisional patent application in the applicable country. Our issued U.S. and foreign patents are anticipated to naturally expire between 2035 and 2038, and our U.S. pending patent applications and pending PCT applications, if issued into patents, are anticipated to naturally expire between 2035 and 2039, excluding any additional patent term adjustment(s) or extension(s), and assuming payment of all applicable maintenance or annuity fees. Once a patent expires, patent protection ends and an invention enters the public domain allowing anyone to commercially exploit the invention without infringing the patent.

In addition, we hold design patents and patent applications that cover certain ornamental features of our platform device. As of March 15, 2021, we owned two allowed U.S. design patents, three pending U.S. design patent applications, nine European Community Design Registration applications, four Hong Kong design registrations, one Australian design registration and ten pending foreign design applications. Our allowed U.S. design patent and pending U.S. design patent applications, if issued into design patents, are anticipated to naturally expire between 2035 and 2037. Our foreign design registrations are anticipated to naturally expire between 2030 and 2045.

We cannot guarantee that patents will be issued from any of our pending applications or that issued patents will be of sufficient scope or strength to provide meaningful protection for our technology. Notwithstanding the scope of the patent protection available to us, a competitor could develop methods or devices that are not covered by our patents or circumvent these patents. Furthermore, numerous U.S. and foreign-issued patents and patent applications owned by third parties exist in the fields in which our test kits compete. Because patent applications can take many years to publish, there may be applications unknown to us, which may result in issued patents that our existing or future products or technologies may be alleged to infringe.

There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. We may need to engage in litigation to enforce patents issued to us, to protect our trade secrets or know-how, to defend against claims of infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. Such litigation could be costly and could divert our attention from other functions and responsibilities. Furthermore, even if our patents are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market. Adverse determinations in litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing, selling or using the product determined to be infringing, any of which could harm our business. See Part I. Item IA, “Risk Factors—Risks Related to Our Intellectual Property” in this Annual Report for additional information regarding these and other risks related to our intellectual property portfolio.

We also rely upon trademarks to build and maintain the integrity of our brand. As of March 15, 2021, we owned two U.S. pending intent-to-use trademark applications, one pending foreign trademark application in Canada and three foreign trademark registrations in Hong Kong, the Madrid Protocol and New Zealand. We also rely, in part, on unpatented trade secrets, know-how, continuing technological innovation, and confidential information, to develop and maintain our competitive position and protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. However, such proprietary rights are difficult to protect. We seek to protect our proprietary rights through a variety of methods, including confidentiality and assignment agreements with suppliers, employees, consultants and others who may have access to our proprietary information. However, these agreements may not provide meaningful protection. These agreements may be breached, and we may not have an adequate remedy for any such breach. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have implemented measures to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors,

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or misused by any collaborator to whom we disclose such information. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our test kits or to obtain or use information that we regard as proprietary. As a result, we may be unable to meaningfully protect our trade secrets and proprietary information. For more information regarding the risks related to our intellectual property, please see Part I. Item 1A, “Risk Factors—Risks Related to Our Intellectual Property” in this Annual Report.

License Agreement with Eiken Chemical Co., Ltd.

In July 2020, we entered into a patent license agreement, or the Eiken Agreement, with Eiken Chemical Co., Ltd., or Eiken. Pursuant to the terms of the Eiken Agreement, Eiken granted us a non-transferable, non-assignable, sublicensable (to our affiliates), non-exclusive license under certain patents, which we refer to collectively as the Eiken Licensed Patents, relating, in part, to LAMP, to develop, make, use, sell, offer for sale and dispose of any reagent, product, kit, device, equipment and/or system for nucleic acid-based in-vitro diagnostic tests for detection of SARS-CoV-2, which causes COVID-19, which we collectively refer to as the Initial Licensed Products, in the United States. We also have limited have-made rights with respect to the Eiken Licensed Patents.

Under the terms of the Eiken Agreement, we also have an option to expand the license to the Eiken Licensed Patents for the Initial Licensed Products outside of the United States for a payment of additional fees. In addition, we also have an option to expand the license to the Eiken Licensed Patents for new targets beyond the purpose of testing COVID-19 in the United States, which we collectively refer to as the Additional Licensed Products, and together with the Initial Licensed Products, the Licensed Products, for a payment of a one-time fee for each Additional Licensed Product and an additional fee for the expansion of the licensed territory outside of the United States for each Additional Licensed Product.

As partial consideration of the rights granted to us under the Eiken Agreement, we made a one-time upfront payment to Eiken of $23,778. We are also required to pay Eiken $24,141 (based on the December 31, 2020 conversion ratio of 103.56 yen to one U.S. dollar) by July 2021. In addition, we are obligated to pay a royalty in the low single-digit percentage on total net sales of all Licensed Products.

The Eiken Agreement will terminate on the expiration date of the last to expire valid claim of the Eiken Licensed Patents in all countries, the latest of which is June 2031. We may also terminate the Eiken Agreement at any time upon a certain number of days’ prior written notice to Eiken after Eiken has received the payment due July 2021 mentioned above and all royalties accrued up to the termination date. Eiken may terminate the Eiken Agreement upon (1) not receiving any royalties on Licensed Products for a certain period of time after we commence sale of such Licensed Product, (2) a breach by us or our affiliates that is not cured within a certain number of days after receiving written notice of the breach, (3) our bankruptcy or insolvency or certain other bankruptcy or insolvency events, (4) the assignment or attempt to assign the Eiken Agreement by us in violation of the Eiken Agreement or (5) a challenge by us or our affiliates of the validity of any of the Eiken Licensed Patents.

Government Regulation

Regulation of Medical Devices in the United States

Our product candidates and operations are subject to extensive and ongoing regulation by the FDA under the Federal Food, Drug, and Cosmetic Act of 1938 and its implementing regulations, collectively referred to as the FDCA, as well as other federal and state regulatory bodies in the United States. The laws and regulations govern, among other things, product design and development, pre-clinical and clinical testing, manufacturing, packaging, labeling, storage, record keeping and reporting, clearance or approval, marketing, distribution, promotion, import and export and post-marketing surveillance.

The FDA regulates the development, design, pre-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution of medical devices in the United States to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA. Failure to comply with applicable requirements may subject a

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device and/or its manufacturer to a variety of administrative sanctions, such as FDA refusal to approve pending premarket applications, issuance of warning letters, mandatory product recalls, import detentions, civil monetary penalties, and/or judicial sanctions, such as product seizures, injunctions and criminal prosecution.

FDA Premarket Clearance and Approval Requirements

Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, approval of a premarket approval, or PMA, or grant of a de novo request for classification. During public emergencies, FDA also may grant emergency use authorizations to allow commercial distribution of devices intended to address the public health emergency. Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to provide reasonable assurance of its safety and effectiveness. Classification of a device is important because the class to which a device is assigned determines, among other things, the necessity and type of FDA review required prior to marketing the device.

Class I devices include those with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to the FDA’s “general controls” for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events and malfunctions through the submission of Medical Device Reports, or MDRs, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I or low risk devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.

Class II devices are moderate risk devices subject to the FDA’s general controls, and any other “special controls” deemed necessary by the FDA to ensure the safety and effectiveness of the device, such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or post-market surveillance. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, though certain Class II devices are exempt from this premarket review process. When required, the manufacturer must submit to the FDA a premarket notification, or 510(k), submission demonstrating that the device is “substantially equivalent” to a legally marketed predicate device, which in some cases may require submission of clinical data. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. If the FDA determines that the device, or its intended use, is not substantially equivalent to a legally marketed device, the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill more rigorous premarketing requirements.

Class III devices include devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices and devices deemed not substantially equivalent to a predicate device following a 510(k) submission. The safety and effectiveness of Class III devices cannot be reasonably assured solely by general or special controls. Submission and FDA approval of a PMA application is required before marketing of a Class III device can proceed. As with 510(k) submissions, unless an exemption applies, PMA submissions are subject to user fees. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is reasonably safe and effective for its intended use and must be supported by extensive data, typically including data from pre-clinical studies and clinical trials.

The FDA also has the authority to allow the commercialization of unapproved medical devices, or new uses of existing devices in times of emergency, such as during a pandemic.

Emergency Use Authorization

In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved, and available alternatives.

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Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose, or treat the disease or condition identified in a declaration of emergency issued by the Secretary of HHS. The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence.

Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product.

The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety.

On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect guidance with policy specific to development of in vitro diagnostic tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020 and May 11, 2020. We received an EUA from the FDA for our COVID-19 test kit on November 17, 2020 and submitted EUA applications to the FDA for the expansion of our current EUA to include asymptomatic individuals and OTC use in February 2021.

510(k) Clearance Marketing Pathway

Our current products are class II and, but for the immediate ability to seek an EUA, would be subject to premarket notification and clearance under section 510(k) of the FDCA. To obtain 510(k) clearance for a medical device, an applicant must submit to the FDA a 510(k) submission demonstrating that the proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate device.” A legally marketed predicate device may include a device that was legally marketed prior to May 28, 1976 (a pre-amendment device), a device that has been reclassified from Class III to Class II or Class I, or a device that was found substantially equivalent through the 510(k) process. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (1) the same technological characteristics, or (2i) different technological characteristics, but the information provided in the 510(k) submission demonstrates that the device does not raise new questions of safety and effectiveness and is at least as safe and effective as the predicate device. A showing of substantial equivalence sometimes, but not always, requires clinical data. Once the 510(k) submission is accepted for review, by regulation, the FDA has 90 calendar days to review and issue a determination. As a practical matter, clearance may take and often takes longer. Upon review, the FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. In addition, the FDA collects user fees for certain medical device submissions and annual fees and for medical device establishments. For fiscal year 2020, the standard user fee for a 510(k) premarket notification application is $11,594.

Before the FDA will accept a 510(k) submission for substantive review, the FDA will first assess whether the submission satisfies a minimum threshold of acceptability. If the FDA determines that the 510(k)

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submission is incomplete, the FDA will issue a “Refuse to Accept” letter which generally outlines the information the FDA believes is necessary to permit a substantive review and to reach a determination regarding substantial equivalence. An applicant must submit the requested information within 180 days before the FDA will proceed with additional review of the submission.

If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, for example, due to a finding of a lack of a predicate device, that the device has a new intended use or different technological characteristics that raise different questions of safety or effectiveness when the device is compared to the cited predicate device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device. If the FDA determines that the information provided in a 510(k) submission is insufficient to demonstrate substantial equivalence to the predicate device, the FDA generally identifies the specific information that needs to be provided so that the FDA may complete its evaluation of substantial equivalence, and such information may be provided within the time allotted by the FDA or in a new 510(k) submission should the original 510(k) submission have been withdrawn.

After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The determination as to whether or not a modification could significantly affect the device’s safety or effectiveness is initially left to the manufacturer using available FDA guidance. Many minor modifications today are accomplished by a “letter to file” in which the manufacturer documents the rationale for the change and why a new 510(k) submission is not required. However, the FDA may review such letters to file to evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until 510(k) marketing clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced that it planned to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these proposals. The FDA requested public feedback on whether it should consider certain actions that might require new authority, such as whether to sunset certain older devices that were used as predicates under the 510(k) clearance pathway. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation.

PMA Approval Pathway

Class III devices require PMA approval before they can be marketed although some pre-amendment Class III devices for which FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is generally more demanding than the 510(k) premarket notification process. In a PMA, the manufacturer must demonstrate that the device is reasonably safe and effective, and the PMA must be supported by extensive data, including data from pre-clinical studies and clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing, and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If the FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, the FDA’s review may take and often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and

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evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR.

The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical trial that supported PMA approval or requirements to conduct additional clinical trials post-approval. The FDA may also condition PMA approval on some form of post-market surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.

Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, that affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our test kits are currently approved under a PMA, nor are we currently seeking approval under a PMA for our COVID-19 test kit. However, we may in the future develop devices which will require the approval of a PMA.

De novo Classification

Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. To market low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, a manufacturer may request a de novo down-classification. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A medical device may be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent or a manufacturer may request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. The FDA is required to classify the device within 120 calendar days following receipt of the de novo application, although in practice, the FDA’s review may take significantly longer. During the pendency of the FDA’s review, the FDA may issue an additional information letter, which places the de novo request on hold and stops the review clock pending receipt of the additional information requested. In the event the de novo requestor does not provide the requested information within 180 calendar days, the FDA will consider the de novo request to be withdrawn. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the de novo request for classification if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. In the event the FDA determines the data and information submitted demonstrate that general controls or general and special controls are adequate to provide reasonable assurance of safety and effectiveness, the FDA will grant the de novo request for classification. When the FDA grants a de novo request for classification, the device is granted marketing authorization and further can serve as a predicate for future devices of that type, through a 510(k) premarket notification.

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Clinical Trials

Clinical trials are typically required to support a PMA, oftentimes for a de novo request for classification, and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to submit an IDE application to the FDA, which must be approved prior to commencing clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, purported or represented to be used in supporting or sustaining human life, is for a use that is substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. A clinical trial may begin 30 days after receipt of the IDE by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval. Acceptance of an IDE application for review does not guarantee that the FDA will approve the IDE and, if it is approved, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.

In addition, the clinical trials must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB, for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA.

If the device is considered a “non-significant risk,” IDE submission to FDA is not required. Instead, only approval from the IRB overseeing the investigation at each clinical trial site is required. Abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent, and labeling and record-keeping requirements also apply to non-significant risk device studies.

During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical trial are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all applicable reporting and record keeping requirements.

Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a clinical trial is completed, there can be no assurance that the data generated during a clinical trial will meet the safety and effectiveness endpoints or otherwise produce results that will lead the FDA to grant marketing clearance or approval.

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Post-market Regulation

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

 

establishment registration and device listing with the FDA;

 

QSR requirements, which require manufacturers and contract manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

 

labeling regulations and FDA prohibitions against the promotion of investigational products, or “off-label” uses of cleared or approved products;

 

requirements related to promotional activities;

 

clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices;

 

medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;

 

correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections, product removals or recalls if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;

 

the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and

 

post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.

Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. In general, if the FDA determines that our promotional materials or training constitutes promotion of an unapproved or uncleared use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved or uncleared use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

Manufacturing processes for commercial products are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, design history file, device history records, and complaint files. As manufacturers, we and our contract manufacturers, such as Jabil, will be subject to periodic scheduled or unscheduled inspections by the FDA. Failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, manufacturing operations and the recall or seizure of products, which would harm our business. The discovery of previously unknown

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problems with any of our test kits, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

 

untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

 

unanticipated expenditures to address or defend such actions;

 

customer notifications for repair, replacement, refunds;

 

recall, withdrawal, administrative detention or seizure of our test kits;

 

operating restrictions or partial suspension or total shutdown of production;

 

refusal of or delay in granting our requests for 510(k) clearance or PMA approval of new test kits or modified test kits;

 

operating restrictions, partial suspension or total shutdown of production;

 

withdrawing 510(k) clearance or PMA approvals that are already granted;

 

refusal to grant export approval for our test kits; or

 

criminal prosecution.

Health Insurance Portability and Accountability Act

The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Healthcare Information Technology for Economic and Clinical Health Act of 2009, or HIPAA, among other things, established federal protection for the privacy and security of protected health information, or PHI. Under HIPAA, the HHS has issued regulations to protect the privacy and security of PHI used or disclosed by “covered entities,” including certain healthcare providers, health plans and healthcare clearinghouses, and their respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HIPAA also regulates standardization of data content, codes and formats used in healthcare transactions and standardization of identifiers for health plans and certain healthcare providers. The HIPAA privacy regulations protect PHI by limiting its use and disclosure, giving patients the right to access certain information about them, and limiting most disclosures of PHI to the minimum amount necessary to accomplish an intended purpose. The HIPAA security standards require the adoption of administrative, physical and technical safeguards and the adoption of written security policies and procedures. In addition, HIPAA requires covered entities to execute business associate agreements with their business associates and subcontractors, who provide services for or on behalf of covered entities. Business associates have a corresponding obligation to maintain appropriate business associate agreements with downstream subcontractors under HIPAA.

In addition, various states, such as California and Massachusetts, have implemented similar privacy and security laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. For

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example, the California Consumer Privacy Act, or the CCPA, which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues and potentially exposing us to additional expense, adverse publicity and liability. The compliance requirements of these laws, including additional breach reporting requirements, and the penalties for violation vary widely, and new privacy and security laws in this area are evolving. Requirements of these laws and penalties for violations vary widely.

If we or our operations are found to be in violation of HIPAA, Healthcare Information Technology for Economic and Clinical Health Act of 2009 or their implementing regulations, and similar state laws, we may be subject to significant penalties, including civil, criminal and administrative penalties, fines, imprisonment and exclusion from participation in federal or state healthcare programs, and the curtailment or restructuring of our operations. HIPAA has four tiers of civil monetary penalties, as well as criminal penalties, both of which may be applied to business associates as well as covered entities, and state attorneys have authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. State privacy and security laws also may include penalties for noncompliance, as well as a private right of action.

U.S. Federal, State and Foreign Fraud and Abuse Laws

The U.S. federal and state governments have enacted, and actively enforce, a number of laws to address fraud and abuse in federal healthcare programs. Our business is subject to compliance with these laws.

Anti-Kickback Statutes

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully soliciting, offering, receiving or paying remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual, or the purchase, order, arrangement for, or recommendation of, items or services for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare or Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.

The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payment of cash and waivers of payments. The government takes the position, and courts have agreed with the government’s interpretation, that the statute’s intent requirement is satisfied if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered businesses, even if there are other legitimate purposes. Violations of the federal Anti-Kickback Statute can result in criminal penalties and fines, imprisonment of up to ten years, civil and administrative penalties for each violation, damages, and exclusion from participation in federal healthcare programs like Medicare or Medicaid. A claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act, or FCA, discussed in greater detail below.

There are a number of statutory exceptions and regulatory “safe harbors” protecting some common activities from prosecution, but the exceptions and safe harbors are drawn narrowly and require strict compliance to offer protection. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the HHS, Office of the Inspector General, or the OIG.

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Many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of recipients for healthcare products or services reimbursed by any source, not only government healthcare programs, and may apply to payments made directly by the patient.

Government officials have focused their enforcement efforts on the marketing of healthcare services and products, among other activities, and recently have brought cases against companies, and certain individual sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.

Federal False Claims Laws

The FCA prohibits any person or entity, among other things, to knowingly present, or cause to be presented, a false or fraudulent claim for payment of government funds and knowingly making, using or causing to be made or used, a false record or statement to get a false claim paid or to avoid, decrease or conceal an obligation to pay money to the federal government. The qui tam provisions of the FCA allow a private individual to bring actions on behalf of the federal government alleging that the defendant has violated the FCA and to share in any monetary recovery. In addition, various states have enacted false claims laws analogous to the FCA, and many of these state laws apply where a claim is submitted to any third-party payor and not only a federal healthcare program.

When an entity is found to have violated the FCA, it may be required to pay treble damages and significant mandatory penalties, civil monetary penalties, and may be subject to exclusion from participation in federal healthcare programs such as Medicare and Medicaid. Many medical device manufacturers and healthcare companies have reached substantial financial settlements with the federal government for a variety of alleged improper activities and have entered into corporate integrity agreements with OIG, under which the companies undertake certain compliance, certification and reporting obligations, to avoid exclusion from federal health care program. The federal government has used the FCA to assert liability on the basis of kickbacks, or in instances in which manufacturers have provided billing or coding advice to providers that the government considered to be inaccurate. In these cases, the manufacturer is subject to liability for “causing” a false claim. In addition, the federal government has pursued companies under the FCA in connection with off-label promotion of products. Our activities, including those relating to the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our test kits (once approved) and the sale and marketing of our test kits (once approved), may be subject to scrutiny under the federal Anti-Kickback Statute and the FCA. We are also subject to other criminal federal laws that prohibit making false or fictitious claims and false statements to the federal government.

While we are unaware of any current investigations or allegations for violations of anti-kickback or false claims laws, we are unable to predict whether we will be subject to actions under the FCA or a similar state law, or the impact of such actions. However, the costs of defending such claims, even if successful or if any sanctions imposed, could significantly affect our business as well as our financial performance.

HIPAA Fraud Statute

HIPAA, among other things, imposes criminal liability for knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and creates federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal healthcare Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.

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Open Payments

The federal Physician Payments Sunshine Act, implemented as the Open Payments Program, requires certain manufacturers of drugs, medical devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to CMS information related to payments and other “transfers of value” to physicians, and teaching hospitals, and requires applicable manufacturers to report annually ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers will also be required to report information and transfers of value provided (beginning in 2021) to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives. Failure to submit timely, accurate and complete reports may result in substantial monetary penalties. We are subject to the Open Payments Program and the information we disclose may lead to greater scrutiny, which may result in modifications to established practices and additional costs. Additionally, similar reporting requirements have also been enacted on the state level domestically, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with healthcare professionals.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977, or FCPA, prohibits any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring them to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, if any, and to devise and maintain an adequate system of internal accounting controls for international operations.

U.S. Centers for Medicare and Medicaid Services

Medicare is a federal program administered by CMS through Medicare Administrative Contractors, or MACs. Available to people age 65 or over, and certain other people, Medicare provides, among other things, healthcare benefits that cover, within prescribed limits, the major costs of most medically necessary care for such people, subject to certain deductibles and copayments.

CMS has established guidelines for the coverage and reimbursement of certain products and procedures by Medicare. In general, in order to be reimbursed by Medicare, a healthcare procedure furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury, or to improve the functioning of a malformed body part. The methodology for determining coverage status and the amount of Medicare reimbursement varies based upon, among other factors, the setting in which a Medicare beneficiary received healthcare products and services. The reimbursement rate for certain services, including clinical laboratory services, is established under fee schedules that are developed and periodically updated pursuant to specific statutory or regulatory provisions. Any changes in federal legislation, regulations and policy affecting CMS coverage and reimbursement relative to the procedure using our test kits (once approved) could have a material effect on our performance.  

CMS also administers the Medicaid program, a cooperative federal/state program that provides medical assistance benefits to qualifying low income and medically needy people. State participation in Medicaid is optional, and each state is given discretion in developing and administering its own Medicaid program, subject to certain federal requirements pertaining to payment levels, eligibility criteria and minimum categories of services. The coverage, method and level of reimbursement vary from state to state and is subject to each state’s budget restraints. Changes to the availability of coverage, method or level of reimbursement for relevant procedures may affect future revenue negatively if reimbursement amounts are decreased or discontinued.

All CMS programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, intermediary determinations, and government funding restrictions, all of which may materially increase or decrease the rate of program payments to healthcare facilities and other healthcare providers.

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U.S. Health Reform

Changes in healthcare policy could increase our costs, decrease our revenue and impact sales of and reimbursement for our current and future products once approved. The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our test kits profitably once approved. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our test kits once approved. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our test kits once approved.

The implementation of the Affordable Care Act in the United States, for example, has changed healthcare financing and delivery by both governmental and private insurers substantially, and affected medical device manufacturers significantly. The Affordable Care Act imposed, among other things, a 2.3% federal excise tax, with limited exceptions, on any entity that manufactures or imports Class I, II and III medical devices offered for sale in the United States that began on January 1, 2013. Through a series of legislative amendments, the tax was suspended for 2016 through 2019, and was permanently repealed on December 20, 2019 by the Further Consolidated Appropriations Act, 2020. The Affordable Care Act also implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Additionally, the Affordable Care Act has expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research. There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. For example, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the Affordable Care Act such as removing penalties, starting January 1, 2019, for not complying with the Affordable Care Act’s individual mandate to carry health insurance and delaying the implementation of certain fees mandated by the Affordable Care Act. Further, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the Affordable Care Act mandated “Cadillac” tax on high-cost employer-sponsored health coverage and the aforementioned medical device tax, and, effective January 1, 2021, also eliminates the annual fee imposed on certain health insurance providers based on market share. On December 14, 2018, a U.S. District Court in Texas ruled that the individual mandate, without the penalty that was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017, is unconstitutional and cannot be severed from the remainder of the Affordable Care Act, rendering the entire Act invalid. The Supreme Court of the United States is currently reviewing the case, but it is unknown when a decision will be reached. Although the U.S. Supreme Court has yet to rule on the constitutionality of the Affordable Care Act, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the Affordable Care Act.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken. The CARES Act and other COVID-19 relief legislation suspended the 2% Medicare sequester from May 1, 2020 through March 31, 2021. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

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We believe that there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to reduce costs and potentially affect individual healthcare benefits. Certain of these changes could impose additional limitations on the rates we will be able to charge for our current and future products or the amounts of reimbursement available for our current and future products from governmental agencies or third-party payors. Current and future healthcare reform legislation and policies could harm our business and financial condition.

Employees and Human Capital Resources

As of December 31, 2020, we had 57 full-time employees and 32 contractors. Of our full-time employees, 14 of them have advanced degrees, including but not limited to Ph.D.’s in chemical engineering and bioengineering, 26 work in operations and quality, 20 work in research and development and 11 work in selling, general and administration. Our employees are primarily located in Emeryville, California. None of our employees are represented by a labor union or are a party to a collective bargaining agreement and we believe that we have good relations with our employees.

Our human capital objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards.

Facilities

Our corporate headquarters are currently located in Emeryville, California, where we lease 6,353 square feet of office, research and development space pursuant to a lease agreement that expires in March 2022. Pursuant to the same lease agreement, we lease an additional 4,211 square feet of office and development space in Emeryville, California that expires in January 2024. We believe these facilities are adequate to meet our needs in the near term and that additional space can be obtained on commercially reasonable terms as needed.

Corporate Information

We were incorporated under the laws of the state of Delaware in February 2013 under the name DiAssess Inc. In April 2019, we changed our name to Lucira Health, Inc. Our principal executive offices are located at 1412 62nd Street, Emeryville, California 94608. Our telephone number is (510) 350-8071. Our website is www.lucirahealth.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information on our website to be part of this Annual Report on Form 10-K.

“Lucira Health,” “Lucira,” the Lucira Health logo and our other registered or common law trade names, trademarks or service marks appearing in this Annual Report on Form 10-K are our property. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, the trademarks and tradenames referred to in this Annual Report on Form 10-K appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

 

Item 1A. Risk Factors.

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all of the other information contained in this Annual Report on Form 10-K before deciding whether to purchase, hold or sell shares of our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of

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or that we currently think are immaterial may also arise and materially affect our business. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this Annual Report on Form 10-K and those we may make from time to time. You should consider all of the risk factors described when evaluating our business.

Risks Related to Our Business and Strategy

We have incurred losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, which could harm our future business prospects.

We have incurred net losses since our inception. For the years ended December 31, 2020 and 2019, we incurred a net loss of $37.3 million and $8.5 million, respectively. We expect to incur additional losses and increased operating expenses in future periods. As of December 31, 2020, we had an accumulated deficit of $63.7 million. To date, we have financed our operations principally from issuance and sale of our common stock through our recent initial public offering, grant revenue and the issuances and sales of convertible promissory notes and preferred stock. We have devoted our resources to the research, development, manufacturing and commercialization of our COVID-19 test kit and our influenza test kit, and to research and development activities related to these test kits, including clinical, regulatory and manufacturing initiatives to obtain marketing approval. These losses have, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with our research, development, manufacturing and commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability would make it difficult to finance our business and accomplish our strategic objectives, which would negatively affect our business, financial condition, results of operations, and cash flows.

We have refocused our near-term business strategy on responding to the COVID-19 pandemic, for which the diagnostic testing market is new and rapidly developing, making it difficult to evaluate our business and future prospects. Our focus on a new and rapidly developing market could make it difficult to succeed and achieve our goals and could harm our future business prospects.

Prior to the COVID-19 pandemic, we focused our research and development efforts on developing our molecular nucleic acid amplification technology for use in our influenza test kit. However, based on our clinical trials of our influenza test kit to date, we believe our molecular nucleic acid amplification technology is adaptable to detecting whether a person is shedding the SARS-CoV-2 virus that causes COVID-19. Although we plan to continue our development efforts of our influenza test kit, we have refocused our near-term business strategy to respond to the COVID-19 pandemic. The market for COVID-19 diagnostic testing is new and rapidly developing, which makes it difficult to evaluate our future business prospects and, therefore, we may not be able to achieve our goals and strategy.

We have encountered, and will continue to encounter, risks and difficulties, some of which are outside of our control, frequently experienced in rapidly changing industries, including those related to:

 

our ability to compete with companies that are currently in, or may in the future enter, the COVID-19 diagnostic testing market, including companies with greater financial, technical and other resources than our company;

 

the possibility that the FDA revokes our existing EUA for our COVID-19 test kit;

 

our ability to scale manufacturing to quantities sufficient to meet demand in a timely manner, in accordance with our specifications, and in compliance with applicable regulatory requirements;

 

our ability to control costs, including our operating expenses;

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the amount and timing of operating expenses, particularly manufacturing expenses, related to the expansion of our business, operations and infrastructure;

 

unanticipated delays in test kit development or test kit launches;

 

positive or negative media coverage, or public, user, healthcare provider and/or physician perception, of our COVID-19 test kit or competing products;

 

lack or perceived lack of sufficient clinical evidence supporting the accuracy or cost-effectiveness of our COVID-19 test kit over existing products;

 

the failure of physicians to prescribe our COVID-19 test kit;

 

the failure of third-party payors to cover or adequately reimburse our COVID-19 test kit for prescription at-home and non-laboratory use;

 

our ability to meet customer and user demand for our COVID-19 test kit;

 

our ability to achieve or maintain a consumer-appropriate retail price;

 

our ability to obtain, maintain and enforce our intellectual property rights; and

 

general economic and political conditions.

Given the unpredictable nature of the COVID-19 pandemic, the potential size of the COVID-19 diagnostic testing market and the timing of its development are highly uncertain. In addition, the production and widely administered use of an efficacious vaccine or treatment for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not develop or substantially grow. Currently there are companies developing vaccines and therapeutic treatments for COVID-19, and from December 2020 through February 2021, the FDA issued EUAs for three COVID-19 vaccines. Our future success is substantially dependent on the manner in which the market for COVID-19 diagnostic testing develops and grows. If the market develops in a manner that does not facilitate demand for our COVID-19 test kit, or fails to develop or grow in the manner in which we expect or at all, our business, financial condition, results of operations and cash flows may be negatively affected.

We recently received an EUA from the FDA for our COVID-19 test kit. If the FDA revokes or terminates our EUA application after issuance, such as when the federally-declared COVID-19 public health emergency ends, we will be required to stop commercial distribution of our COVID-19 test kit immediately unless we can obtain FDA clearance for our COVID-19 test kit under a traditional regulatory pathway, which is lengthy and expensive, which could harm our future business prospects.

Under the Federal Food, Drug, and Cosmetic Act, or the FDCA, the FDA has authority to allow certain unapproved medical products or unapproved uses of approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions when there are no adequate, approved and available alternatives. In issuing an EUA, the FDA will consider the totality of scientific evidence available to the FDA regarding safety, efficacy and known and potential risks of such products and availability of alternatives to the emergency use products, among others. EUAs issued by the FDA specify the scope of authorization and conditions of authorization, including limitations on distribution and conditions related to product advertising and promotion. Once granted, an EUA is effective until the declaration that circumstances justifying the authorization of the emergency use is terminated or the EUA is revoked, after which the product must be approved by the FDA under a traditional pathway in order to remain on the market or to continue commercialization of the product.

On November 17, 2020, we received an EUA from the FDA for POC and prescription at-home indications for the detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19, in nasal swab samples from people who are suspected of COVID-19. We are working towards expanding this indication and

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submitted an amended EUA application to include detection of nucleic acid from SARS-CoV-2 in asymptomatic people in February 2021. The FDA may require additional data, including additional validation data and clinical performance data, and may not ultimately issue an authorization. Changes in FDA policies, guidance, and requirements for EUA application submission may delay FDA authorization of additional indications for our COVID-19 test kit. Further, given the high volume of EUA requests received by the FDA and other factors due to the COVID-19 pandemic, including any disruptions in the FDA’s normal operations, the FDA’s review of an amended or additional EUA application may be significantly delayed. The FDA may not grant an EUA for additional indications of our COVID-19 test kit on a timely basis or at all, which could harm our future business prospects.

The distribution and advertising conditions set forth in our existing EUA limits our market opportunities and restricts how we can commercialize our COVID-19 test kit. For example, according to our authorized EUA, our COVID-19 test kit must comply with certain labeling requirements, including the label that our COVID-19 test kit has not been FDA cleared or approved but has been authorized by the FDA under an EUA and that our COVID-19 test kit has been authorized only for the detection of nucleic acid from SARS-CoV-2, and not for any other viruses or pathogens. In addition, if any additional EUAs are granted for our COVID-19 test kit, the distribution and advertising conditions set forth in the EUA may limit our market opportunities or restrict how we can commercialize our COVID-19 test kit. If the FDA’s policies and guidance change unexpectedly and/or materially or if we misinterpret them, potential sales of our COVID-19 test kit could be adversely impacted. In addition, the FDA may revoke our existing or any future EUA where it is determined that the COVID-19 public health emergency no longer exists or warrants such authorization, or if new evidence becomes available that indicates that our test kit is not as safe, effective or reliable as the data provided in the applicable EUA application. We cannot predict how long an EUA will remain effective and we may not receive advance notice from the FDA regarding revocation of our EUA. In addition, according to our authorized EUA, we must develop a mobile phone application or website to further facilitate results reporting by both the healthcare provider and the individual using our test kit, and submit to the FDA such application or website within four months of November 17, 2020. If we fail to comply, our EUA may be revoked. The termination or revocation of our existing EUA for our COVID-19 test kit would cause us to cease our commercialization efforts until and if we have obtained marketing authorization from the FDA through another regulatory pathway. In addition, changing policies and regulatory requirements could require us to obtain a 510(k) or other marketing authorization from the FDA for our COVID-19 test kit, which could limit, delay or prevent commercialization of our COVID-19 test kit and could adversely impact our business, financial condition and results of operations.

Our existing EUA for our COVID-19 test kit is for an indication for POC and prescription at-home use. We also intend to seek FDA authorization for OTC use of our COVID-19 test kit in a future submission. The pathway to obtain such authorization remains uncertain. We may not be able to timely obtain OTC authorization, if at all, which would adversely impact our ability to market our COVID-19 test kit in the United States.

At this time, the testing and data requirements that would be needed to obtain an EUA for an OTC indication are uncertain. Although in July 2020, the FDA released a non-laboratory template for prescription at-home and OTC, to date, only Ellume has obtained an EUA for OTC use of its COVID-19 test, and the pathway to obtain authorization remains uncertain. We anticipate that in order to obtain an EUA for OTC use of our COVID-19 test kit, we would need to provide clinical data demonstrating safety, effectiveness, accuracy and usability of the test kit for people who are suspected of COVID-19 and symptomatic people, which we refer to as all-comers, human factors, or usability data supporting at-home use, and, because COVID-19 is a reportable infectious disease under federal and state reporting regulations, the identification and verification of a method by which users can report their results. We are currently conducting clinical trials that will support our OTC indication. Once the FDA identifies the requirements that would be necessary to support an OTC indication, we may need to modify our data and even may need to re-conduct certain aspects of our clinical trials. Depending on the requirements, we also may need to conduct a new clinical trial as well as additional bench tests and a human factors study. We may not receive OTC approval for our COVID-19 test kit. Due to the uncertainty of what will be required to obtain an OTC indication, the timeliness of obtaining authorization of an OTC indication may be significantly delayed. Any delays, or our inability to obtain an OTC indication will limit the sales of our COVID-19 test kit to POC and prescription at-home uses.

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We are allocating substantially all of our resources to the development, manufacturing and commercialization of our COVID-19 test kit for the foreseeable future, and our long-term business success could be negatively impacted by our diversion of resources from our legacy business of diagnostic testing for influenza.

We are committing substantially all of our financial and personnel resources to the development, manufacturing and commercialization of our COVID-19 test kit. For example, on September 10, 2020, we entered into the Jabil MSA to support the commercial manufacturing of our COVID-19 test kit and on November 17, 2020, we received an EUA from the FDA for POC and prescription at-home indications for the detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19, in nasal swab samples from people who are suspected of COVID-19. This resource allocation may negatively impact the development of our influenza test kit, as we expect to spend less time in the near-term on the research, development or commercialization of this test kit. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could dissipate or stabilize, which would limit or eliminate demand for our COVID-19 test kit. We may not be able to successfully commence or recommence the development, manufacturing and commercialization of our influenza test kit that remains under development.

Our near-term success is highly dependent on the successful commercialization of our COVID-19 test kit, and it may not attain or maintain market acceptance or be successfully commercialized in the United States, which could negatively impact our business.

Our near-term prospects, including our ability to finance our company and generate revenue, as well as our future growth, is highly dependent on the successful and timely regulatory approval from the FDA and commercialization of our COVID-19 test kit. The regulatory and commercial success of our COVID-19 test kit will depend on a number of factors, some of which are outside our control, including the following:

 

whether we are required by the FDA or other similar regulatory authorities to conduct additional clinical trials or to modify the design of our current trials to support the approval of our COVID-19 test kit;

 

achieving and maintaining compliance with all regulatory requirements applicable to our COVID-19 test kit;

 

the acceptance by the medical community and others of the convenience and accuracy of our COVID-19 test kit and the sufficiency of clinical evidence supporting our COVID-19 test kit;

 

the ability of our COVID-19 test kit to accurately detect different strains of SARS-CoV-2, created by genetic mutation or otherwise, such as the four notable SARS-CoV-2 variants in the U.K., South Africa, Brazil and Southern California;

 

our ability to obtain coverage and adequate reimbursement from third-party payors for prescription at-home use of our COVID-19 test kit; and

 

the ability of Jabil and other third parties with whom we may contract to manufacture our COVID-19 test kit to remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with applicable requirements and to manufacture sufficient quantities of our test kits to meet demand in a timely manner, in accordance with our specifications, and in compliance with applicable regulatory requirements.

Even though we have received an EUA for our COVID-19 test kit, it may not gain broad market acceptance among our customers, including physicians, healthcare payors, users and others in the medical community. The commercial success of our COVID-19 test kit will initially be dependent upon physicians and healthcare providers adopting our test kit, which will be informed, in part, by the convenience and accuracy of our COVID-19 test kit. The accuracy of our COVID-19 test kit could be impacted by novel strains of SARS-CoV-2 with genetic variations from viral mutation over time.

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The CDC has highlighted the emergence of four notable SARS-CoV-2 variants in the U.K., South Africa, Brazil and Southern California: B.1.1.7 variant (also known as 20B/501Y.V1 or Variant of Concern, 202012/01) first detected in the U.K., B.1351 variant (also known as 20C/501Y.V2) first detected in South Africa, P.1 first detected in Brazil and B.1.427/B.1.429 (also known as CAL.20C) first deterred in Southern California. These variants have multiple mutations in the spike protein. We perform routine surveillance of emerging SARS-CoV-2 strains by periodically evaluating in silico reactivity against sequence databases. These evaluations have shown that these four emerging variants are reactive to our COVID-19 test kit. As these particular viral strains are not yet available for testing, we have not been able to perform testing to confirm detection with these strains. We anticipate performing testing to confirm detection with these strains once they become commercially available.

Moreover, our COVID-19 test kit is authorized under an EUA from the FDA for the detection of the novel coronavirus SARS-CoV-2 that causes COVID-19, regardless of the virus variant. The FDA may require us to conduct additional clinical trials or seek a new or amended EUA and our COVID-19 test kit may not be successful in detecting future variant strains, which could significantly impact the accuracy and usefulness of our test kit and materially harm our business and prospects. In addition, the risk of false negative results may increase when testing patients with genetic variants of SARS-CoV-2, including the four notable SARS-CoV-2 variants.

In addition, the COVID-19 diagnostic testing market is susceptible to rapid technological developments and we may not be able to match any new technological advances, which would render our COVID-19 test kit uncompetitive or obsolete, even if it were to gain widespread market acceptance initially. If we are unable to match technological improvements in competitive products or effectively respond to the needs of our customers and users, the demand for our COVID-19 test kit could be reduced.

Our commercial success, including acceptance and use of our COVID-19 test kit, will depend upon a number of factors, some of which are beyond our control, including:

 

the timely receipt of additional marketing authorizations and approvals from the FDA and other similar regulatory authorities;

 

perceptions by the public and members of the medical community, including physicians, as to its convenience, accuracy and the sufficiency of clinical evidence supporting its performance;

 

demand from the public and members of the medical community for our COVID-19 test kit and adoption of our test kit;

 

the availability, perceived advantages, relative cost, relative convenience and relative accuracy of our COVID-19 test kit compared to those of our competitors;

 

positive or negative media coverage of our COVID-19 test kit or competing products, as to its convenience, accuracy and the sufficiency of clinical evidence supporting its performance;

 

the effectiveness of our marketing and sales efforts, including our ability to have a sufficient number of talented sales representatives to sell our test kits;

 

unanticipated delays in manufacturing, test kit development or test kit launch;

 

our ability to raise additional capital on acceptable terms, or at all, if needed to support the commercialization of our COVID-19 test kit;

 

our ability to achieve and maintain compliance with all regulatory requirements applicable to our COVID-19 test kit;

 

our ability to obtain, maintain and enforce our intellectual property rights;

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our ability to maintain a continued supply of test kit materials that meets our quality control requirements;

 

the ability of Jabil and other third parties with whom we may contract to manufacture our COVID-19 test kit to manufacture and supply sufficient quantities of our COVID-19 test kit to meet demand in a timely manner, in accordance with our specifications, and in compliance with applicable regulatory requirements;

 

limitation on use or warnings required by the FDA in our COVID-19 test kit labeling; and

 

availability of, or changes in, coverage or reimbursement rates for our COVID-19 test kit from government or other commercial or healthcare payors.

Our future success also depends upon consumers having an experience with our COVID-19 test kit that meets their expectations in order to increase demand for our COVID-19 test kit as a result of positive feedback and word-of-mouth. Consumers may be dissatisfied if their expectations of the diagnostic test and results are not met. Consumers may also be dissatisfied if they experience adverse events, such as device malfunctions, inaccurate readouts or significantly delayed responses. If our COVID-19 test kit does not meet the expectations of consumers, or if consumers experience adverse events, it could discourage consumers from repurchasing our COVID-19 test kit or referring our COVID-19 test kit to others. Further, dissatisfied consumers may express negative opinions through social media. Any failure to meet consumer expectations and any resulting negative publicity could harm our reputation and future sales.

Our near-term revenue will be primarily generated from sales of our COVID-19 test kit, and we are highly dependent on it for our success.

We expect that sales of our COVID-19 test kit will account for the substantial majority of our revenue for the foreseeable future. Our ability to execute our growth strategy and become profitable will therefore depend upon the adoption of our COVID-19 test kit by consumers. We currently only have a very small number of existing customers and customers with whom we are actively negotiating contracts. We may not be able to successfully negotiate additional customer contracts in a timely manner, on terms favorable to us or at all. If we are unable to execute additional contracts and expand our customer base, we will not be able to increase our revenues which will have a material adverse impact on our business and results of operation. This risk is particularly exacerbated given our very early stage of commercial operations and limited experience with selling and commercializing our products and negotiating contracts with potential customers. We may not be successful in expanding our customer base significantly, or at all. Adoption and use of our COVID-19 test kit will depend on several factors, including, but not limited to the accuracy, affordability and ease of use of our test kit as compared to existing products, and coverage and reimbursement policies with respect to our COVID-19 test kit and products that compete with our COVID-19 test kit. Our COVID-19 test kit may not gain market acceptance, and any failure to do so would harm our business and results of operations.

Because we expect virtually all of our revenue for the foreseeable future to be generated from sales of our COVID-19 test kit, the failure of our COVID-19 test kit to garner market acceptance would substantially harm our business and would adversely affect our revenue. If our COVID-19 test kit is not as successfully commercialized as expected, we may not be able to generate sufficient revenue to become profitable. Any failure of our COVID-19 test kit to be successfully commercialized may have a material adverse effect on our business, operating results, financial condition and cash flows, and could result in a substantial decline in the price of our common stock.  

We are an early-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance. If we do not successfully manage the development and launch of our COVID-19 test kit and any future test kits, our financial results could be adversely affected.

We are an early-stage company and have a limited operating history. We began our operations in 2013 and we plan to commercially launch our COVID-19 test kit in the first quarter of 2021 in the United States in accordance with our POC and prescription at-home indications. Our limited commercial operating history may make

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it difficult to evaluate our current business and predict our future performance. Any assessment of our profitability or prediction about our future success or viability is subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries. If we do not address these risks successfully, it could have a material adverse effect on our revenue, results of operations and business.

In addition, we face risks associated with launching new test kits, such as our COVID-19 test kit. Additionally, as an organization, we have not yet demonstrated an ability to successfully manufacture a commercial scale test kit or conduct sales and marketing activities necessary for successful commercialization. If we encounter development or manufacturing challenges or discover errors during our product development cycle, the product launch dates of our COVID-19 test kit and any future test kits may be delayed. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new test kits could adversely affect our business or financial condition.

We rely substantially on Jabil for the manufacturing, quality-testing, assembly and shipping of our COVID-19 test kit. Any termination or loss of significant rights under the Jabil MSA would harm our commercialization of our COVID-19 test kit. In addition, Jabil may fail to obtain and maintain regulatory approval for its facilities, fail to provide us with sufficient quantities of our COVID-19 test kit or fail to do so at acceptable quality levels or prices.

We rely substantially, and intend to continue to rely substantially on Jabil for the manufacturing, quality-testing, assembly and shipping of our COVID-19 test kit. Pursuant to the Jabil MSA, Jabil has agreed to manufacture, test, pack and ship our COVID-19 test kit in accordance with our specifications and applicable forecasts and purchase orders. We are obligated to provide, on a monthly basis, a rolling 12-month forecast to Jabil of historical aggregate end customer demand at the finished product level, which will be used to constitute written purchase orders. After the initial term of three years, the Jabil MSA renews automatically for consecutive one-year terms, subject to written notice of the intention not to renew from either party, given at least 180 days prior to the expiration of the then-current yearly term. The parties may terminate the Jabil MSA at any time upon mutual written consent, and either party may terminate the Jabil MSA upon 180 days prior written notice. Either party may also terminate the Jabil MSA upon a material breach by the other party that is not cured within 30 days after receiving written notice of the breach, or upon a bankruptcy of the other party.

Any termination or loss of rights under the Jabil MSA would harm our ability to commercialize, sell and distribute our COVID-19 test kit, which in turn would have a material adverse effect on our business, operating results and prospects. If we were to lose our rights under the Jabil MSA, we believe it would be difficult for us to find an alternative manufacturer. In addition, to the extent Jabil or the alternative manufacturer has not secured applicable regulatory approvals, we would have to expend significant resources to obtain regulatory approvals that may never be obtained or require several years to obtain, which could significantly delay commercialization. We may be unable to raise additional capital to fund our operations during this extended time on terms acceptable to us or at all. In addition, if we were to commercialize our COVID-19 test kit and later experience manufacturing delays as a result of a dispute with Jabil or otherwise, the supply of our COVID-19 test kit could be harmed.

In addition, the manufacture of medical devices is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. As Jabil has not yet operated assembly lines for our products at scale, it may be difficult to predict the cost of manufacturing our test kits. We may not be able to manufacture our test kits at expected prices. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our test kits, changes to labor costs or less favorable terms with third-party suppliers or contract manufacturing partners. As a result, even if automated production lines perform as anticipated, it may not be possible to manufacture our products in a profitable manner.

Manufacturers of medical devices encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. We are currently working with Jabil to increase manufacturing production and capacity at its facilities located in Michigan and the Dominican Republic. In order to achieve our near-term and long-term operational and financial plans, we need to substantially increase the manufacturing

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capacity to which we have access, and there is no assurance that we would be able to do so in a timely manner, or at all. For example, Jabil is still required to assemble a controlled “dry room” environment for the facility in the Dominican Republic in order to commence validation work in 2021 and implement additional processes such as subassembly and semi-automation of production. If Jabil is unable to increase and achieve our required or target production capacities, we would be unable to fulfill our actual or anticipated customer demand which would negatively impact our business, financial condition and results of operations. In addition, our inability to meet the manufacturing and production requirements could cause us to lose our existing customers or lose our ability to acquire new customers which would also negatively impact our business, financial condition and results of operations. Any issues relating to the manufacture of our test kits, including with respect to scaling up and validating initial production, may occur in the future. These risks could be exacerbated by Jabil’s limited experience with our COVID-19 test kit and related manufacturing processes.

In addition, quarantines, shelter-in-place and similar government orders related to COVID-19 or other infectious diseases, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, could impact personnel at Jabil’s facilities upon which we rely. Further, Jabil may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If Jabil were to encounter any of these difficulties, or otherwise fail to comply with its contractual obligations, our ability to commercialize our COVID-19 test kit would be jeopardized.

The diagnostic testing market, particularly with respect to COVID-19 diagnostic tests, is highly competitive, and many of our competitors are larger, better established and have greater technical and marketing capabilities and financial and other resources than we have. In addition, we expect competition with respect to testing solutions for COVID-19 to continue to increase and our success will depend on widespread market acceptance of our COVID-19 test kit.

The diagnostic testing market, particularly with respect to COVID-19 diagnostic tests, is highly competitive and we face substantial competition based on factors such as product quality, underlying technology, analytical performance, accuracy, speed of results, convenience and ease of use, price, product enhancements, customer and user service and reputation. Industry competition is also based the following additional factors, among others:

 

patent protection;

 

evidence of clinical performance and support of KOLs;

 

scientific expertise;

 

ability to develop and market products and processes and meet consumer demand;

 

ability to obtain and maintain required regulatory approvals;

 

ability to manufacture cost-effective products that meet applicable regulatory requirements;

 

pricing and reimbursement levels;

 

access to adequate capital; and

 

ability to attract and retain qualified personnel.

In diagnostic testing, we anticipate facing competition from companies that have or are developing molecular tests (including centralized laboratory and POC tests) as well as antigen and antibody tests. Antigen tests in particular are a source of competition because they are rapid and are already in use across the United States for mass-population testing. We will also compete on the basis of test methods, such as tests that utilize nasopharyngeal and mid-turbinate swab collection methods, saliva collection methods as well as other methods that may be developed in the future.

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We face potential competition from many sources, including academic institutions, public and private research institutions and governmental agencies. Competitors with COVID-19 diagnostic testing platforms currently include, but are not limited to, private and public companies, such as Abbott Laboratories, Inc., or Abbott, Cue, Danaher Corp., Bio-Rad Laboratories, F. Hoffman-La Roche Ltd., Becton, Dickinson and Company, or BD, Thermo Fisher Scientific, Inc., Siemens AG, BioMerieux SA, GenMark Diagnostics Inc., Qiagen, Sherlock Biosciences, Mammoth Biosciences, Everlywell, Inc., the CDC, Mesa Biotech, Inc., Quidel Corporation, Talis Biomedical Corporation, Visby Medical, Ginkgo Bioworks, Helix OpCo, LLC and Fluidigm Corporation. Large lab companies like Quest Diagnostics, Inc. and Laboratory Corporation of America have also expanded beyond centralized laboratory testing into home sample collection.

We could see a significant reduction or elimination of our commercial opportunity if our competitors develop and commercialize products that are faster, more convenient or are less expensive than our COVID-19 test kit or any other test kits that we may develop. Our competitors also may be quicker and/or more successful than us in obtaining FDA or other regulatory approvals for their products, which could result in our competitors establishing a strong market position before we are able to enter the market.

In addition, numerous companies in the United States and internationally have announced their intention to offer new products, services and technologies that could be used in substitution for our COVID-19 test kit. Many of those competitors are significantly larger, and have substantially greater financial, scientific, manufacturing and other resources, than us. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and enrolling subjects for our clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. In addition, our competitors may have or may develop products or technologies that currently or in the future will enable them to produce competitive products with greater functionality or at lower cost than ours. In July of 2020, BD announced FDA approval of its EUA application for the BD Veritor System for Rapid Detection of SARS-CoV-2. This test is a chromatographic immunoassay for the direct and qualitative detection of SARS-CoV-2 antigens in nasal swabs from patients with signs and symptoms who are suspected of COVID-19. In August 2020, Abbott announced FDA approval of its POC EUA application for BinaxNOW COVID-19 Ag Card, Abbott’s COVID-19 antigen test. In December 2020, the FDA updated the Abbott BinaxNOW COVID-19 Ag Card antigen test to include prescription at-home use among people suspected of COVID-19 by their healthcare provider within the first seven days of symptom onset; this test may only be performed when supervised by a telehealth proctor. In March 2021, the FDA issued an EUA to Quidel for its QuickVue COVID-19 antigen test to be used in the prescription at-home setting among people suspected of COVID-19 by their healthcare provider within the first six days of symptom onset.  The FDA also granted an EUA to the Ellume COVID-19 Home Test, an OTC antigen test and to Cue for its molecular OTC COVID-19 test.

If we are unable to compete effectively, we may fail to meet our strategic objectives, and our business, financial condition and operating results could be harmed. The success or failure, or perceived success or failure, of other companies may adversely impact our ability to obtain any future funding, or to ultimately commercialize our COVID-19 test kit.

We expect competition to continue to increase as other established and emerging companies enter the market, as customer requirements evolve, and as new products, services and technologies are introduced. For example, Abbott introduced a mobile phone application to allow people to display the results of their COVID-19 test obtained through a healthcare provider when entering facilities requiring proof of testing. Moreover, the entrance of new competitors is being encouraged by governmental authorities, which are offering significant funding to support development of testing solutions for COVID-19. Some of our existing or new competitors may have strong relationships with current and potential customers, including governmental authorities, and, as a result, may be able to respond more quickly to new or changing regulatory requirements, new or emerging technologies, and changes in customer and user requirements. Our COVID-19 test kit may not compete favorably, and we may not be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. Any failure to compete effectively could harm our business, financial condition and operating results.

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The production and widely administered use of an efficacious vaccine or treatment for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not develop or substantially grow.

Currently, there are companies developing vaccines and therapeutic treatments for COVID-19. From December 2020 through February 2021, the FDA issued EUAs for three COVID-19 vaccines, which are currently being administered in the United States, the U.K. and other countries. If current or future vaccines are widely distributed and compliantly administered, or if new therapeutic treatments are identified and become widely used, then our testing opportunities and market interest may lessen or disappear. Our future success is substantially dependent on the manner in which the market for COVID-19 diagnostic testing develops and grows. If the market develops in a manner that does not facilitate demand for our COVID-19 test kit, or fails to develop or grow in the manner in which we expect or at all, our business, financial condition, results of operations and cash flows may be negatively affected.

We rely on a limited number of suppliers or, in many cases, a single supplier, for test kit materials and may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our business, financial condition and results of operations.

We have sourced and will continue to source test kit components, molds, reagents and other test kit materials from a limited number of suppliers or, in many cases, a single supplier. For example, our molds and many of our reagents are sole-sourced. In addition, we rely solely on Promega Corporation and New England BioLabs, Inc. for the supply of our current enzymes and primers. We intend to put in place framework agreements with certain of our single-source suppliers, including Promega Corporation and New England BioLabs, Inc., under which these third-party contract suppliers will generally provide us with necessary quantities of such materials based on our development and commercial needs. However, we may be unsuccessful in putting in place such framework agreements on acceptable terms or at all, or in otherwise protecting against potential supply disruptions. Our failure to maintain a continued supply of these test kit materials would adversely impact our business, financial condition and results of operations.

Because we rely on third-party suppliers, we do not control the manufacture of the components of our test kits, including whether such components will meet our quality control requirements, nor the compliance of our suppliers with applicable legal and regulatory requirements. In many cases, our suppliers are not contractually required to supply these components to the quality or performance standards that we require. If the supply of components we receive does not meet our quality control or performance standards, we may not be able to use the components, or if we use them not knowing that they are of inadequate quality, which occasionally occurs with respect to certain reagents our tests may not work properly or at all, or they may provide erroneous results, and we may be subject to significant delays caused by interruption in production or manufacturing, to lost revenue from such interruption or from spoiled tests, or to the effects of negative perception related to defective test kits.

In the event that any adverse developments occur with our suppliers, in particular for those products that are sole-sourced, or if any of our suppliers modifies any of the components they supply to us, our ability to supply our test kits may be temporarily or permanently interrupted. Obtaining substitute components could be difficult, time and resource-consuming and costly or it could require us to re-design or re-validate our test kits. Our failure to maintain a continued supply of components that meets our quality control requirements for any reason, including changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other suppliers, particularly in the case of sole suppliers, could result in the loss of access to important materials of our test kits and impact our test performance or affect our ability to supply fully functional test kits in a timely manner or at all, which could impair, delay or suspend our commercialization activities.

Moreover, in the event that we transition to a new supplier from any of our sole suppliers, doing so could be time-consuming and expensive, may result in interruptions in our ability to supply our test kits to the market, could affect the performance of our test kits or could require that we re-validate our processes and our other test kits using replacement equipment and supplies, which could hinder the adoption of our test kits, resulting in increased costs and negative customer and/or user perception. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

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In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at our suppliers upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our test kits. Any delay or interruption in the supply of our test kit materials could delay or suspend the commercialization of our test kits and increase the costs of manufacturing our test kits, which could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to an order from federal or state governments, including pursuant to the Defense Production Act of 1950, as amended, or the DPA, to distribute our COVID-19 test kit directly to the government or as directed by the government, which could adversely affect our business, financial condition and results of operations.

The DPA is a federal statute that confers upon the President of the United States a broad set of authorities to influence domestic industry in the interest of national defense. “National defense” can include emergency and disaster response and, since the start of the current COVID-19 crisis, the President of the United States has used this authority more than 30 times to address the public health crisis. Through the DPA, the executive branch has struck agreements with multiple companies to accelerate COVID-19 countermeasures, like producing N95 protective masks, testing swabs, and vaccine development, and, in September 2020, used the DPA to acquire POC diagnostic testing instruments from two of our potential competitors for placement in nursing homes, and to require one of our potential competitors to prioritize government orders over others. The government may similarly apply the DPA, or another law or program, to our existing or potential new contracts to acquire our COVID-19 test kits or to direct us to distribute our products in a particular manner, and we may be likewise required to prioritize distribution to certain government agencies or other recipients, or to allocate inventory, supplies or facilities for government or government-directed use. The DPA provides that orders pursuant to the statute must “meet regularly established terms of sale or payment” and further provides that no person “shall be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order” under the DPA. However, compliance with the DPA could potentially cause business disruption, interfere with our commercial sales and marketing efforts, and depending on the demand, could even prevent or delay our ability to sell our products commercially, or may have other implications that significantly affect our commercialization and development efforts and general ability to conduct our business operations as planned. For example, government directed use of our products under such a program may result in our instruments not being placed in settings where they will be used often for additional tests following the COVID-19 pandemic which would adversely affect our long-term commercial plan. In addition, such government requirements may adversely affect our regular operations and financial results, result in differential treatment of customers and/or adversely affect our reputation and customer relationships. It is also possible that the recent change in the administration could impact the manner in which the government uses the DPA and its other authorities, and result in additional or different risk to us.

The results of our earlier research and development and clinical trials for our influenza test kit may not be replicable in an influenza test kit or in a combination COVID-19 and influenza test kit and may not be sufficient to support the authorization of an influenza test kit or a combination COVID-19 and influenza test kit.

Since inception, we have primarily focused on the research and development of our influenza test kit. We conducted two clinical trials in 2018 and 2019 for our influenza test kit in Santiago, Chile, and the United States. The clinical trial conducted in the United States served as the basis for our dual 510(k) and Clinical Laboratory Improvements Amendment, or CLIA, waiver submission for our influenza test kit in the second half of 2019. This clinical trial was conducted across the 2018 and 2019 influenza season and included a comparator. This clinical trial showed similarly strong assay performance as the initial Chile clinical trial, but we failed to meet required endpoints as a result of two main issues. First, the comparator did not detect influenza A virus as well as our assay did, which negatively and artificially lowered our influenza A virus specificity to 92% in the clinical trial. When applying discrepant resolution, our influenza A virus specificity improved to 97%. The impact of running this clinical trial with a single comparator and the comparator not correctly identifying at least 35 specimens as true positives impeded us from being able to provide the necessary clinical data with the level of specificity required by the FDA without additional clinical testing. The second issue related to a higher than anticipated rate of invalids, at nearly 10%. Root cause analysis showed greater than half of invalids to be related to prototype manufacturing quality

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issues, and importantly, not related to fundamental assay performance. We believe these issues have since been resolved and the assay’s invalid rate is now less than 5%. In January 2020, we received an additional information letter from the FDA discussing this clinical trial and the resulting comparator issues, high rate of invalids and exclusion of samples. As a result, we withdrew our dual 510(k) and CLIA waiver submission for our influenza assay and shifted our focus to the COVID-19 pandemic.

Based on our clinical trials of our influenza test kit to date, we believe our molecular nucleic acid amplification technology is adaptable to detecting whether a person is shedding the influenza A or B viruses that cause influenza. However, the results of our earlier research and development and clinical trials for our influenza test kit may not be replicable in a combination COVID-19 and influenza test kit or sufficient to support the approval of a combination COVID-19 and influenza test kit. Additional clinical trials on the combination COVID-19 and influenza test kit will be required for FDA submission. In addition, the FDA may weigh the results of our prior clinical trials related to our influenza test kit and the issues raised in its January 2020 additional information letter more heavily than anticipated, potentially hindering our future FDA approval of our influenza test kit. We are uncertain as to whether the combined COVID-19 and influenza clinical trials will be successful, and the future trials may not replicate the results of prior clinical trials and pre-clinical studies.

If our test kits fail to achieve the broad degree of adoption by the medical community necessary for commercial success, our operating results and financial condition will be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.

Even if our test kits receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, customers and others in the medical community. The commercial success of our test kits will depend significantly on sufficient coverage and reimbursement by third-party payors, the broad adoption and use of our test kits by physicians and, if and when authorized for OTC use, ultimate users, for authorized or approved indications. We are aware that other companies are seeking to develop alternative diagnostic products for COVID-19 and influenza, any of which could impact the demand for our COVID-19 test kit and our influenza test kit, respectively.

The degree and rate of physician, patient and customer adoption of any of our test kits, and initially our COVID-19 test kit, depend on a number of factors, some of which are beyond our control, including:

 

the accuracy, affordability and ease of use of our test kits as compared to existing diagnostic products;

 

physician adoption of our combination of LAMP and proprietary colorimetric detection chemistry;

 

lack or perceived lack of sufficient clinical evidence supporting the accuracy and performance of our test kits;

 

physician and patient willingness to adopt our test kits to treat COVID-19 and influenza over diagnostic products and brands with which patients and physicians may have more familiarity or recognition or additional approved uses;

 

any perceived burdens imposed on physicians or patients with respect to public health reporting obligations for certain infectious diseases such as COVID-19;

 

overcoming any biases physicians or patients may have toward the accuracy and ease of use of existing diagnostic test kits and successful marketing efforts;

 

the cost of our test kits in relation to alternative diagnostic products, and in the OTC setting, if authorized, patient willingness to pay for our test kits;

 

proper training in the use of our test kits by physicians and healthcare providers;

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patient satisfaction with the accuracy and ease of use of our test kits and overall user experience;

 

changes in pricing and promotional efforts by competitors;

 

coverage and reimbursement policies with respect to our test kits and products that compete with our test kits;

 

patient demand for POC and OTC diagnostic testing;

 

the revenue and profitability that our test kits may offer a physician as compared to alternative diagnostic tests;

 

the effectiveness of our sales, marketing and distribution efforts; and

 

adverse publicity about our test kits, competitive products, or the industry as a whole, or favorable publicity about competitive products.

Further, outbreaks of highly contagious diseases, like COVID-19 and influenza, require immediate, mass population testing; however, we believe the traditional testing infrastructure within the United States is not designed to support mass population testing at high-complexity labs or at the POC. Accordingly, the ease of integration of our test kits into a physician’s practice may not be as evident as we anticipate.

In addition, our COVID-19 test kit utilizes our combination of LAMP and proprietary colorimetric detection chemistry. Physicians may prefer to use diagnostic tests with alternative technologies, such as PCR, or even antigen or antibody diagnostic tests. If our test kits fail to achieve the broad degree of physician adoption necessary for commercial success, our operating results and financial condition will be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.

If we do not have the support of physicians or KOLs, it may be difficult to drive adoption of our test kits, which could limit our revenue growth and our ability to achieve profitability.

Building on our usability studies and EUA indications, we plan to leverage our clinical work to publish key research and articles as a way to increase awareness and drive adoption among users, healthcare providers, physicians and KOLs. If physicians and KOLs in particular determine that our test kits are not accurate or easy to use and bill for, or that alternative diagnostic tests are more accurate or easier to use and bill for, we may see lower demand for our test kits, and face difficulty establishing our test kits as an integral component of the applicable standard of testing, which would limit our revenue growth and our ability to achieve profitability. If our test kits do not receive sufficient favorable exposure in peer-reviewed publications, the rate of physician adoption of our test kits and positive reimbursement coverage determinations for our test kits could be negatively affected.

The initial use of our test kits requires users to follow instructions, and not adhering to instructions may lead to negative outcomes, which could harm our business.

The successful use of our test kits depends on a user following the test instructions. Any user, whether it be a healthcare provider or patient at home, could experience difficulty performing a test using our test kits if they fail to follow the instructions, or otherwise misuse the test. If physicians or other users utilize our test kits incorrectly, or without adhering to our instructions, their test result outcomes may not be consistent with the outcomes achieved in our clinical trials. This could harm our ability to achieve the broad degree of physician adoption necessary for commercial success, or cause negative publicity and word-of-mouth as a result of our test kits not meeting user expectations and accordingly, our operating results and financial condition could be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.

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We may be unable to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for our test kits.

Our market success is dependent upon government and commercial third-party payors providing coverage and adequate reimbursement for our test kits. Under the EUA authorized for the POC setting, our COVID-19 test kit is eligible for reimbursement as a molecular POC test. However, coverage criteria and reimbursement rates for clinical laboratory tests are subject to adjustment by payors, and current reimbursement rates could be reduced, or coverage criteria restricted in the future, which could adversely affect the market for our COVID-19 test kit. In addition, there is currently no approved coverage for at-home COVID-19 testing in the United States and the reimbursement rate for our at-home test is uncertain. Third-party payors may require additional clinical or other data in order to cover our test kit in certain settings.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:

 

the level of demand for any approved test kits, which may vary significantly;

 

the timing and cost of, and level of investment in, research, development, manufacturing, regulatory approval and commercialization activities relating to our test kits, which may change from time to time;

 

the size, seasonality and customer mix of the COVID-19 and influenza diagnostic testing market;

 

sales and marketing efforts and expenses;

 

the rate at which we grow our sales force and the speed at which newly hired salespeople become effective;

 

changes in the productivity of our sales force;

 

positive or negative coverage in the media or clinical publications of our test kits or competitive products;

 

the cost of manufacturing our test kits, which may vary depending on the quantity of production and the terms of our arrangements with Jabil and our suppliers;

 

the introduction of new test kits or enhancements or technologies by us or others in the diagnostic testing industry;

 

pricing pressures;

 

coverage and reimbursement policies with respect to our test kits and products that compete with our test kits;

 

expenditures that we may incur to acquire, develop or commercialize test kits for additional indications, if any;

 

the degree of competition in our industry and any change in the competitive landscape of our industry;

 

changes in governmental regulations or in the status of our regulatory approvals or applications;

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future accounting pronouncements or changes in our accounting policies; and

 

general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

The cumulative effects of factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated guidance we may provide.

We may not be able to achieve or maintain satisfactory pricing and margins for our test kits, which could harm our business and results of operations.

Manufacturers of diagnostic tests have a history of price competition, and we may not be able to achieve satisfactory prices for our test kits. Our POC pricing is at a modest premium to other POC tests and we may not be able to achieve or maintain a consumer-appropriate retail price for OTC use, if authorized. The pricing of our test kits could be impacted by several factors, including pressure to improve margins as a result of competitive or customer pricing pressure or a limit or decline in the amount that third-party payors reimburse our customers, which could make it difficult for customers to adopt our test kits. If we are forced to lower the price we may charge for our test kits, our gross margins will decrease, which will harm our ability to invest in and grow our business. If we are unable to maintain our prices, or if our costs increase and we are unable to offset such increase with an increase in our prices, not purchase our tests in significant volumes or at all, especially in the OTC market, if authorized, or otherwise in the absence of reimbursement, and our margins could erode. We may be subject to significant pricing pressure, which could harm our business and results of operations.

Our results of operations will be harmed if we are unable to accurately forecast customer and user demand for our test kits and manage our inventory.

To ensure adequate supply, we must forecast inventory needs and manufacture our test kits based on our estimates of future demand. For example, pursuant to the Jabil MSA, we are obligated to provide, on a monthly basis, a rolling 12-month forecast to Jabil of historical aggregate end customer demand at the finished product level, which will be used to constitute written purchase orders. Our ability to accurately forecast demand for our test kits could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer and user demand for our test kits or for products of our competitors, our failure to accurately forecast market acceptance of new products, unanticipated changes in general market conditions, including the production and distribution of an efficacious vaccine or treatment for COVID-19, seasonal demands, or regulatory matters and weakening of economic conditions or user confidence in future economic conditions. In addition, we anticipate that we will experience fluctuations in customer and user demand based on seasonality, which for COVID-19, remains unknown. However, for example, because influenza typically occurs in the fall and winter seasons, we expect our forecasts of inventory for these seasons to reflect a significant increase in inventory relative to our forecasts for the spring and summer seasons. If this expectation does not materialize, our inventory forecasts may be inaccurate, resulting in shortages or excesses of inventory. Inventory levels in excess of customer and user demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand.

Conversely, if we underestimate customer and user demand for our test kits, our manufacturing partner, Jabil, may not be able to deliver test kits that meet our requirements, and this could result in damage to our reputation and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will negatively affect our business, financial condition and results of operations. We rely substantially on Jabil to manufacture our COVID-19 test kit initially at manufacturing facilities located in Michigan

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and in the Dominican Republic. While the facilities in Michigan are currently operational, we are working with Jabil to assemble a controlled “dry room” environment for the facilities in the Dominican Republic in order to commence our validation work in 2021 and implement additional processes such as subassembly and semi-automation of production. If Jabil is unable to increase and achieve our required or target production capacities, we would be unable fulfill our actual or anticipated customer demand which would negatively impact our business, financial condition and results of operations. In addition, our inability to meet the manufacturing and production requirements could cause us to lose our existing customers or lose our ability to acquire new customers which would also negatively impact our business, financial condition and results of operations.

We will seek to maintain sufficient levels of inventory in order to protect ourselves from supply interruptions. As a result, we are subject to the risk that a portion of our inventory will become obsolete or expire, which could have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.

We depend on intellectual property licensed from Eiken and the termination of our license could result in the loss of significant rights, which would harm our business.

We are dependent on patents licensed from Eiken. In July 2020, we entered into a patent license agreement, or the Eiken Agreement, with Eiken. Pursuant to the terms of the Eiken Agreement, Eiken granted us a non-transferable, non-assignable, sublicensable (solely to our affiliates), non-exclusive license under certain patents, which we refer to collectively as the Eiken Licensed Patents, relating to LAMP and as listed in the Eiken Agreement, to develop and make any reagent, product, kit, device, equipment and/or system for nucleic acid-based in vitro diagnostic, or IVD, tests for detection of SARS-CoV-2, which causes COVID-19, which we collectively refer to as the Initial Licensed Products, in the United States. The Eiken Licensed Patents allow us to use LAMP to amplify genetic material. In addition, we own patents covering the necessary additional step of detection of target genetic material. Eiken may license patents to additional third parties for the use of LAMP, and if such third parties were able to independently develop or license the ability to detect amplified genetic material, then our business could be harmed. A termination of this license would result in the loss of significant rights and would restrict our ability to commercialize our COVID-19 test kit.

The Eiken Agreement will terminate on the expiration date of the last to expire valid claim of the Eiken Licensed Patents in any country. Eiken may terminate the Eiken Agreement upon (1) not receiving any royalties on licensed products for a certain period of time after sale of such products commences, (2) an uncured breach by us or our affiliates, (3) our bankruptcy or insolvency or certain other bankruptcy or insolvency events, (4) the assignment or attempt to assign the Eiken Agreement in violation of the Eiken Agreement or (5) a challenge by us or our affiliates of the validity of any of the Eiken Licensed Patents.

If we are determined to have breached the Eiken Agreement, Eiken would have the right to terminate the Eiken Agreement, which would result in the loss of our rights to the patents licensed to us, and we would therefore not be able to sell and/or market our test kits that are covered by those patents licensed to us. This would adversely affect our competitive business position and harm our business prospects. Moreover, disputes, arbitration, litigation or other proceedings with Eiken could last for an extended period of time, may not be resolved in a favorable manner and could result in substantial damages payable by us. In addition, the cost to us in defending or initiating any arbitration, litigation or other proceeding relating to the Eiken Agreement, even if resolved in our favor, could be substantial, and arbitration, litigation or other proceedings would divert our management’s attention. Uncertainties resulting from the initiation and continuation of arbitration, litigation or other proceedings could adversely affect our business operations and delay our commercialization efforts and also result in reputational harm.

We are generally also subject to all of the same risks with respect to protection of intellectual property that we license, as we are for intellectual property that we own, which are described below under “Risks Related to Our Intellectual Property—We are dependent on patents and other intellectual property licensed from others and may become dependent on other patents or other intellectual property licensed from others in the future. If we lose our licenses for intellectual property that is important to our business, we may not be able to continue developing or selling our test kits.” If we or Eiken fail to adequately protect this intellectual property, our ability to commercialize our test kits would suffer and our business would be harmed.

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If we are not successful in leveraging our platform to discover, develop and commercialize additional test kits, our ability to expand our business and achieve our strategic objectives would be impaired.

While the global COVID-19 pandemic remains our current and primary focus, we believe our flexible platform enables us to launch different test kits for other infectious diseases. Capitalizing on the flexibility of our platform is a key pillar to our strategy, which we believe will enable us to focus on other test kits, including influenza. We plan to conduct additional research and development activities to explore the potential of our platform to be used in additional indications, including other infectious diseases such as STIs and respiratory syncytial virus, but we may not be successful in developing such additional indications in a timely manner or at all. Moreover, identifying new test kits requires substantial technical, financial and human resources, whether or not any test kits are ultimately developed or commercialized, which may divert management’s attention away from our core business. We may pursue what we believe is a promising opportunity to leverage our platform only to discover that certain of our risk or resource allocation decisions were incorrect or insufficient, or that certain test kits or our platform in general has risks that were previously unknown or underappreciated. Our strategy of pursuing the value of our platform over a long time horizon and across a broad array of respiratory viruses may not be effective. In the event material decisions with respect to our strategy turn out to be incorrect or sub-optimal, we may experience a material adverse impact on our business and ability to fund our operations and we may never realize what we believe is the potential of our platform. The success of any new test kits or enhancements to our platform will depend on several factors, some of which are outside of our control, including our ability to:

 

assemble sufficient resources to acquire or discover additional test kits or enhancements;

 

properly identify and anticipate physician and patient needs;

 

develop and introduce new test kits and enhancements in a timely manner;

 

demonstrate, if required, the accuracy and usability of new test kits and enhancements with data from pre-clinical studies and clinical trials;

 

obtain the necessary regulatory clearances or approvals for expanded indications, new test kits or enhancements;

 

be fully FDA-compliant with marketing of new devices or modified products;

 

produce new test kits in commercial quantities at an acceptable cost; and

 

provide adequate training to potential users of our test kits and provide adequate updated training to potential users of test kits that contain enhancements or alterations.

If we are unable to develop or improve test kits, applications or features due to constraints, such as insufficient cash resources, high employee turnover, inability to hire personnel with sufficient technical skills or a lack of other research and development resources, we may not be able to maintain our competitive position compared to other companies. Furthermore, many of our competitors devote a considerably greater amount of funds to their research and development programs than we do, and those that do not may be acquired by larger companies that would allocate greater resources to research and development programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.

In addition, we may choose to focus our efforts and resources on potential test kits or indications that ultimately prove to be unsuccessful, or to license or purchase a marketed product that does not meet our financial expectations. As a result, we may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other potential products or other diseases that may later prove to have greater commercial potential, or relinquish valuable rights to such potential products through collaboration, licensing or other royalty arrangements in cases in which it would have been advantageous for us to

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retain sole development and commercialization rights, which could adversely impact our business, financial condition and results of operations.

If our test kits do not perform as expected, our operating results, reputation and business will suffer.

Our success depends on our ability to provide reliable test kits that enable high quality diagnostic testing with high accuracy, ease of use, and short turnaround times. The accuracy and reproducibility we have demonstrated to date in our clinical trials, particularly with respect to our COVID-19 test kit, may not continue or be indicative of actual future performance.

Our test kits use a number of complex and sophisticated biochemical and bioinformatics processes, many of which are highly sensitive to external factors, including human error. An operational, technological, user or other failure in one of these complex processes or fluctuations in external variables may result in sensitivity or specificity rates that are lower than we anticipate or result in longer than expected turnaround times. If our test kits do not perform, or are perceived to not have performed, as expected or favorably in comparison to competitive products, our operating results, reputation, and business will suffer, and we may also be subject to legal claims arising from product limitations, errors, or inaccuracies. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

Operational, technical, user and other difficulties may adversely affect test performance, harm our reputation, impact the commercial attractiveness of our test kits and increase our costs or divert our resources, including management’s time and attention, from other projects and priorities. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

If we cannot provide quality technical and customer and user support, we could lose customers and our business and prospects will suffer.

The introduction of our test kits into our customers’ existing workflows, and in the OTC context, if authorized, our users’ homes, and ongoing customer and user support can be complex. Accordingly, we need trained technical and customer and user support personnel. Hiring technical and customer and user support personnel is very competitive in our industry due to the limited number of people available with the necessary scientific and technical backgrounds and ability to understand our platform at a technical level. To effectively support potential new customers and ultimately users, we will need to substantially develop a technical and customer and user support staff. If we are unable to attract, train or retain the number of qualified technical and customer and user support personnel that our business needs, our business and prospects will suffer.

If we are unable to successfully expand our sales and marketing to match our growth, our business may be adversely affected.

Our future sales will depend in large part on our ability to develop, and substantially expand, our sales force and to increase the scope of our marketing efforts. We plan to take a measured approach to expand and optimize our sales infrastructure to grow our customer base and our business. Identifying and recruiting qualified personnel and training them in the use of our test kits, applicable federal and state laws and regulations and our internal policies and procedures, requires significant time, expense and attention. In addition, our EUA applications with respect to our COVID-19 test kit specifies the scope and conditions of authorization, including limitations on distribution and conditions related to product advertising and promotion. It can take significant time before our sales representatives are fully trained and productive. Our business may be harmed if our efforts to expand do not generate a corresponding increase in revenue or result in a decrease in our operating margin. In particular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

We plan to dedicate significant financial and other resources to our marketing programs, which may require us to incur significant upfront costs. Our business and gross margins would be harmed if our marketing efforts and expenditures do not generate a corresponding increase in revenue.

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In addition, we believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving broad acceptance of our test kits and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and, even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our test kits.

We are highly dependent on our senior management team and key personnel and our business could be harmed if we are unable to attract and retain personnel necessary for our success.

We are highly dependent on our senior management team and key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals and scientists as well as contract employees could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a negative impact on our business, financial condition and results of operations.

Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms, or at all. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued, and will in the future issue, stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these people or the lives of any of our other employees.

Many of the other medical device and diagnostic companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages. They may also provide more diverse opportunities and better chances for career advancement. Some of these characteristics are more appealing to high quality candidates than what we can offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can discover, develop and commercialize our test kits will be limited.

In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived benefits of our stock awards decline, either because we are a public company or for other reasons, it may harm our ability to recruit and retain highly skilled employees. Many of our employees have become or will soon become vested in a substantial amount of our common stock or a number of common stock options. Our employees may be more likely to leave us if the shares they own have significantly appreciated in value relative to the original purchase prices of the shares, or if the exercise prices of the options that they hold are significantly below the market price of our common stock, particularly after the expiration of the lock-up agreements described herein. Our future success also depends on our ability to continue to attract and retain additional executive officers and other key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, it will negatively affect our business, financial condition and results of operations.

We have increased the size of our organization and expect to further increase it in the future, and we may experience difficulties in managing this growth. If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.

As of December 31, 2020, we had 57 full-time employees. As our sales and marketing strategies develop and as we transition into operating as a public company, we expect to need additional managerial,

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operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

identifying, recruiting, integrating, maintaining and motivating additional employees;

 

managing our internal development efforts effectively, while complying with our contractual obligations to contractors and other third parties; and

 

improving our operational, financial and management controls, reporting systems and procedures.

Since our inception, we have experienced growth and anticipate further growth in our business operations. This future growth could strain our organizational, administrative and operational infrastructure, including quality control, operational, finance, customer service and sales organization management. We expect to continue to increase our headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, customer service personnel, and sales and marketing staff and improve and maintain our platform to properly manage our growth. Rapid expansion in personnel could mean that less experienced people develop, market and sell our test kits, which could result in inefficiencies and unanticipated costs, reduced quality and disruptions to our operations. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. We may not be able to maintain the quality or expected turnaround times of our test kits, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely, efficient and effective manner could adversely affect our operations. In addition, as a result of being a public company, we are obligated to develop and maintain effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock.

We may need to raise additional capital to fund our existing operations, develop our platform, commercialize new products or expand our operations.

Based on our current planned operations, we expect that our existing cash, including the net proceeds from our recent initial public offering, or IPO, will enable us to fund our operating expenses for at least 12 months from the date hereof. If our available cash and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of failure to secure additional regulatory approvals for our test kits, lower than anticipated or non-existent demand or reimbursement levels for our test kits, or otherwise, we may seek to issue equity or convertible debt securities, enter into a credit facility or another form of third-party funding, seek other debt financing or enter into collaborations or licensing arrangements.

We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to further scale up the manufacturing of our test kits, and if user demand warrants such increase in scale, to increase our sales and marketing efforts to drive market adoption of our test kits and address competitive developments, and to finance capital expenditures and general and administrative expenses.

Our present and future funding requirements will depend on many factors, some of which are beyond our control, including:

 

the cost and timing of additional regulatory clearances or approvals for our test kits and any future test kits;

 

our ability to achieve and maintain revenue growth;

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our rate of progress in establishing payor coverage and reimbursement arrangements in the prescription at-home channel with commercial third-party payors and government payors;

 

our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our COVID-19 test kit;

 

our rate of progress in, and cost of research and development activities associated with, our influenza test kit;

 

the effect of competing technological and market developments, including developments in COVID-19 vaccination and therapeutics;

 

the potential cost of and delays in test kit development as a result of any regulatory oversight applicable to our test kits;

 

the scope, rate of progress and cost of our current and future clinical trials;

 

the costs associated with any product recall that may occur;

 

the costs of attaining, defending and enforcing our intellectual property rights; and

 

the terms and timing of any other collaborative, licensing and other arrangements that we may establish.

Additional funding may not be available on acceptable terms, or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or test kits or grant licenses on terms that may not be favorable to us.

In addition, our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and actions taken to slow its spread, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development, manufacturing or commercialization of our COVID-19 test kit, our influenza test kit, or other research and development initiatives. If this were to occur, our ability to grow and support our business and to respond to market challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations.

The sizes of the markets for our test kits may be smaller than we estimate.

Our estimates of the annual addressable markets for our COVID-19 test kit and our influenza test kits are based on a number of internal and third-party estimates. For example, our estimates for the COVID-19 diagnostic testing market include, but are not limited to, estimates relating to the number of times per week healthcare workers would be tested, the time period for which tests may be required, administered or sought, as well as the assumed rate at which such test kit will be reimbursed, or the assumed prices at which we can sell our COVID-19 test kit for. In addition, our estimates for the influenza diagnostic testing market are based on the population of people who experienced ILI symptoms during the previous flu season, as estimated by the number of

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people who purchased OTC cold and flu medication. While we believe our assumptions and the data underlying our estimates are reasonable, we have not independently verified the accuracy of the third-party data on which we have based our assumptions and estimates, and these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, including as a result of factors outside our control, thereby reducing the predictive accuracy of these underlying factors. If the actual number of customers who would benefit from our test kits, the price at which we can sell test kits or the annual addressable market for our test kits is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business, financial condition and results of operations.

Interim, topline and preliminary data from our clinical trials that we announce or publish from time to time may change as more data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose interim, topline, or preliminary data from our clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, topline, or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated, and thus are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Interim, topline and preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, such data should be viewed with caution until the final data are available. Adverse differences between preliminary, interim or topline data and final data could significantly harm our business prospects.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability, or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular test kit or our business. If the interim, topline or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our test kits and any future test kits may be harmed, which could harm our business, operating results, prospects or financial condition.

In addition, even if our clinical trials are successfully completed, their results may not support our future product claims and the FDA may not agree with our conclusions regarding these results. The clinical trial process may fail to demonstrate that our test kits are safe and effective for the proposed indicated uses, which could cause us to abandon a test kit and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our test kits and generate revenue.

Deficiencies in the components of our test kits could result in field actions, recalls, substantial costs and write-downs and could harm our reputation, business and financial results.

Our test kits are subject to various regulatory guidelines and involve complex technologies. The FDA and similar foreign regulatory authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. Manufacturers may, under their own initiative, conduct a product notification or recall to inform physicians of changes to instructions for use or if a deficiency in a device is found or suspected.

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Identified quality problems, such as failure of critical components, including batteries and light-emitting diode, or LED, lights, or the failure of third parties to supply us with sufficient conforming quantities of these components, could impact the availability of our test kits in the marketplace or lead to adverse clinical events that could cause us to amend, repeat or terminate clinical trials. In addition, test kit improvements, redundancies or failure to sell a test kit before its expiration date could result in scrapping or expensive rework of test kits, and our business, financial condition or results of operations could suffer. Test kit complaints, quality issues and necessary corrective and preventative actions could result in communications to customers or patients, field actions, the scrapping, rework, recall or replacement of test kits, substantial costs and write-offs, and harm to our business reputation and financial results. Further, these activities could adversely affect our reputation with those in the medical community, as well as our distributor customers and end-users, which could materially adversely affect our earnings, results and financial viability.

As a result, any identified quality issue can both harm our business reputation and result in substantial costs and write-offs, which in either case could materially harm our business and financial results.

If we were to be sued for product liability, we could face substantial liabilities that exceed our resources.

The marketing, sale and use of our test kits, if approved, could lead to the filing of product liability claims where someone may allege that our test kits identified inaccurate or incomplete information or otherwise failed to perform as designed. We may also be subject to liability for errors in, a misunderstanding of or inappropriate reliance upon, the information we provide in the ordinary course of our business activities. In addition, we may be subject to product liability claims resulting from misuse or off-label use of our test kits. See the risk factor “—The misuse or off-label use of our test kits may harm our reputation or the image of our test kits in the marketplace, or result in injuries that lead to product liability suits, which could be costly to our business. Moreover, we could be subject to FDA sanctions if we are deemed to have engaged in off-label promotion.” A product liability claim could result in substantial damages and be costly and time-consuming for us to defend. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

costs of litigation;

 

distraction of management’s attention from our primary business;

 

the inability to commercialize our test kits or new products;

 

decreased demand for our test kits;

 

damage to our business reputation;

 

product recalls or withdrawals from the market;

 

withdrawal of clinical trial participants;

 

substantial monetary awards to patients or other claimants;

 

loss of sales; or

 

termination of existing agreements by our partners and potential partners failing to partner with us.

We maintain product liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability claims. Any product liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future.

While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our test kits may delay the supply of

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those test kits to our customers and users and may impact our reputation. We may not be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future and these efforts may not have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our test kits, either of which could negatively affect our business, financial condition and results of operations.

Litigation and other legal proceedings may harm our business.

We have been, and may become, involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal or state regulatory investigations, securities class actions and other legal proceedings or investigations, which could have a negative impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could harm our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our test kits, even if the regulatory or legal action is unfounded or not material to our operations.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations (including our clinical trials) could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and pandemics, including the COVID-19 pandemic, and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. Our ability to obtain components for our test kits could be disrupted if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. In addition, our corporate headquarters is located in Emeryville, California, near major earthquake faults and fire zones, and the ultimate impact on us for being located near earthquake faults and fire zones and being consolidated in a certain geographical area is unknown. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

We rely substantially on Jabil to manufacture our COVID-19 test kit initially at manufacturing facilities located in Michigan and expect to begin manufacturing activities in the Dominican Republic in the second quarter of 2021. Over time and as automation efforts improve, we and Jabil may relocate manufacturing to one more additional facilities, which may include additional facilities located outside of the United States. Should Jabil’s current or future manufacturing facilities be significantly damaged or destroyed by natural or man-made disasters, such as earthquakes, fires or other events, or should events such as political unrest unfold, it could take months to relocate or rebuild, during which time our manufacturing would cease or be delayed and our COVID-19 test kit may be unavailable. Moreover, the use of a new facility or new manufacturing, quality control, or environmental control equipment or systems generally requires FDA review and approval. Because of the time required to authorize manufacturing in a new facility under FDA and non-U.S. regulatory requirements, we may not be able to resume production on a timely basis even if we are able to replace production capacity in the event we lose manufacturing capacity. The inability to perform our manufacturing activities, combined with our limited inventory of materials and components and manufactured products, may cause us to be unable to meet customer demand, physicians and other users to discontinue using our COVID-19 test kits, or harm our reputation, and we may be unable to reestablish relationships with such customers and users in the future. Consequently, a catastrophic event or business interruption at Jabil’s current or future manufacturing facilities could harm our business, financial condition and results of operations.

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If we or our third-party collaborators, including Jabil, experience significant disruptions in performing their services for us, our business may be harmed.

We and our third-party collaborators, including Jabil, depend on information technology systems for the efficient functioning of our business, including the manufacture, distribution and maintenance of our test kits, as well as for accounting, data storage, compliance, purchasing and inventory management. Our and our third-party collaborator’s information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions and other cyber-attacks. We and our third-party collaborators could be subject to an unintentional event that involves a third-party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Additionally, theft of our intellectual property or proprietary business information could require substantial expenditures to remedy. Although the aggregate impact on our operations and financial condition has not been material to date, we may have been the target of events of this nature and expect them to continue as cybersecurity threats have been rapidly evolving in sophistication and becoming more prevalent in the industry.

Technological interruptions could disrupt operations, including the ability to timely ship and track product orders, project inventory requirements, manage supply chain and otherwise adequately service our customers or disrupt our customers’ ability use our test kits. In addition, we will rely heavily on providers of transport services for reliable and secure point-to-point transport of test kits to our customers and users and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our test kits and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to process orders for test kits on a timely basis.

In the event we or our third-party collaborators experience significant disruptions, we may be unable to repair such systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and harm our business, financial condition and results of operations. Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could harm our business, financial condition and results of operations.

In addition, the COVID-19 pandemic has generally increased the risk of cybersecurity intrusions. For example, there has been an increase in phishing and spam emails as well as social engineering attempts from “hackers” hoping to use the recent COVID-19 pandemic to their advantage. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate or unauthorized access to or disclosure or use of confidential, proprietary, or other sensitive information, we could incur liability and suffer reputational harm.

We may acquire other businesses or form other joint ventures or make investments in other companies or technologies that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

Although we currently have no agreements or commitments to complete any such transactions and are not involved in negotiations to do so, we may pursue acquisitions of businesses and assets in the future. We also may pursue strategic alliances and additional joint ventures that leverage our platform and industry experience to expand our offerings or distribution. We have no experience with acquiring other companies and limited experience with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the incurrence of debt, contingent liabilities or

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future write-offs of intangible assets or goodwill, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, any pursuit of an acquisition and any potential integration of an acquired company also may disrupt ongoing operations and divert management attention and resources that we would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or joint venture.

We have a history of significant net losses, which we expect to continue, and we may not be able to achieve or sustain profitability in the future.

We have incurred net losses since our inception. For the years ended December 31, 2020 and 2019, we had net losses of $37.3 million and $8.5 million, respectively, and we expect to continue to incur additional losses. As of December 31, 2020, we had an accumulated deficit of $63.7 million. We expect to continue to incur significant sales and marketing, research and development, regulatory and other expenses as we grow our sales force and expand our marketing efforts to commercial our test kits, create relationships with customers, obtain regulatory clearances or approvals for our planned or future products, conduct clinical trials on our existing and planned or future products and develop new products. The net losses that we incur may fluctuate significantly from period to period. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time.

Our ability to use our net operating losses, or NOLs, to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we had federal and state NOL carryforwards of approximately $53.3 million and $25.5 million, respectively. The federal NOLs include $11.0 million that may be used to offset up to 100% of future taxable income and the federal and state NOLs will begin to expire in the calendar year 2034, unless previously utilized. The NOL carryforwards subject to expiration could expire unused and be unavailable to offset future income tax liabilities.

Under the Tax Cuts and Jobs Act, or the Tax Act, as modified by the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, federal NOLs incurred in taxable years beginning after December 31, 2017 and in future taxable years may be carried forward indefinitely, but the deductibility of such federal NOLs in taxable years beginning after December 31, 2020 is limited. There is variation in how states will respond to the Tax Act and CARES Act. In addition, for state income tax purposes, there may be periods during which the use of NOLs is suspended or otherwise limited, such as recent California legislation limiting the usability of NOLs for tax years beginning in 2020 and before 2023.

Separately, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We determined that an ownership change occurred on October 9, 2015, but that all federal NOL carryforwards can be utilized prior to the expiration. As of August 7, 2020, we experienced an ownership change, which resulted in limitations in our ability to utilize federal research and development credits of $1.6 million and state NOLs of $24.5 million.

In addition, we may in the future experience ownership changes, either as a result of our recent initial public offering or other changes in our stock ownership (some of which are not in our control). For these reasons, our ability to utilize our NOL carryforwards and other tax attributes to reduce future tax liabilities may be limited.

Risks Related to Government Regulation and Our Industry

We received an EUA and are seeking an additional and an amended EUA for our COVID-19 test kit. The FDA may not timely grant any additional EUAs, if at all.  For our existing EUA and any new EUA, the FDA may

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revoke any EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, which would adversely impact our ability to market our test in the United States.

The FDA has the authority to grant an EUA to allow unapproved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions when there are no adequate, approved and available alternatives. The speed at which companies and institutions are acting to create and test medical products for COVID-19 is unusually rapid, and evolving or changing plans or priorities within the FDA, including changes based on new knowledge of COVID-19 and how the disease affects the human body, may significantly affect the regulatory timelines for our COVID-19 test kit. Results from our continued development and planned clinical trials may raise new questions and require us to redesign proposed clinical trials with minimal lead time.

On November 17, 2020, we received an EUA from the FDA for our COVID-19 test kit for (1) prescription at-home use with self-collected nasal swab specimens in individuals aged 14 and older who are suspected of COVID-19 by their healthcare provider and (2) use at the POC with self-collected nasal swab specimens in individuals aged 14 and older, and in individuals aged 13 and under when the specimen is collected by a healthcare provider at the POC. All prescribing healthcare providers will be required to report test results to relevant public health authorities in accordance with local, state, and federal requirements, using appropriate LOINC and SNOMED codes, as defined by the Laboratory In Vitro Diagnostics (LIVD) Test Code Mapping for SARS-CoV-2 Tests provided by the CDC.

Because the FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, we cannot predict how long our EUA will remain in place. Such revocation could materially adversely impact our business in a variety of ways, including if our COVID-19 test kit is not yet approved by the FDA under a traditional approval pathway and if we and Jabil have invested in the supply chain to provide our COVID-19 test kit under an EUA, and would require us to obtain a 510(k) or other marketing authorization from the FDA. If the FDA revokes our existing EUA prior to us having received regulatory approval to commercialize our COVID-19 test kit through a traditional approval pathway, we would be required to cease our commercialization efforts, which would substantially and negatively impact our business.

Our business and sale of our test kits are subject to extensive regulatory requirements, including compliance with labelling, manufacturing and reporting controls. If our existing EUA for our COVID-19 test kit is revoked or withdrawn, we will need to utilize other pathways to obtain marketing authorization. Our influenza test also will require marketing authorization from the FDA. If we fail or are unable to timely obtain the necessary EUA, 510(k) clearances, de-novo authorizations, or premarket approval, or PMA, approvals for new products or for the use of our test kits for additional indications, our ability to generate revenue could be materially harmed.

Our test kits are classified as medical devices and are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities and by similar regulatory authorities in overseas jurisdictions. Government regulation of medical devices is meant to assure their safety and effectiveness, and includes regulation of, among other things:

 

design, development and manufacturing;

 

testing, labeling, including directions for use, processes, controls, quality assurance, packaging, storage, distribution, installation and servicing;

 

pre-clinical studies and clinical trials;

 

establishment registration and listing;

 

test kit safety and effectiveness;

 

marketing, sales and distribution;

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recordkeeping procedures;

 

advertising and promotion;

 

premarket authorization (510(k), PMA, de-novo, EUA);

 

corrections and removals and recalls;

 

post-market surveillance, including reporting of deaths or serious injuries, and malfunctions that, if they were to recur, would be likely to cause or contribute to a death or serious injury; and

 

product import and export.

In the United States, before we can market a new medical device, or a new use of, or claim for, an existing product, we must first receive either 510(k) clearance, PMA approval or approval of a de-novo application from the FDA, unless an exemption applies. The FDA also has authority to issue EUAs in times of crises such as pandemics (declaration of emergencies).

In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device. Substantial equivalence means that with respect to the proposed device being compared to the predicate device, the proposed device has the same intended use as the predicate device and the proposed device has the same technological characteristics as the predicate device, or has different technological characteristics but that the proposed device is as safe and effective as the predicate device and does not raise different questions of safety and effectiveness. Clinical data are sometimes required to support substantial equivalence.

In the PMA approval process, the FDA requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, pre-clinical study, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices and also novel devices that remain in Class III. Products that are approved from a PMA application generally need FDA approval of a PMA supplement before they can be modified. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k) clearance.

Another pathway, known as de-novo down-classification also can be used for lower risk devices for which there is no existing product code or predicate device. The Food and Drug Administration Modernization Act of 1997 established the de-novo down-classification procedure as a new route to market for low to moderate risk medical devices that automatically require a PMA due to the absence of a predicate device. This procedure allows a manufacturer whose novel device automatically requires a PMA to request down-classification of its medical device (to allow clearance through the 510(k) pathway) on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Manufacturers can request de-novo down-classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a “not substantially equivalent” determination. Under this pathway, the FDA is required to classify the device within 120 days following receipt of the de-novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed.

The FDA has the authority to grant an EUA to allow unapproved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions when there are no adequate, approved and available alternatives.

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Each of these processes can be expensive and lengthy, and with respect to a PMA, can entail significant user fees, unless exempt. The FDA’s 510(k) clearance process usually takes from three to six months, but may take significantly longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or longer, from the time the application is submitted to the FDA until an approval is obtained. The process of obtaining 510(k) clearances or PMA approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.

In the United States, outside of the context of the EUA application process, our test kits will likely need to obtain clearance through the 510(k) premarket notification process. If the FDA requires us to go through a lengthier, more rigorous process for future products or modifications to existing products than expected, our product introductions or modifications could be delayed or cancelled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA process. Although we do not currently market any devices under a PMA, the FDA may demand that we obtain a PMA prior to marketing certain of our future products. Further, even with respect to those future products where a PMA is not required, we may not be able to obtain the 510(k) clearances with respect to those products. The FDA can delay, limit or deny 510(k) clearance or PMA approval of a device for many reasons, including:

 

we may not be able to demonstrate to the FDA’s satisfaction that our test kits are safe and effective for their intended uses;

 

the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

 

the manufacturing process or facilities we use or contract to use may not meet applicable requirements; and

 

disruptions at the FDA caused by funding shortages or global health concerns, including the COVID-19 pandemic.

The FDA may refuse our requests for 510(k) clearance, de-novo or PMA of new products, new intended uses or modifications to existing products.

From time to time, legislation is drafted and introduced in the United States that could significantly change the statutory provisions governing any regulatory approval or clearance that we receive in the United States. In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our test kits under development or impact our ability to modify our currently approved or cleared test kits on a timely basis.

Modifications to our test kits may require new regulatory clearances or approvals or may require us to recall or cease marketing our test kits until clearances or approvals are obtained.

Once our test kits are initially cleared or approved, modifications to our test kits may require new regulatory approvals or clearances, including additional EUAs, 510(k) clearances or PMA approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We may make modifications to our test kits in the future. For example, we may explore the development of a software component to our test kits, which may require new clearances or approvals from the FDA. If the FDA requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our test kits, as approved and as modified, which

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could require us to redesign our test kits and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.

If a manufacturer determines that a modification to an FDA 510(k)-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a PMA application. Where we determine that modifications to our test kits require a new 510(k) clearance or PMA, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced test kits in a timely manner, which in turn would harm our future growth.

If we or our contract manufacturers fail to comply with the FDA’s Quality System Regulations, or QSR, our manufacturing operations could be interrupted and our test kit sales and operating results could suffer.

Although full compliance may not be required under an EUA, we will be required to comply with the FDA’s QSR, which covers the methods used in, and the facilities and controls used for, the design, testing, manufacture, quality assurance, labeling, packaging, sterilization, storage and shipping of our test kits. The FDA enforces the QSR through periodic announced and unannounced inspections of manufacturing facilities. The failure by us or one of our current or future manufacturers or suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory authorities, or the failure to timely and adequately respond to any adverse inspectional observations, could result in, among other things, any of the following enforcement actions:

 

untitled letters, warning letters, injunctions, civil penalties and criminal fines;

 

customer notifications or repair, replacement, refunds, recall, detention or seizure of our test kits;

 

operating restrictions or partial suspension or total shutdown of production;

 

refusing or delaying our requests for approval of a PMA or 510(k) clearance of new products, modified products or new indications of cleared products;

 

withdrawing PMA approvals or reclassifying devices that have 510(k) clearances;

 

refusal to grant export certificates for our test kits; or

 

criminal prosecution.

Any of these actions could impair our ability to produce our test kits in a cost-effective and timely manner to meet our customers’ demands once approved for marketing. Furthermore, our key suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our test kits on a timely basis and in the required quantities, if at all.

Our test kits are and will continue to be, subject to extensive regulation and compliance obligations, which are costly and time-consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize our test kits.

The manufacture, labeling, advertising, promotion, record-keeping, post-market surveillance and marketing of medical devices are subject to extensive regulation and review by the FDA and numerous other governmental authorities in the United States as well as foreign countries where we may sell our test kits. Even after we have obtained EUA approval, 510(k) clearance or PMA approval to market a product, we have ongoing responsibilities under FDA and other regulations. The FDA and other national governmental authorities have broad enforcement powers. The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than

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anticipated costs or lower than anticipated sales. Our failure to comply with applicable regulatory requirements could result in enforcement actions such as:

 

civil penalties;

 

delays on or denials of pending requests for 510(k) clearance or PMA approval;

 

recalls or seizures;

 

withdrawals or suspensions of current PMA approvals or reclassification of 510(k) cleared devices, resulting in prohibitions on sales of our test kits, if approved;

 

warning letters or untitled letters;

 

operating restrictions, including a partial or total shutdown of production on our test kits for any indication;

 

refusal to issue export approvals or certifications;

 

obtaining injunctions preventing us from manufacturing or distributing our products;

 

commencing criminal prosecutions; and

 

total prohibitions on our sales.

The incurrence or commencement of any such action would harm our reputation and cause sales of our test kits to suffer and may prevent us from generating revenue.

In order to facilitate the rapid and thorough public health response to the COVID-19 pandemic, the CARES Act requires every laboratory that performs or analyzes a test that is intended to detect SARS-CoV-2 or to diagnose a possible case of COVID-19 to report the results from each such test to the Secretary of the U.S. Department of Health and Human Services, or HHS. The CARES Act also authorized the HHS Secretary to identify the form and manner, as well as the timing and frequency, of such reporting. Based on subsequent guidance issued by the HHS on June 4, 2020, all laboratories, including testing locations operating as temporary overflow or remote locations for a laboratory, and other facilities or locations performing testing at POC or with at-home specimen collection related to SARS-CoV-2, will report data for all testing completed, for each individual tested, within 24 hours of results being known or determined, on a daily basis to the appropriate state or local public health department based on the individual’s residence.

Since we will offer prescription at-home, we expect to assist the prescribing providers in reporting test results. In a prescription at-home setting, the patients will be expected to report their respective results back to the prescribing health care providers who will be responsible for reporting the results to the appropriate public health authorities. We expect to provide two methods to facilitate such reporting, including through an on-package photo guide that would allow users to upload results to secure physician portals and through web-based test results registration reporting. We believe these processes would fulfill our reporting obligations. Additionally, we believe that these methods are secure and in compliance with applicable health information privacy laws, such as HIPAA. If governmental authorities conclude that our reporting processes do not comply with applicable law, we or the prescribing physician may be subject to penalties and other damages.

If our test kits cause or contribute to patient injuries or otherwise malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device may have caused or contributed to a patient death or serious injury or

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has or may have malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our test kits also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

Our test kits or any component thereof may be subject to product recalls in the future. A recall of our test kits, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our test kits, could have a significant adverse impact on us.

The FDA has the authority to require the recall of commercialized products that are subject to FDA regulation. Manufacturers may, under their own initiative, recall a product if any deficiency is found. For reportable corrections and removals, companies are required to make additional periodic submissions to the FDA after initiating the recall, and often engage with the FDA on their recall strategy prior to initiating the recall. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable health risk, component failures, failures in laboratory processes, malfunctions, manufacturing errors, design or labeling defects, or other deficiencies and issues. Recalls of any of our test kits would divert managerial and financial resources and adversely affect our business, results of operations, financial condition and reputation. We may also be subject to liability claims, be required to bear other costs or take other actions that may negatively impact our future sales and our ability to generate profits. Companies are also required to maintain certain records of corrections and removals, even if these do not require reporting to the FDA. We may initiate voluntary recalls involving our test kits. A recall announcement by us could harm our reputation with customers and negatively affect our business, financial condition, and results of operations. In addition, the FDA or other agency could take enforcement action for failing to report the recalls when they were conducted.

If we initiate a recall, including a correction or removal, for one of our test kits, issue a safety alert, or undertake a field action or recall to reduce a health risk, this could lead to increased scrutiny by the FDA, other governmental and regulatory enforcement bodies, and our customers regarding the quality and safety of our test kits, and to negative publicity, including FDA alerts, press releases, or administrative or judicial actions. Furthermore, the submission of these reports could be used against us by competitors and cause customers to delay purchase decisions or cancel orders, which would harm our reputation.

The misuse or off-label use of our test kits may harm our reputation or the image of our test kits in the marketplace, or result in injuries that lead to product liability suits, which could be costly to our business. Moreover, we could be subject to FDA sanctions if we are deemed to have engaged in off-label promotion.

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for an indication that has not been approved or cleared by the FDA, referred to as an off-label use. The FDA does not restrict or regulate a physician’s use of a medical device within the practice of medicine, and we cannot prevent a physician from using our test kits for an off-label use. If the FDA determines that our promotional materials constitute the unlawful promotion of an off-label use, it could subject us to regulatory or enforcement actions, including revocation of our existing EUA, additional civil money penalties, criminal fines and penalties, and exclusion from participation in federal health programs, among others. For example, in connection with our existing EUA, our COVID-19 test kit must comply with certain labeling requirements, including the label that our COVID-19 test kit has not been FDA cleared or approved but has been authorized by the FDA under an EUA and that our COVID-19 test kit has been authorized only for the detection of nucleic acid from SARS-CoV-2, and not for any other viruses or pathogens. Other federal, state or foreign governmental authorities might also take action if they consider our promotion or training materials to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities. In that event, our reputation could be damaged and the use of our test kits in the marketplace could be impaired.

Furthermore, the use of our test kits for indications other than those that have been approved or cleared by the FDA may lead to performance issues or produce erroneous results, which could harm our reputation in the

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marketplace among physicians and patients and increase the risk of product liability. Product liability claims are expensive to defend and could divert our management’s attention from our primary business and result in substantial damage awards against us. Any of these events could harm our business, results of operations and financial condition.

Clinical trials necessary to support a future test kit submission will be expensive and may require the enrollment of large numbers of subjects, and suitable subjects may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new test kits and will adversely affect our business, operating results and prospects.

Initiating and completing clinical trials necessary to support a future EUA, 510(k), PMA, or de novo submission, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any test kit we advance into clinical trials may not have favorable results in later clinical trials.

Conducting successful clinical trials will require the enrollment of large numbers of subjects, and suitable subjects may be difficult to identify and recruit. Subject enrollment in clinical trials and completion of subject participation depends on many factors, including the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the indication of the underlying test kit, the availability of appropriate clinical trial investigators, support staff, and proximity of subjects to clinical sites and able to comply with the eligibility and exclusion criteria for participation in the clinical trial and subject compliance. In addition, subjects may not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products.

In addition, our clinical trials may in the future be affected by the COVID-19 pandemic. For example, the COVID-19 pandemic may impact subject enrollment. In particular, some sites may pause enrollment to focus on, and direct resources to, COVID-19, while at other sites, subjects may choose not to enroll or continue participating in the clinical trial as a result of the pandemic. As a result, potential subjects in our clinical trials may choose to not enroll, not participate in follow-up clinical visits, or drop out of the trial as a precaution against contracting COVID-19. Further, some subjects may not be able or willing to comply with clinical trial protocols if quarantines impede subject movement or interrupt healthcare services. We are unable to predict with confidence the duration of any such potential subject enrollment delays and difficulties, whether related to COVID-19 or otherwise. Delays in subject enrollment or failure of subjects to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our test kits or result in the failure of the clinical trial.

Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of subjects than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate for approval. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.

If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our test kits.

We do not have the ability to independently conduct our pre-clinical studies and clinical trials for our test kits and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our test kits on a timely basis, if at all, and our business, operating results and prospects

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may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.

Our collection, use, storage, disclosure, transfer and other processing of personal information, could give rise to significant costs, liabilities and other risks, including as a result of investigations, inquiries, litigation, fines, legislative and regulatory action and negative press about our privacy and data protection practices, which may harm our business, financial conditions, results of operations and prospects.

In the course of our operations, we collect, use, store, disclose, transfer and otherwise process an increasing volume of personal information, including from our employees and third parties with whom we conduct business. The collection, use, storage, disclosure, transfer and other processing of personal information is increasingly subject to a wide array of federal, state and foreign laws and regulations regarding data privacy and security, including comprehensive laws of broad application, such as the European Union General Data Protection Regulation, that are intended to protect the privacy of personal information that is collected, used, stored, disclosed, transferred and otherwise processed in or from the governing jurisdiction. As we seek to expand our business, we are, and may increasingly become, subject to various laws, regulations and standards, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. When conducting clinical trials, we face risks associated with collecting trial participants’ data, especially health data, in a manner consistent with applicable laws and regulations, such as FDA human subject protection regulations.

In many cases, these laws and regulations apply not only to third-party transactions, but also to transfers of information between or among us, any affiliates and other parties with whom we conduct business. These laws, regulations and standards may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may harm our business, financial condition and results of operations. The regulatory framework for data privacy and security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future.

We are subject to diverse laws and regulations relating to data privacy and security. In the United States, various federal and state regulators have adopted, or are considering adopting, laws and regulations concerning personal information and data security, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA. This patchwork of legislation and regulation may give rise to conflicts or differing views of personal privacy rights. For example, certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. Additionally, new privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. For example, the CCPA, which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA has been amended several times, and it is possible that further amendments will be enacted, but even in its current form it remains unclear how various provisions of the CCPA will be interpreted and enforced. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects, and could restrict the way products and services involving data are offered, all of which may harm our business, financial condition and results of operations.

In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. We expect that there will continue to be new proposed laws and regulations concerning data privacy and security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. New laws, amendments to or re-interpretations of existing laws, regulations, standards and other obligations may require us to incur additional costs and restrict our business operations. Because the interpretation and application of laws, regulations, standards and other obligations relating

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to data privacy and security are still uncertain, it is possible that these laws, regulations, standards and other obligations may be interpreted and applied in a manner that is inconsistent with our data processing practices and policies or the features of our test kits. If so, in addition to the possibility of fines, lawsuits, regulatory investigations, public censure, other claims and penalties, and significant costs for remediation and damage to our reputation, we could be materially and adversely affected if legislation or regulations are expanded to require changes in our data processing practices and policies or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively impact our business, financial condition and results of operations. We may be unable to make such changes and modifications in a commercially reasonable manner, or at all. Any inability to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, harm our reputation and brand, damage our relationships with users and harm our business, financial condition and results of operations.

We make public statements about our use and disclosure of personal information through our privacy policies, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our business and harm our business, financial condition and results of operations.

Complying with these numerous, complex and often changing regulations is expensive and difficult. Any failure or perceived failure by us or our service providers to comply with our posted privacy policies or with any applicable federal, state or similar foreign laws, regulations, standards, certifications or orders relating to data privacy, security or consumer protection, or any compromise of security that results in the theft, unauthorized access, acquisition, use, disclosure, or misappropriation of personal information or other user data, could result in significant fines or penalties, negative publicity or proceedings or litigation by governmental agencies or consumers, including class action privacy litigation in certain jurisdictions, which would subject us to significant awards, penalties or judgments, one or all of which could require us to change our business practices or increase our costs and could materially and adversely affect our business, financial condition and results of operations. In addition, if our practices are not consistent, or viewed as not consistent, with legal and regulatory requirements, including changes in laws, regulations and standards or new interpretations or applications of existing laws, regulations and standards, we may also become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, criminal or civil sanctions, all of which may harm our business, financial condition and results of operations.

If we fail to comply with U.S. federal and state fraud and abuse and other healthcare laws and regulations, including those relating to kickbacks and false claims, we could face substantial penalties and our business operations and financial condition could be harmed.

Healthcare providers and third-party payors play a primary role in the distribution, recommendation, ordering and purchasing of any medical device for which we have or obtain marketing clearance or approval. Through our arrangements with healthcare professionals and customers, we are exposed to broadly applicable anti-fraud and abuse, anti-kickback, false claims and other healthcare laws and regulations that may constrain our business, our arrangements and relationships with customers, and how we market, sell and distribute our marketed medical devices. We have a compliance program, code of conduct and associated policies and procedures, but it is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent noncompliance may not be effective in protecting us from governmental investigations for failure to comply with applicable fraud and abuse or other healthcare laws and regulations.

In the United States, we are subject to various state and federal anti-fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal civil False Claims Act, or the FCA. There are similar laws in other countries. Our relationships with physicians, other health care professionals and hospitals are subject to scrutiny under these laws.

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The laws that may affect our ability to operate include, among others:

 

the Anti-Kickback Statute, which prohibits, among other things, knowingly and willingly soliciting, offering, receiving or paying remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of a person, or the purchase, order or recommendation of, items or services for which payment may be made, in whole or in part, under a federal healthcare program such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value, and the government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or a specific intent to violate. In addition, the government may assert that a claim, including items or services resulting from a violation of the Anti-Kickback Statute, constitutes a false or fraudulent claim for purposes of the FCA. There are a number of statutory exceptions and regulatory safe harbors protecting certain business arrangements from prosecution under the Anti-Kickback Statute; however, those exceptions and safe harbors are drawn narrowly, and there may be limited or no exception or safe harbor for many common business activities. Certain common business activities including, certain reimbursement support programs, educational and research grants or charitable donations, and practices that involve remuneration to those