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Lucira Health (LHDX)

Filed: 31 Mar 22, 4:43pm

 

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, 2021

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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the Nasdaq Stock Market on June 30, 2021, was $192.9 million.

 

The number of shares of Registrant’s common stock, par value $0.001 per share outstanding as of March 28, 2022 was 39,825,333.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, which the Registrant intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 


 

Table of Contents

 

 

 

Page

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

ii

SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

iv

 

 

 

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

41

Item 1B.

Unresolved Staff Comments

101

Item 2.

Properties

101

Item 3.

Legal Proceedings

101

Item 4.

Mine Safety Disclosures

101

 

 

 

PART II

 

 

Item 5.

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

102

Item 6.

Reserved

103

Item 7.

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

104

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

117

Item 8.

Financial Statements and Supplementary Data

118

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

155

Item 9A.

Controls and Procedures

155

Item 9B.

Other Information

156

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

156

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

157

Item 11.

Executive Compensation

157

Item 12.

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

157

Item 13.

Certain Relationships and Related Transactions, and Director Independence

157

Item 14.

Principal Accountant Fees and Services

157

 

 

 

PART IV

 

 

Item 15.

Exhibit and Financial Statement Schedules

158

Item 16

Form 10-K Summary

162

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, or Annual Report, 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, 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 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 kits;

 

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 Switch Health Solutions Inc., or Switch, and our single-source suppliers;

 

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

 

regulatory developments in the United States and foreign countries;

 

our research and development for our combination COVID-19 and 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 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. 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. 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. 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 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 to reflect events or circumstances after the date of this Annual Report 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 and the documents that we reference in this Annual Report and have filed with the Securities and Exchange Commission as exhibits to this Annual Report with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

“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 are our property. Trade names, trademarks and service marks of other companies appearing in this Annual Report 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 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.


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. These risks include, but are not limited to, the following:

 

We have incurred losses since our inception and we may continue to incur losses in the future, which could harm our future business prospects.

 

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

 

We received EUAs from the U.S. Food and Drug Administration, or FDA, for our COVID-19 test kit. If the FDA revokes or terminates our EUAs, 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.

 

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

 

The production and widely administered use of efficacious vaccines or treatments for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not be sustained or substantially grow.

 

We are allocating the majority of our resources to the development, manufacturing and commercialization of our COVID-19 test kits and combination COVID-19 and influenza test kits 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 and internationally, which could negatively impact our business.

 

We 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 manufacturing and distribution of our COVID-19 test kits and development and launch of any future test kits, our financial results could be adversely affected.

 

We identified a material weakness in our internal control over financial reporting and may identify material weaknesses in the future or otherwise fail to maintain proper and effective internal controls, which may impair our ability to produce accurate financial statements on a timely basis.

 

We rely substantially on Jabil for the manufacturing, quality-testing, and assembly of our COVID-19 test kits and on Switch as a significant customer. Any termination or loss of significant rights under the Manufacturing Services Agreement, dated September 10, 2020, or the Jabil MSA, with Jabil or the Distribution Agreement, dated July 14, 2021, as amended, with Switch would harm our commercialization of our COVID-19 test kits. 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 kits or fail to do so at acceptable quality levels or prices.

iv


 

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 updated widespread market acceptance of our COVID-19 test kits.

 

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 any other development stage molecular 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.

 

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 significant net losses, which may continue, and we may not be able to achieve or sustain profitability in the future.

 

Business disruptions have impacted and can in the future harm our revenue and financial condition and increase our costs and expenses.

 

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.

 

 

v


 

 

PART I

Item 1. Business.

 

Overview

Bringing Central Lab Reliability to Single-Use Rapid Diagnostic Testing

We are a medical technology company on a mission to bring central laboratory quality testing for infectious diseases into the home and point of care settings. We aim to have disposable, single use test kit platform replace central lab testing for accurately diagnosing infectious diseases leading to faster treatment and better disease control outcomes. We believe that society benefits from real-time and accurate disease detection in order to deploy time-sensitive therapeutic treatments for the individual and reduce spread of infection in the community. Currently, the United States relies on centralized lab testing for accurate disease detection. We believe testing labs are too geographically centralized, rely too heavily on instrumented equipment, and are expensive and difficult to access. With our polymerase chain reaction, or PCR-quality technology, we offer decentralized and accessible single-use testing for infectious diseases. Our test kits are coupled with our digital platform, LUCI PASS, which is designed to securely deliver a clinically relevant test result to users, healthcare providers, and to required public health authorities.  We plan on developing and commercializing lab quality single-use test kits for several infectious diseases and have started by commercializing our PCR-quality COVID-19 test kits.

The COVID-19 pandemic has placed unprecedented pressure on the current U.S. healthcare system. We believe the pandemic demonstrated that the infectious disease testing infrastructure in the United States was too quickly overwhelmed to efficiently and reliably detect COVID-19 early enough to drive effective treatment and better patient outcomes. To suppress the spread of infection in the population, we believe testing should be fast, accurate, and away from other people so as to reduce potential transmission. While PCR lab testing for COVID-19 is trusted and accurate, it is slow, inconvenient and centralized. Rapid at-home antigen testing for COVID-19 is fast and decentralized but the test method has accuracy challenges, especially in the face of variants. There are widespread reports of people receiving negative test results from rapid antigen test kits only to receive a positive PCR result days later from the lab. We believe false negative results from rapid antigen testing can create a false sense of security, confuse the public, and lead to increased infection rates.  

We believe that providing a fast and easy-to-use at-home COVID-19 test kit with PCR-quality accuracy is one of the best ways to help mitigate against the spread of infection and foster better treatment decisions. The traditional testing infrastructure within the United States is not designed to provide fast and convenient PCR-quality results because our historical infrastructure requires the sophistication of a central lab. With our platform, we are reimagining current infectious disease testing through innovative test kits that are designed to deliver on-the-spot testing with PCR-quality in a single-use, portable, and easy-to-use format. Our platform is designed to produce assays that combine the accuracy and reliability of PCR tests and the accessibility and ease of use of antigen tests. Our molecular test kits are designed to be diagnostically definitive, unlike the antigen tests on the market today.  Importantly, our tests also provide a platform for both symptomatic and asymptomatic individuals to easily check their COVID-19 infection status in 30 minutes or less, thus providing a 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 also believe that the COVID-19 pandemic is rapidly evolving and so are the reasons for testing.  While people have tested to prevent spread of infection through isolation and hoped for recovery, we believe that moving forward, people will seek PCR-quality at-home tests to treat infection as quickly as possible. We believe this new “test to treat” paradigm will become increasingly important as COVID-19 becomes endemic. This is because new therapies for COVID-19 infection are now available contingent upon accurate and early testing. New oral antivirals from Pfizer (Paxlovid) and Merck (molnupiravir) are available by prescription after receiving EUA to treat COVID-19 in certain people who are at increased risk for severe illness. Both Paxlovid and molnupiravir may only be prescribed after a positive COVID-19 test and within five days of symptom onset, suggesting that early detection and initiation of treatment is correlated with better outcomes. The same is true for monoclonal antibody treatments.

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On March 2, 2022, President Joe Biden announced a new “test to treat” federal initiative during his State of the Union address. Under the “test to treat” initiative, individuals will have immediate access to COVID-19 therapeutics at the pharmacy upon testing positive for COVID-19. We believe our test kits can play an important role in facilitating a “test to treat” paradigm because our tests are PCR-quality and therefore able to detect infection early, which can lead to early therapy and potentially better outcomes. This is because PCR lab testing is understood to detect viral genetic material at the earliest stages of infection because it amplifies trace amounts of virus DNA. Rapid antigen tests are understood to be less sensitive because antigen tests do not amplify the virus. A person must have first produced enough antigens in their body to return a positive result, which could be up to seven days into their infectious stage and mostly past the time for an anti-viral to be effective. We believe this leads to potential delays in detection and a potential loss of trust in rapid antigen test results. We believe the U.S. healthcare system is in need of PCR-quality testing to be delivered with the convenience of rapid antigen test kits along with a digitally shareable test record the public can trust.  

Our first commercially available PCR-quality diagnostic test was the LUCIRA COVID-19 All-In-One Test Kit, which received EUA from the FDA for prescription use in at-home settings, and point-of-care, or POC. Our COVID-19 test kit was the first at-home self-test to receive FDA EUA authorization, and remains the only FDA EUA authorized single-use molecular test for at-home use. On April 9, 2021, we received our first FDA EUA authorization for over-the-counter, or OTC, non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged 2-13 (with parent collection) and launched LUCI PASS, our digital platform designed to securely record and share verified test results via text messaging. The LUCIRA CHECK IT COVID-19 Test Kit utilizes identical components to the LUCIRA COVID-19 All-In-One Test Kit and both are referred to as test kits or COVID-19 test kits. On April 26, 2021, we received authorization with conditions from Health Canada for our CHECK IT test kit, and the conditions were removed on June 1, 2021. On June 11, 2021, we received approval from the Taiwan Ministry of Health and Welfare for emergency use in Taiwan. On October 12, 2021, we received Pandemic Special Access Route, or PSAR, approval for our CHECK IT test kit by Singapore's Health Sciences Authority. On November 2, 2021, Israel approved registration of our CHECK IT test kit with a requirement for PCR confirmation of any positive test. On January 10, 2022, Israel recognized our CHECK IT test kit as a PCR-quality test for POC use. In the second half of 2022, we hope to obtain several new regulatory approvals including extending our EUA authorization into full FDA approval via de novo application, CE Mark, and submissions to the United Kingdom and Australia to further extend access to international markets.

We believe that enabling PCR-quality at-home testing for infectious disease testing outside of COVID-19 is critical for enabling treatment and preventing disease spread. Our PCR-quality 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 other respiratory infections. We plan on seeking EUA authorization from FDA for prescription use, authorization from Health Canada, and European Medicines Agency, and CE Mark, to commercialize a combination COVID-19/influenza A/B, or COVID/flu combo test, in the first half of 2022. We expect to grow our test kit platform offerings in the future.

Our Test Kit Platform

Our PCR-quality platform is designed to leverage the following competitive benefits:

 

Accurate.  Molecular testing methods utilize nucleic acid amplification-based chemistries to achieve PCR-quality Limit of Detection or LoD. The amplification chemistries generate copies of the genetic targets allowing even low levels of target to be detected. Our platform utilizes LAMP, which we believe provides high accuracy results that are recognized as PCR-quality by FDA.

 

Decentralized.  Our platform is designed to serve as a miniature, disposable and accessible infectious disease diagnostic laboratory. It is designed to be untethered from reader or hub equipment and deployable anywhere lab-quality accuracy is needed, whether at the point of care or in the home.

 

Simple and intuitive. We designed our test kit platform to be used anywhere and at any time. Ease of use is paramount to our design from sample collection to sample insertion for analysis.  

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No durable equipment. Unlike other molecular test providers, our test kit platform is designed without the need for a durable component, test reader, hub, or other cumbersome equipment. We believe that the utility provided by our all-in-one design is preferred to solutions requiring additional equipment and cost.

 

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 and expertise in target identification and assay development for influenza into a test kit for COVID-19.

Fundamentally, our PCR-quality 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 and comes with clear instructions and all the necessary components 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. Our intentional design choices allow for low-cost hardware by eliminating the need for pumps and valves. The colorimetric process 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 we believe could grow OTC consumer purchase demand.  

4. Adaptable test kit 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 kit bases into which chemistries are run to the

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development of new test kits addressing additional infectious diseases. We anticipate that our colorimetric detection in our test kit base can be used in a broad range of applications and that the test kit 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.

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 also believe our PCR-quality platform addresses historical challenges and can unlock 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, in 30 minutes or less for our COVID-19 test kit, 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, and ease of use of an antigen test. According to many virologists, the most important time to mitigate the spread of infectious disease and deploy therapeutics is early in a pathogen’s infectious period. With our platform’s proprietary technology, we designed our test platform to detect infections early, therefore mitigating the spread of an infectious disease and filling an important gap in the current testing infrastructure.

 

 

4


 

 

Our First Test Kit Offering – COVID-19

The following picture depicts our COVID-19 test kit utilized whether at POC or at-home. On the left we show our simple test kit as presented to our end user. On the right, we show the miniature, disposable, single use laboratory beneath the packaging.

 

 

We believe our COVID-19 test kit possesses all of the benefits of our technological platform and produces a PCR-quality result within 30 minutes, with the potential for a positive COVID-19 result in as few as 11 minutes.  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.

 

What Sets Us Apart from Centralized Lab PCR TestsOur solution costs less to manufacture and provides a faster time to result

Centralized lab tests for infectious disease require large upfront investments and expensive on-going maintenance and supply contracts, and highly trained operations, leaving them only available in large hospital systems and other labs concentrated in high population areas. Our solution is less expensive to develop and manufacture. Regardless of the speed of the test, central lab testing can require significant time to produce results because of the complex workflow required for lab testing.  First a doctor’s visit is needed to obtain a lab order. Then a sample collection visit is required (or use of a mail-in collection kit). Next, transportation of the sample to the lab occurs and finally it is processed at the lab and results transmitted. Our test kit provides a result within 30 minutes from sample collection. We provide a faster solution because our lab sits in the palm of your hand.

What Sets Us Apart from Rapid Antigen Tests – Our solution is more accurate and clinically relevant

Rapid antigen tests, while cheap and widely available, suffer from the inability to detect infection outside of the window of peak viral load, which generally occurs in the earlier stages of infection. Accordingly, a positive antigen test result is more likely to occur in the later stages of infection.  We believe this later positive

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detection reduces the antigen tests’ utility as a tool for driving treatment because therapies generally produce the best outcomes when prescribed and administered in the early stages of infection.  Just one of our COVID-19 test kits can produce an actionable result in 30 minutes that could otherwise take up to three tests: two antigen tests taken 24-48 hours apart and an additional confirmatory POC or lab-based PCR test.  We further believe that reliance on government mandated antigen testing to confirm a negative result will wane as COVID-19 becomes endemic and society becomes focused on testing that can timely and accurately detect and drive treatment.  We believe antigen testing may not meet this need and therefore its demand will potentially shrink.

What Sets Us Apart from POC Antigen and PCR TestsOur solution is less expensive for health care providers, easier to access and portable

POC tests have effectively moved infectious disease testing closer to the patient, and are often deployed in large multi-physician clinics, urgent care centers, and smaller and more remote hospitals that do not have large central lab equipment. While more affordable for health care providers than central lab assays, POC equipment also requires investment and maintenance and highly trained operators and technicians to collect the sample. We are a less expensive solution for the health care provider because our test requires none of this infrastructure. POC tests are still inaccessible to many consumers because they must secure and complete an appointment with a physician and physically interact with a healthcare technician to collect the sample. Our solution is easier to access through our OTC and prescription at-home authorization. Likewise, tests conducted at the POC have limited throughput. Our solution is portable and self-contained with no throughput limitation. Multiple large integrated delivery networks, or IDNs, are now using our tests as both an alternative and a supplement to POC tests because there is no additional investment, beyond purchase of our test kits, and they can use our tests expand throughput capacity.

What Sets Us Apart from Other At-Home Molecular Tests – Our solution is easier to use and is an all-in-one test kit

Only two competitors offer at-home molecular testing platforms that include a hub and cartridge model. While both tests produce similar accuracy with similar time to result as our solution, their hubs require a durable investment with a larger form factor. One competitor offers a hub as a separate expense and can only communicate results to a smart phone. As a result, that testing experience requires three devices a hub, a cartridge and a smartphone two of which need to be charged and may require software updates prior to use. We believe our solution is easier to use because it requires no hub or smartphone. The other competitor’s solution may offer a cheaper hub and requires no smart phone, but the testing process runs for an hour. Additionally, tests relying on a hub create an unnecessary bottleneck because multiple members of a family or group cannot test on the same hub at the same time. Our all-in-one single use solution means that testing throughput is not limited by hub availability. Among currently authorized at-home molecular tests, only our test kit can be purchased and used anywhere, anytime and can also be used as a POC, prescription at-home, and OTC test.

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Our Digital Test Record Platform

We have also developed a text message-based electronic test record we call LUCI PASS to use with our COVID-19 test kit. A sample record is pictured below:

 

 

Our LUCI PASS platform is designed to provide a reliable and electronically transmittable digital record of the test result. We believe LUCI PASS provides the following competitive benefits:

 

Device agnostic reporting. We designed LUCI PASS records to be a text-based reporting platform that accessible from a wide range of mobile phones. We designed LUCI PASS to avoid the complexity and inconvenience of installing a smartphone app to create a test record.  Instead, users create and share web-based records and PDF files recording their test results and identifying the test kit that was used.

 

Shareable test results. We believe that the world is entering a phase in which COVID-19 and other infectious disease testing will be done primarily for the purpose of seeking treatment. Testing to treat infection requires that reliable results are transmittable to health care providers as quickly and easily as possible. We believe the simplicity of sharing a LUCI PASS digital record can speed access to treatments requiring a trusted test result as a condition of prescription. Secure cloud storage can enable direct digital connection to healthcare providers and health systems.  

 

Fosters return to normal activities with ease. While we believe testing to treat infection will be the primary reason for testing in the future, we also believe that testing to show proof of negative infection status will continue for the near term.  We designed LUCI PASS to serve as an easy-to-use negative test verification tool for large and small gatherings such as sporting activities, workplace gatherings, weddings, concerts and conferences.  

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Infectious Disease Testing Landscape and Limitations

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 that all serve to provide information to support clinical diagnosis and have become familiar to the public due to the COVID-19 pandemic. Infectious disease tests usually fall into one of three categories: molecular tests, antigen tests and antibody tests.

Antigen Tests

Antigen tests are designed to detect specific viral surface proteins and do not use an amplification step.  As a result, until a large amount of virus is present, antigen tests may produce false negative results.  Antigen tests tend to be of limited use until symptom onset and often require a follow-on confirmatory test via a more accurate molecular test to determine if viral material is present. This creates a time lag that can lead to the spread of infection while waiting for a diagnostically definitive result. Per the Centers for Disease Control and Prevention, or CDC, one in five patients with symptoms and a confirmed case of COVID-19 received a negative rapid antigen test result. Accordingly, antigen tests are more likely to catch infection at a delayed time when viral load is high and therapeutics may not be effective. We believe that antigen tests have become a stopgap measure for mass-population testing because they are rapid, low-cost and portable. They are generally available OTC and conducted in the home.  While users may favor OTC or at-home testing and fast time to test results, we believe that antigen tests are too unreliable for an accurate clinical diagnosis.  

Antibody Tests

Antibody tests target human antibodies which are produced after the body has encountered and responded to a pathogenic threat. Antibodies can exist in the blood in varying concentrations 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 may indicate whether, not when, there has been exposure to a certain pathogen. Antibody tests have limited clinical relevance because they do not test for active infection and therefore do not indicate whether a person is contagious.  

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. A 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 (in the case of an antigen test). It is defined as the lowest target concentration at which the assay can 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 antigen tests given molecular tests’ ability to amplify a target. 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. Antigen tests, and some poor-performing molecular tests may have LoDs that are orders of magnitude higher than accurate tests.

Low LoD tests enable infection to be caught earlier allowing for interventions to be most effective. A case study is provided below in an excerpt from the New England Journal of Medicine (NEJM) on SARS-CoV-2. As can be seen in the figure below, the viral load in an infected patient increases over a window of several days. PCR-quality molecular tests can detect the infection before the onset of symptoms. Such early detection can not only prevent spread but also lead to the use of antiviral drugs earlier in the course of infection, thereby making them more effective.

 

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In short, molecular tests can detect diseases earlier in their incubation periods and are considered diagnostically definitive. Traditional infectious disease molecular tests, such as those that use PCR for the amplification step also tend to incorporate fluorescence for the detection step and this necessitates specialized equipment that is expensive and complex.  Our PCR-quality LAMP molecular test kit provides accuracy similar to that of PCR without the need for PCR or fluorescent detection, thereby enabling low cost to produce, portability, ease of use and elimination of the need for an instrument.

Testing Settings and the Typical Patient Journey

 

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.

 Molecular Testing Through Centralized High or Medium-Complexity Laboratories

Central laboratories have historically been the most common setting for molecular tests – like the PCR test for COVID-19 – are accessed.  However, central labs were designed to conduct highly accurate testing for non-infectious diseases that do not require immediate results, such as tests for diabetes, heart disease and cancer. The current centralized lab testing environment provides test results in days and this hinders the ability to provide immediate on-the-spot results that are most beneficial for diagnosing and treating infection.

Accessibility to central lab testing is controlled by the health care provider.  The patient process is visually depicted below:

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This lengthy, multistep process is time-consuming.  A sample must be obtained and delivered to centralized facilities for processing. The patient sample is collected at a physician’s office, at a third-party collection location, or in the home. 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 to maximize economics per test.  As a result of per-test economics, labs may collect samples over time until the lab test equipment can be run in the most cost-effective manner. 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.

Molecular and Antigen Testing at the Point of Care

POC testing refers to near-patient testing and typically occurs at the time of consultation with a medical professional. There are a variety of molecular and antigen tests used in the POC setting, including COVID-19 and influenza. POC testing can occur at hospitals, physician offices, urgent care clinics and retail clinics.  The circulation of potentially infectious individuals among others leads to a threat of spread. 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 than a central lab test. However, these tests generally still require a trained operator to collect the sample and perform the test, and can produce results in anywhere from 15 minutes to a few hours assuming the instrument is ready to be used and there is no sample queue or maintenance needed and trained personnel are available. 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 hours later during a surge of testing. The potentially infectious person may still expose healthcare providers and others.

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 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 so that 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

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convenience of their home, they can immediately self-isolate and reach out to a healthcare provider, thereby mitigating the spread of disease while obtaining healthcare counseling or treatment.

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 without the need for additional instrumentation.  

OTC At-Home Testing

OTC testing refers to test kits available for purchase at retail and e-commerce locations such as drug stores, grocery stores, or other large retailers. OTC testing does not require a prescription.

Our test is the only single use, all-in-one OTC COVID-19 molecular testing option currently available. We believe that providing a highly accurate molecular, easy to use at-home test enables testing to be conducted sooner after suspected exposure and thereby offers the potential for early treatment. We believe there is going to be a paradigm shift from centralized testing for infectious disease to decentralized testing including both the OTC and POC markets. We believe that decentralized yet highly accurate and easy-to-use testing, when combined with treatment, will change the course of infectious disease. Our goal is to be a leader in decentralized early disease detection.

COVID-19 and Influenza A/B

Disease

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. 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 pre-symptomatic incubation period can range from two to 14 days, enabling potential viral spread.

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, or WHO, 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.

From December 2020 through February 2022, the FDA issued EUAs for three COVID-19 vaccines, two of which became fully approved. The FDA also issued EUAs for three therapeutic treatments. However, we believe the need for ongoing detection and monitoring will continue given the ongoing COVID-19 pandemic. We believe that COVID-19 variants will continue to emerge and potentially cause periodic and/or seasonal surges. However, new therapeutics such as Pfizer’s Paxlovid antiviral pill represents a paradigm shift in the fight against COVID-19.  Healthcare providers are now able to help their patients recover from COVID-19 and avoid severe infection.  Likewise, we believe that the availability of Paxlovid by prescription will give the general population a new and compelling reason to reliably identify COVID-19 infection as early as possible. We believe central lab-based PCR testing is not conducive to serving this emerging “test to treat” market because it is slow and inconvenient for the patient and physician. Our solution can be deployed in the home – via telemedicine if needed – or at the point of care without sacrificing diagnostic accuracy. Within 30 minutes, a positive PCR-quality test result from our test kit

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can be translated into a prescription for Paxlovid as opposed to waiting a day or more for a PCR test result.  We believe our faster molecular test result can potentially drive better health outcomes when coupled with earlier access to prescription therapeutics like Paxlovid.

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 fatigue. 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, influenza A and B, are the most common among human infections. 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 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 the current centralized testing infrastructure is equally ill-equipped to support the testing needs of a future influenza pandemic.

Combined COVID-19 and Influenza Market for Testing

COVID-19 diagnostic testing volume in the United States grew rapidly to approximately 250 million tests in 2020.  During 2021, testing volume was estimated at approximately 465 million tests reported through centralized lab, POC and at-home testing. This estimate does not include unreported at-home testing, the majority of which is rapid antigen based and not PCR-quality. Additionally, prior to the COVID-19 pandemic, there were an estimated 40 million influenza tests performed annually in laboratory and POC settings in the United States but approximately 230 million people purchased products to treat the flu-like symptoms. We believe there was a substantial population who treated flu-like symptoms without a confirmed flu diagnosis. As COVID-19 moves to the endemic stage, we believe people will be unable to definitively determine based on symptoms alone whether a person has COVID-19, or influenza or another viral infection because the symptoms are virtually identical. However, the treatments for these infections are very different.  Therefore, we believe patients and healthcare providers alike will demand a trusted, and immediate diagnosis to pinpoint the type of infection to drive treatment and behavior. We estimate a 2022 total addressable market of approximately $8.4 billion to diagnose COVID-19 and/or influenza in the United States. We estimate that the international market opportunity is up to three times greater than the U.S. market opportunity.

Other Infectious Diseases and Markets for Testing

There are several other common infectious diseases, apart from COVID-19 and flu, that require testing for effective treatment. We believe that a PCR-quality at-home testing platform can disrupt the existing diagnostic market for these infections because testing is limited to the central lab or complex POC instruments. There are no at-home, PCR-quality solutions for the following infections:

 

Strep throat, which infects approximately 600 million people worldwide and frequently requires treatment with antibiotics.

 

Chlamydia trachomatis, or Ct, which is the most common bacterial cause of STIs worldwide with more than approximately 131 million annual infections according to the WHO. The CDC recommends regular testing for multiple population groups as infection can be asymptomatic.

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Neisseria gonorrhoeae, or Ng, which is the second most reported disease in the United States that requires notification to government authorities by law. The CDC recommends regular testing for multiple population groups.

We believe that our PCR-quality testing platform can be further developed to detect infection in these disease states and potentially others.  

Research and Development and Product Pipeline

As of December 31, 2021, our research and development, or R&D, team consisted of 28 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 development pipeline includes test kits focused on respiratory and sexual health.  Our immediate focus is to expand our COVID-19 test kit to a COVID-19/flu combo test, which is currently undergoing validation and clinical studies. To date, clinical trial results for our candidate COVID-19/flu combo test demonstrated similar sensitivity and specificity to highly sensitive lab-based PCR assays for COVID-19, Flu A and Flu B. In parallel, we are performing feasibility evaluation on both respiratory syncytial virus and Group A strep. We expect a phase gate review in the second half of 2022. We are also exploring the feasibility of using our platform for Ct and Ng. We recently published assay feasibility results, collected in Fiji, for our chlamydia assay.

 

 

Commercial Strategy and Growth

Our commercial strategic objective is to deploy our PCR-quality COVID-19 test kit –delivered in the palm of your hand – to new and existing customers who will continue to require accurate and immediate diagnoses as COVID-19 moves to the endemic stage. Throughout 2021 we discovered that customers specifically sought our testing solution because it was and continues to be unique in the market.  We provide the only solution in the market for immediate PCR-quality test results at the POC and at home in a single-use self-contained and fully disposable form factor.  

We believe these customers will be durable, repeat long-term customers of our testing solutions because of their need for accuracy, immediacy, and portability of COVID-19 testing.  In the future we expect their needs will

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evolve into a combined COVID-19/flu PCR-quality test.  We believe these durable customers fall into four customer segments: (1) U.S. healthcare systems and providers; (2) business and governments; (3) self-directed consumers in the home; and (4) international customers with local market needs.

To achieve our commercial objectives, we are focusing on the following business strategies:

 

Continuing to expand our commercial organization with top talent lead by our Chief Revenue Officer who has responsibility for our commercial organization including the direct sales, marketing, and customer experience teams.  

 

Increasing manufacturing capacity to meet outsized and continued customer demand.

 

Leveraging the demand we saw in 2021 for decentralized and immediate PCR-quality COVID-19 testing into the long-term leading solution in the market for early and accurate detection of COVID-19 at the POC and at-home.

 

Driving the adoption of our current test kit and digital LUCI Pass solutions through direct sales and marketing efforts.

 

Entering into key distribution arrangements in the United States to drive sales to larger health care systems and IDNs who specifically require our PCR-quality decentralized solution to facilitate mandatory day of surgery COVID-19 testing, high risk emergency surgeries and testing at POC to drive patient treatment decisions.

 

Cultivating distributor arrangements, educating and leveraging these distributors to develop our “test to treat” model in their local markets.

 

Transitioning our larger customers from ordering “as needed” to engaging in longer term contracts that specify purchases requirements up to 12 months.

 

Continue to develop the market for lab quality, at-home or POC testing that was reinforced during the COVID-19 pandemic in preparation for the development of new test kits.

U.S. Healthcare

We believe our market advantage with the U.S. healthcare customer segment is a result of our PCR-quality reliability combined with decentralized immediacy of diagnosis.  This permits our healthcare customers to use our test kit to drive treatment decisions in a manner that antigen tests and PCR tests at the central lab cannot.  For this reason, we have become the solution of choice for certain telehealth platforms and providers who are able to confirm diagnosis immediately and over a telehealth platform to drive treatment.  We believe we will continue to be the solution of choice for telehealth and in office physician groups as new COVID-19 therapeutics become more widely available and require the earliest accurate diagnosis.  

Likewise, we believe we have become a preferred solution for pre-surgery COVID-19 testing as surgery generally cannot proceed with confirmed infection.  Such pre-surgery testing is likely to continue as COVID-19 becomes endemic.  Accordingly, IDNs, surgery centers, emergency rooms and urgent care centers rely on our differentiated and flexible testing solution to provide PCR-quality results without relying on large equipment or a reader to meet pre-surgery testing needs.

We believe our decentralized PCR-quality solution also meets the following long-term healthcare provider needs:

 

Enables PCR-quality testing in remote areas such rural hospital networks and IDNs.

 

Solves need for surge capacity testing without investments in or anchors to durable equipment.

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Serves as a PCR-quality trusted testing solution for healthcare system employers.

 

Provides a differentiated testing pathway for high-risk patient populations.

The urgency of COVID-19 has accelerated our sales organization’s ability to build relationships with providers in the U.S. healthcare system. These efforts create a foundation for new products we plan to introduce including the COVID-19/flu combo test, which is currently undergoing validation and clinical studies. We believe that COVID-19 has changed physician and patient attitudes towards diagnostic testing and that in the future, both groups will expect to test before treating influenza-like illness.  

We plan to drive adoption of our solutions by U.S. healthcare providers through our direct sales professionals, distribution partners, promotion of our test kits and our online prescription store, creating awareness through our key opinion leader advisory panel, and through additional direct marketing efforts by our sales and marketing team.  

U.S. Business to Business and Government  

After receiving EUA authorization for our OTC test kit in the United States, we began selling our tests to both employers and government organizations and refer to this as our business-to-business segment. This customer segment tends to operate in industries with highly compensated and skilled workers.  Frequently these business customers employ sophisticated medical or health officers focused exclusively on maintaining a healthy work environment for their elite workforce. These business customers tend to employ an infrastructure that focuses on employee and workplace health continuously and independent of the COVID-19 pandemic. We believe these businesses will continue to appreciate the ongoing need for testing because their infrastructure appreciates that employees will continue to present with flu-like symptoms and diagnostics will be needed to differentiate infection for the health of the employee and the business. Business sectors that employ this type of employee health infrastructure include technology, financial services, entertainment and professional sports. Our tests have facilitated back to work strategies despite the lack of any government driven regulation requiring testing of any kind.  

We believe these sophisticated business segment customers select our PCR-quality test kits after a deliberate and highly informed decision process.  They continue to choose our solution because antigen and central lab testing does not meet their need for accuracy and on-the-spot results.  We believe their appetite for our solution will continue after the COVID-19 pandemic becomes endemic because of their need to keep their highly skilled workforce in the workplace and to keep their businesses running at maximum efficiency. We believe that our business customers in this stratum are well positioned to seek long term supplies of our combo COVID/flu test, which is currently undergoing validation and clinical studies.  

We employ a direct sales force to target and maintain these business customer relationships.  Additionally, we may partner with certain business customers to offer our test kits to their employees through direct marketing campaigns in partnership with their employer who is our business customer.    

Additionally, several sophisticated governmental organizations with operational similarities to elite business have sought our differentiated solutions.  We service these governments with strategies similar to our business customers and believe their demand will be durable for the same reasons as our business customers.  

Direct to Consumer

 

Our direct-to-consumer, or DTC sales and marketing team sells our OTC test kits directly to the individual consumer through our website, through Amazon and through our value-added reseller partners. Our online platforms offer fast delivery, in most cases next day. We believe that our individual customers primarily chose our test kits in 2021 to confirm negative diagnosis. In 2022 and beyond, we believe our direct consumer sales will be driven by consumer desire to test for the purpose of seeking treatment. Through our direct marketing campaigns via online, email and social media, we plan to continue to make consumers aware of our ability to identify infection earlier than antigen testing with trusted PCR-quality results. In addition, our value-added reseller partners offer our test kit on

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their online platforms and in certain cases offer proctoring services as well. We believe this channel will help create a new “test to treat” market that will evolve from the “test to confirm negative result” paradigm.

 

Apart from more widely based social media driven marketing campaigns, our LUCI PASS digital solution has a growing database of past users introduced to our test kit platform from our healthcare, business and government customers.  Our sales and marketing team plan to continue to develop directed marketing communications to these past users in a compliant manner, sometimes in collaboration with our institutional customers.

International

In 2021, we sold tests into Canada, Taiwan, Singapore, and Israel. During 2022, and in future years we expect to incrementally add new countries and regions, if and when we receive regulatory approval. There are three components of these approvals that we are working towards including non-emergency approval, and the ability to promote our tests as a PCR-equivalent.  

In these international regions, we plan to continue to deploy our strategy of leveraging distributors.  We believe that selecting, managing and educating distributors will cultivate a market reflecting our U.S. success.  We plan to do so while leveraging local distributors’ knowledge and customer relationships to address the specialized needs found in widely varying international locales. Local and regional international distributors will be supported by sales and marketing managers hired in geographic proximity to our distributors.  We plan to select and establish long term distribution agreements with local experts to drive the emerging test to treat paradigm our technology allows.  All while enabling local distributors to innovate methods for accessing their particular local market needs.  

We may not be able to meet all the demand for each new market we enter.  Where possible we plan to establish travel and healthcare use cases with major customers first, then expand to other users and customer segments over time.

 

Clinical Performance and Data

Our Robust Clinical Data

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. This clinical trial was initiated in September 2020 and supported our first EUA. The Hologic Panther Fusion is a high sensitivity molecular assay due to its low LoD as labeled in its EUA. In this clinical trial, we collected samples from 101 individuals, 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 individuals 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 individuals 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

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

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 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

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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)

 

 

 

 

 

 

 

 

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

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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 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.

 

Cleveland Clinic Clinical Trial

We sponsored a study with Cleveland Clinic Florida from August 2020 to April 2021. The criteria for participation in the study included: 1) 18 years of age or older; 2) COVID-19 symptomatic subjects currently experiencing fever of 100 degrees or higher or self-reports of having fever in the past 48 hours and currently experiencing at least one additional associated CDC COVID-19 symptom or previously tested positive for COVID-19; and 3) willingness to try COVID-19 test and self-collect nasal swab samples in both nostrils. A total of 97 subjects were enrolled and completed the study, of which, 90 subjects’ samples were analyzed as there was CDC comparator data available for 90 subjects.

The Cleveland Clinic Clinical Trial was completed and results reported in October 2021. The primary objective of the study was to confirm our COVID-19 All-in One test kit provides similar performance to a central lab-based FDA EUA molecular diagnostic RT-PCR assay with known high sensitivity. In the study, our COVID-19 test kit results were compared to the CDC 2019-nCoV Real-Time RT-PCR Diagnostic Panel Assay with the final results summarized in the following:

 

 

Comparators

 

Our COVID-19 Test Kit

Positive

Negative

Total

 

Positive

58

1

59

 

Negative

2

29

31

 

Total

60

30

90

 

Positive Percent Agreement (PPA)

 

 

97%

 

Negative Percent Agreement (NPA)

 

 

97%

 

The secondary objective was to demonstrate our COVID-19 test kit is suitable for patient use and does not require a health care professional to administer. The following summarizes the post-testing survey results from the 97 subjects enrolled in the study:

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100% of subjects reported that their overall experience was easier or about what they expected;

 

100% of subjects reported that the swab ease of use and instructions of use were easier or about what they expected;

 

93% of subjects reported that the overall instructions were extremely or very clear and understandable, 6% expressed somewhat clear and understandable;

 

96% of subjects reported that they were very or extremely likely to stay home to avoid spreading COVID-19 to others if they knew they were infectious; and

 

99% of subjects reported that it was important for them that an at-home COVID-19 test kit be made available.

 

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 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.

 

 

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(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.

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.

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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.

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

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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 our 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 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.

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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 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. In 2021 we partnered with Jabil to enable significant manufacturing expansion and scale up including in the Dominican Republic. 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 started to see increased scale due to our 2021 efforts with Jabil. We continue to investigate opportunities to enhance manufacturing capacity and efficiency to align with anticipated demand.

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. We continuously assess 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 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, we have developed LUCI PASS as referenced above, and is designed to allow users to easily receive a verified test result 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. Further, beginning January 15, 2022, pursuant to guidance issued by the Biden administration, health plans are required to provide coverage for at-home COVID-19 testing

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during the public health emergency without imposing any cost-sharing requirements (including deductibles, copayments, and coinsurance), prior authorization, or other medical management requirements. Medicare beneficiaries will be eligible for free at home COVID-19 testing in the spring of 2022.

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.

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.  We plan to continue to compete with testing solutions provided by centralized labs for COVID-19 and influenza. Large lab companies like Quest Diagnostics, Inc. and Laboratory Corporation of America have also expanded beyond centralized laboratory testing into home sample collection. We also will face competition from POC testing solutions, whether for influenza, COVID-19 or a combination.  In the at-home setting, we will face continued competition from COVID-19 antigen tests because they are rapid and are already in use across the United States and internationally.  We are not yet aware of any at-home influenza test, or COVID-19/flu combo test, whether molecular or antigen.  However, we believe such tests are under development. Finally, we face competition from companies focused on developing and commercializing molecular testing in the home.  These companies include Cue Health, Inc. and Detect, Inc., which have both received EUA for molecular COVID-19 testing (POC and at-home).  We face potential competition from many other sources, including academic institutions, public and private research institutions and governmental agencies. As of February 18, 2022, 420 tests and sample collection devices were authorized by the FDA under EUAs, including EUAs for 15 antigen OTC at-home tests and 3 molecular OTC at-home tests.

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, which solutions may be relevant diagnostic

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testing for other infectious disease states. 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 provide faster time to results, are 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 7, 2022, we owned seven issued U.S. utility patents, nine pending U.S. utility patent applications, ten issued foreign patents and 44 pending foreign patent applications. Our molecular diagnostic platform is covered by six 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 nine 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 application, if issued into patents, are anticipated to naturally expire between 2035 and 2041, 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 7, 2022, we owned two issued U.S. design patents, two allowed U.S. design patent applications, one pending U.S. design patent application, 32 foreign design registrations, and two pending foreign design applications. Our issued U.S. design patents, allowed U.S. design patent applications, 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.

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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 12, 2022, we own two U.S. trademark registrations, two allowed intent-to-use US trademark applications, one pending trademark application in Canada, and two international registrations through the Madrid Protocol in New Zealand and Hong Kong. . 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, 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 loop-mediated isothermal amplification, or 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 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 April 2021, we paid the first installment of the world-wide license in the amount of $9 thousand. The second installment for the

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world-wide license of $9 thousand was paid in July 2021. 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 an upfront payment to Eiken of $23,778. We also made an additional payment in July 2021 for $24,141(based on the December 31, 2020 conversion ratio of 103.56 yen to one U.S. dollar). In addition, we are obligated to pay a royalty in the low single-digit percentage on total net sales of all Licensed Products.

On March 8, 2022, we provided notice of termination of the Eiken Agreement. Termination will be effective May 12, 2022. We terminated the Eiken Agreement because certain Eiken Licensed Patents have expired, all of which are locations in which we operate. Following termination of the Eiken Agreement, we will not be required to make any future royalty payments under the Eiken Agreement.

Distribution Agreement with Switch

On July 14, 2021, we entered into a Distribution Agreement with Switch, which agreement was subsequently amended, or the Distribution Amendment, on December 21, 2021.  Under the Distribution Agreement, we appointed Switch as a non-exclusive distributor for our CHECK IT test kit in Canada and agreed to provide more than two million test kits in 2022.  

Under the Distribution Agreement, Switch is required to provide us with forecasts of the quantity of test kits that Switch expects to order for each of the coming 12 calendar months through December 2022 and each six-month period following December 2022, each, a Rolling Forecast.  For each calendar month in the Rolling Forecast, Switch is required to purchase at least the quantity of test kits set forth in the Rolling Forecast for such month.

If we fail to fulfill the quantity of test kits set forth in any part of the Rolling Forecast for which Switch submits a purchase order(s), then Switch will not be required to purchase the remaining quantity of test kits set forth in the Rolling Forecast.  If Switch fails to purchase the quantity of test kits in any month, or in the aggregate for the 12-month period, in each case as set forth in the Rolling Forecast, then Switch is liable to us for a low double-digit percentage of the total price applicable to the quantity of test kits set forth in the Rolling Forecast for the two months following such failure by Switch.  

The Distribution Agreement is for a one-year term and either party has the right to renew the Distribution Agreement for successive periods of one-year each by providing written notice to the other party prior to the expiration of the current term. Either party may terminate the Distribution Agreement (a) for uncured material breach by the other party, (b) if the other party enters into insolvency or bankruptcy or a trustee or receiver or the equivalent is appointed for the other party or proceedings are instituted against the other party relating to dissolution, liquidation, winding up, bankruptcy, insolvency, etc. or (c) for convenience upon 30 days’ notice to the other party. Additionally, either party may terminate immediately upon written notice if a regulatory or governmental agency or court takes action the result of which would prohibit or significantly restrict the sale, distribution, use or manufacture of the test kits in accordance with the Distribution Agreement.

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 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.

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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 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.

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, as periodically updated thereafter.

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.

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) 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

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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.

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 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.

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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.

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.

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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.

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

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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 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;

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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 and Other Privacy Laws

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 collectively 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” and their covered subcontractors 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 data 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. Additionally, we are subject to other data privacy and security obligations, including federal, state, local, and foreign laws, regulations, guidance, and industry standards related to data privacy and security. Such obligations may include the Federal Trade Commission Act, the California Consumer Privacy Act of 2018, or the CCPA, the Canadian Personal Data Protection and Electronic Documents Act, and the Payment Card Industry Data Security Standard, or PCI DSS. In addition, states within the United States have enacted or proposed data privacy laws. For example, Virginia passed the Consumer Data Protection Act and Colorado passed the Colorado Privacy Act. 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. In addition, it is anticipated that the California Privacy Rights Act of 2020, or the CPRA, effective January 1, 2023, will expand the CCPA. 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 data 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, or its 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

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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. Federal, state, local, and foreign data privacy and security obligations 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.

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.

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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.

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, which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, other healthcare professionals (such as physicians assistants and nurse practitioners), which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, other healthcare professionals (such as physicians assistants and nurse practitioners), and teaching hospitals, and requires applicable manufacturers to report annually ownership and investment interests held by physicians and their immediate family members. 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

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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.

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

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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 executive, judicial and Congressional challenges to 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 June 17, 2021 the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the Affordable Care Act will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the Affordable Care Act marketplace. The executive order also instructed 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 Affordable Care Act. It is possible that the Affordable Care Act will be subject to judicial or Congressional challenges in the future. It is unclear how any such challenges 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 2031 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, 2022. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. 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.

Various new healthcare reform proposals are emerging at the federal and state level, and additional legislative measures to address the COVID-19 pandemic are expected. For example, beginning January 15, 2022, pursuant to guidance issued by the Biden administration, health plans are required to provide coverage for at-home COVID-19 testing during the public health emergency without imposing any cost-sharing requirements (including deductibles, copayments, and coinsurance), prior authorization, or other medical management requirements. Medicare beneficiaries will be eligible for free at home COVID-19 testing in the spring of 2022. 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, 2021, we had 141 full-time employees and 113 contractors. Our employees are primarily located throughout 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,

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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. In July 2021, we leased an additional 13,267 square feet of office, research and development space in Emeryville, California pursuant to a lease agreement that expires in June 2024. In August 2021, we leased an additional 14,835 square feet of office and laboratory space in San Jose, California which serves as our quality headquarters. Pursuant to the same lease agreement, in December 2021, we leased additional square feet of office and laboratory space in San Jose, California. In March 2022, we leased an 82,000 square foot facility in Vista, California for office, development, research and laboratory space and expect to assume full occupancy by August 2022 after completing tenant improvements. 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 2020, 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, and you should not consider information on our website to be part of this Annual Report.

“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 are our property. Trade names, trademarks and service marks of other companies appearing in this Annual Report 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 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 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 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 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, 2021 and 2020, we incurred a net loss of $64.8 million and $37.3 million, respectively. We may incur additional losses and increased operating expenses in future periods. As of December 31, 2021, we had an accumulated deficit of $128.5 million. To

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date, we have financed our operations principally from sales of our COVID-19 test kit, issuance and sale of our common stock through our 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 rapidly developing and changing 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 rapidly developing and changing, 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 developing and 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 or similar foreign agency revokes our existing EUAs or similar foreign authorization 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;

 

unanticipated manufacturing delays and quality control issues;

 

our ability to control costs, including our operating expenses;

 

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;

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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 efficacious vaccines or treatments for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not substantially grow. Currently there are companies developing vaccines and therapeutic treatments for COVID-19, and there are currently three COVID-10 vaccines authorized for emergency use or FDA-approved. 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 received EUAs from the FDA for our COVID-19 test kit. If the FDA revokes or terminates our EUA, 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. On April 9, 2021, we received an EUA from the FDA for our COVID-19 test kit for OTC non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged two to 13 (with parent collection). On June 30, 2021, we withdrew our pending EUA application with the FDA that was intended to expand our current prescription EUA for suspected symptomatic individuals to include asymptomatic individuals because we decided to refocus on an FDA 510(k) submission. Although we intend to pursue an FDA 510(k) submission for this test kit, we may be compelled to instead pursue an EUA. In the event that we need to pursue an EUA, the FDA may require additional data, including additional validation data and clinical performance data, and may not ultimately issue an authorization to expand our POC indication. 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

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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 EUAs limit our market opportunities and restrict how we can commercialize our COVID-19 test kit. For example, according to our authorized EUAs, 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 EUAs. The termination or revocation of our existing EUAs 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.

We are allocating the majority 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 most 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, to date we have submitted and received EUAs only for our COVID-19 test kit and in July 2021, we entered into a distribution agreement with Switch. This resource allocation may negatively impact the development of our combination COVID-19 and 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 manufacturing and commercialization of our combination COVID-19 and 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 and internationally, 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;

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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 five notable SARS-CoV-2 variants in the U.K., South Africa, India, Japan and Brazil, and two variants in Peru and Columbia; Omicron has been detected in multiple countries;

 

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 EUAs 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 is dependent upon consumers, physicians and healthcare providers adopting our test kit, which will be informed, in part, by the cost, 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.

The CDC has highlighted the emergence of four notable SARS-CoV-2 variants of concern: Alpha (also known as B.1.1.7) first detected in the U.K., Beta (also known as B.1.351, B.1.351.2, B.1.351.3) first detected in South Africa, Delta (also known as B.1.617.2,AY.1, AY.2, AY.3) first detected in India, Gamma (also known as P.1, P.1.1, P.1.2) first detected in Japan/Brazil and Omicron (also known as B.1.1.529) first detected in multiple countries. Additionally, two variants of interest have been identified to be rising in prevalence: Lambda (also known as C.37) first detected in Peru and Mu (also known as B.1.621) first detected in Columbia. 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 variants are reactive to our COVID-19 test kit. Our assay targets two non-overlapping regions of the N gene, therefore the detection region is unaffected by the mutations of the spike protein of SARS-CoV-2 in the variant strains. As these particular viral strains become commercially available for testing, we intend to perform testing to confirm detection with these strains.

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 five 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. 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;

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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 cost, 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;

 

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 or recalls. 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 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 revenue 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

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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, reliability 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. 

If we are unable to expand our marketing infrastructure, we may fail to increase customer adoption of our test kits to meet our forecasts.

We launched direct-to-consumer sales through our website after we received an EUA from the FDA for OTC use of our COVID-19 test kit in April 2021. Additionally, our COVID-19 test kit was made available on Amazon.com in May 2021. As a result, we have only limited experience marketing our offerings and engaging customers at our current scale. Furthermore, late in the second quarter of 2021, we temporarily halted online sales of our LUCIRA CHECK IT test kit as we prioritized distribution to our partnerships. We reactivated online ordering again via our website in October 2021. We plan to derive a meaningful portion of our revenue from consumer purchases of our COVID-19 test kit. Our ability to expand direct-to-consumer sales and drive broad customer adoption of our test kits is integral to our business. Our financial condition and results of operations are and will continue to be highly dependent on the ability of our marketing function to adequately promote, market, and attract customers to our test kits in a manner that complies with applicable laws and regulations.

A key element of our business strategy is the continued expansion of our marketing infrastructure and building brand awareness. As we increase our marketing efforts in connection with the expansion of our OTC COVID-19 test kit sales, we will need to further expand the reach of our marketing networks. Our future success will depend largely on our ability to continue to hire, train, retain, and motivate a skilled marketing workforce with significant industry-specific knowledge in various areas, including direct-to-consumer business models, e-commerce, technology, healthcare, and the regulatory restrictions related thereto, as well as the competitive landscape for our test kits.

If we are unable to expand our marketing capabilities, we may not be able to effectively attract customers. Relatedly, if any of our marketing platforms significantly increase their advertising fees, our ability to expand our marketing reach will be greatly impeded. Any such failure could adversely affect our reputation, revenue, and results of operations.

Direct-to-consumer marketing and social media efforts may expose us to additional regulatory scrutiny, including from the Federal Trade Commission, or FTC, and other consumer protection agencies and regulators.

In addition to the laws and regulations enforced by the FDA, advertising for non-restricted medical devices is subject to federal truth-in-advertising laws enforced by the FTC, as well as comparable state consumer protection laws. Our efforts to promote our prescription and OTC test kits via direct-to-consumer marketing and social media initiatives may subject us to additional scrutiny of our practices. For example, the FTC and other consumer protection agencies scrutinize all forms of advertising (whether in digital or traditional formats) for consumer-directed products and non-restricted medical devices to ensure that advertisers are not making false, misleading or unsubstantiated claims or failing to disclose material relationships between the advertiser and its products’ endorsers, among other potential issues.

Under the Federal Trade Commission Act, or FTC Act, the FTC is empowered, among other things, to (a) prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; and (c) gather and compile information

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and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce. The FTC has very broad enforcement authority, and failure to abide by the substantive requirements of the FTC Act and other consumer protection laws can result in administrative or judicial penalties, including civil penalties, injunctions affecting the manner in which we would be able to market services or products in the future, or criminal prosecution. We plan to increase our advertising activities that may be subject to these federal and state truth-in-advertising laws. Any actual or perceived non-compliance with those laws could lead to an investigation by the FTC or a comparable state agency, or could lead to allegations of misleading advertising by private plaintiffs. Any such action against us would disrupt our business operations, cause damage to our reputation, and result in a material adverse effect on our business.

We 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 manufacturing and distribution of our COVID-19 test kit and development and launch of 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 commercially launched 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 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, including manufacturing challenges and delays and partner product recalls. If we encounter additional 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 identified a material weakness in our internal control over financial reporting and may identify material weaknesses in the future or otherwise fail to maintain proper and effective internal controls, which may impair our ability to produce accurate financial statements on a timely basis.

During the preparation of our financial statements for the year ended December 31, 2021, we identified a material weakness in internal control over financial reporting related to the lack of sufficiently designed and implemented controls and procedures to ensure the accuracy of costing and valuation of inventory, appropriate classification of write-offs and consistent reconciliation of inventory balances at various locations. During this period, we did not have a sufficient complement of personnel within the accounting function adequately conducting review and analysis of certain transactions in connection with our commercialization and related to scaling of our commercial sales during the year ended December 31, 2021.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. This material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. We have begun the process to remediate the material weakness which includes, but is not limited to the following (i) enhancing existing controls around effective review to prevent and timely detect misstatements to be more aligned with our continued growth for improved accuracy of inventory valuation; (ii) designing of additional controls and enhancement of documentation of procedures and policies to ensure a more methodical completion of account reconciliations and verification of the completeness and accuracy of data used to assess the quantity and valuation of inventory; and (iii) hiring, retaining, and training of personnel with appropriate technical accounting, cost accounting and financial reporting expertise in inventory management during the first quarter of 2022, with the focus of implementing a sustainable internal control structure.

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We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, 2021, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This requires that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to our IPO, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We may discover additional weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

The measures we have taken to date, and actions we may take in the future, may not be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or to prevent or avoid potential future material weaknesses. We may not have identified all material weaknesses. Moreover, our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods, which could cause the price of our common stock to decline. In addition, if we are not able to continue to meet these requirements, we may not be able to remain listed on Nasdaq.

We rely substantially on Jabil for the manufacturing, quality-testing, and assembly of our COVID-19 test kit and on Switch as a significant customer. Any termination or loss of significant rights under the Jabil MSA or Switch Distribution Agreement 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, and assembly of our COVID-19 test kit.

Pursuant to the Jabil MSA, Jabil has agreed to manufacture, test and pack 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.

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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 test kit production and sales. 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, we have in the past and may in the future experience manufacturing delays as a result of disputes with Jabil or otherwise; the supply of our COVID-19 test kit could be harmed as a result.

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 facility located in the Dominican Republic. We have closed our manufacturing facility in Michigan and are in the process of transferring the manufacturing equipment to another facility; however, we may not be able to execute such a plan, and such a plan may not proceed as expected. In order to achieve our near-term and long-term operational and financial plans, we need to substantially increase the manufacturing 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. 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.

We also rely substantially on Switch as a significant customer. On July 14, 2021, we entered into a Distribution Agreement with Switch, which agreement was subsequently amended, or the Distribution Amendment, on December 21, 2021. Under the Distribution Agreement, we appointed Switch as a non-exclusive distributor for our CHECK IT test kit in Canada and agreed to provide more than two million test kits in 2022.

Under the Distribution Agreement, Switch is required to provide us with forecasts of the quantity of test kits that Switch expects to order for each of the coming 12 calendar months through December 2022 and each six-month period following December 2022, each, a Rolling Forecast. For each calendar month in the Rolling Forecast, Switch is required to purchase at least the quantity of test kits set forth in the Rolling Forecast for such month.

If we fail to fulfill the quantity of test kits set forth in any part of the Rolling Forecast for which Switch submits a purchase order(s), then Switch will not be required to purchase the remaining quantity of test kits set forth in the Rolling Forecast. If Switch fails to purchase the quantity of test kits in any month, or in the aggregate for the 12-month period, in each case as set forth in the Rolling Forecast, then Switch is liable to us for a low double-digit

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percentage of the total price applicable to the quantity of test kits set forth in the Rolling Forecast for the two months following such failure by Switch.

The Distribution Agreement is for a one-year term and either party has the right to renew the Distribution Agreement for successive periods of one-year each by providing written notice to the other party prior to the expiration of the current term. Either party may terminate the Distribution Agreement (a) for uncured material breach by the other party, (b) if the other party enters into insolvency or bankruptcy or a trustee or receiver or the equivalent is appointed for the other party or proceedings are instituted against the other party relating to dissolution, liquidation, winding up, bankruptcy, insolvency, etc. or (c) for convenience upon 30 days’ notice to the other party. Additionally, either party may terminate immediately upon written notice if a regulatory or governmental agency or court takes action the result of which would prohibit or significantly restrict the sale, distribution, use or manufacture of the test kits in accordance with the Distribution Agreement.

The loss of a large customer, like Switch, a significant reduction in purchases by them, or any difficulties in collecting accounts receivable could harm our financial condition and results of operations. If Switch becomes subject to bankruptcy, is unable to pay us for our product or is acquired by a company that wants to terminate the relationship with us, or if we otherwise lose Switch as a customer, our revenue, results of operations and cash flows would be adversely affected. While we believe we could replace the loss of a significant customer like Switch, such transition may result in a decline in our revenue, results of operations and cash flows.

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 updated 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 key opinion leaders, or 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, POC and OTC tests) as well as antigen and antibody tests. We plan to continue to compete with testing solutions provided by centralized labs for COVID-19 and influenza. Large lab companies like Quest Diagnostics, Inc. and Laboratory Corporation of America have also expanded beyond centralized laboratory testing into home sample collection. We also will face competition from POC testing

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solutions, whether for influenza, COVID-19 or in combination. In the at-home setting, we will face continued competition from COVID-19 antigen tests because they are rapid and are already in use across the United States and internationally. We are not yet aware of any at-home influenza test, or COVID-19/flu combo test, whether molecular or antigen. However, we believe such tests are under development. Finally, we face competition from companies focused on developing and commercializing molecular testing in the home. These companies include Cue Health, Inc. and Detect, Inc., which have both received EUA for molecular COVID-19 testing (POC and at-home). We face potential competition from many other sources, including academic institutions, public and private research institutions and governmental agencies.

We could see a significant reduction or elimination of our commercial opportunity if our competitors develop and commercialize products that provide faster time to results, are 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, or in meeting consumer demand, which could harm our operations results and financial condition.

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. For example, as of February 18, 2022, 420 tests and sample collection devices were authorized by the FDA under EUAs, including EUAs for 15 antigen OTC at-home tests and 3 molecular OTC at-home tests.

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 harm our business, financial condition and reputation.

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.

The production and widely administered use of efficacious vaccines or treatments for COVID-19 may reduce the demand for diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not be sustained or substantially grow.

Currently, there are companies marketing and 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, and in August 2021 the FDA granted full approval to Pfizer’s vaccine and in January 2022 gave full approval to the Moderna vaccine. 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 grows.

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If the market fails to 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. For example, on October 8, 2021, we announced the recent recall by Copan Italia SPA of its FLOQSwabs, a component of our COVID-19 test kits identified on the label as “3 Swab,” that we distributed from April 22, 2021 through September 22, 2021. 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.

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.

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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 test kits 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 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

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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 and customers necessary for commercial success, our operating results and financial condition will be adversely affected, which may 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, 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;

 

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;

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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 and customers 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 and customer adoption necessary for commercial success, our operating results and financial condition will be adversely affected, which may 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 and customer 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 prevent or limit our ability to generate revenue and continue our business.

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, pursuant to guidance issued by the Biden administration, beginning January 15, 2022, health plans are required to provide coverage for at-home COVID-19 testing in the United States during the public health emergency without imposing any cost-sharing requirements (including deductibles, copayments, and coinsurance), prior authorization, or other medical management requirements. However, the guidance is subject to change.

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Medicare beneficiaries will be eligible for free at home COVID-19 testing in the spring of 2022. 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, competitive products or the current status and severity of COVID-19 and influenza;

 

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;

 

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

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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. 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, 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 and meet 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 may 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. Demand has exceeded supply for our COVID-19 test kits, and late in the second quarter of 2021, we temporarily halted online sales of our LUCIRA CHECK IT test kit as we prioritized distribution to our partnerships, which could result in damage to our reputation and customer relationships. We reactivated online ordering again via our website in October 2021. 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 and in the Dominican Republic, however we have closed our manufacturing facility in Michigan and are in the process of transferring the manufacturing equipment to another facility. 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

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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.

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.

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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 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, 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 specify 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

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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.

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.

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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, 2021, we had 141 full-time employees and 113 contractors . As our sales and marketing strategies develop, we expect to need additional managerial, 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 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.

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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;

 

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.

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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 a derivative of the CDC’s estimate of symptomatic influenza cases for prior influenza seasons. 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.

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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.

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.

For example, on October 8, 2021, we announced the recent recall by Copan Italia SPA of its FLOQSwabs, a component of our COVID-19 test kits identified on the label as “3 Swab,” that we distributed from April 22, 2021 through September 22, 2021. 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, 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;

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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 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 have impacted and can in the future seriously harm our 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, geopolitical tensions and conflicts worldwide, and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. Our ability to obtain components for and maintain inventory of our test kits could be disrupted if our operations or the operations of suppliers or manufacturers 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 in the Dominican Republic. 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. Additionally, our third-party manufacturer’s ability to manufacture our test

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kits has been and could be disrupted by pandemics including the COVID-19 pandemic. COVID-19 or other business disruptions could impact us or our third-party manufacturer in the future, which could seriously harm our revenue and financial condition and increase our costs and expenses. 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.

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. Additionally, in the ordinary course of business, we and our service providers process personal data and other sensitive information, and we may share sensitive information with relevant third parties. Our and our third-party collaborator’s information technology systems may be subject to malicious code (such as viruses and works), phishing attacks, supply chain attacks, denial of service attacks (such as credential stuffing) 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. Future acquisitions could also expose us to additional cybersecurity risks and vulnerabilities from any newly acquired information technology infrastructure. 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. These threats come from a variety of sources. Threat actors, personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including cyber-attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our goods and services.

Any of the aforementioned or similar threats could cause a security incident and result in unauthorized access or damage to our or our customers’ data, as well as disablement, encryption, misuse, disclosure, modification, destruction, or loss of such data. Technological interruptions could also 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.

We may spend significant resources to endeavor to protect against, detect and/or mitigate security threats, and applicable laws or other obligations may require us to implement certain security measures. While we and our third-party partners have implemented security measures designed to protect against these threats, there can

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be no assurance that these measures will be effective. 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, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims. There can also be no assurance that the limitations of liability in our contracts would protect us from liabilities or damages if we fail to comply with applicable obligations related to information security. If we, or a third party upon whom we rely, experience a security incident, or are perceived to have experienced a security incident, it may result in: government enforcement actions (e.g., investigations, fines, penalties, audits, or inspections); additional reporting requirements and/or oversight; bans on processing personal data; orders to destroy or not use personal data; class action litigation; indemnity obligations; negative publicity and reputational harm; diversion of funds; interruptions in operations and availability of data; and financial loss. Security incidents and attending consequences may cause some customers to stop using our products, deter new customers for using our products, and negatively impact our ability to grow and operate our business.

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 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 may 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 fiscal years ended December 31, 2021 and 2020, we had net losses of $64.8 million and $37.3 million, respectively, and we may continue to incur additional losses. As of December 31, 2021, we had an accumulated deficit of $128.5 million. We may 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 commercialize 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.

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

As of December 31, 2021, we had federal and state NOL carryforwards of approximately $115.6 million and $56.2 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. 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 2022.

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, as a result of 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 EUAs for our COVID-19 test kit. The FDA may not timely grant any additional or amended EUAs, if at all. For our existing EUAs and any new or amended EUA, the FDA may 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, or LIVD, Test Code Mapping for SARS-CoV-2 Tests provided by the CDC. On April 9, 2021, we received an EUA from the FDA for our COVID-19 test kit for OTC non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged two to 13 (with parent collection).

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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 EUAs 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 EUAs 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 EUAs for our COVID-19 test kit are revoked or withdrawn, we will need to utilize other pathways to obtain marketing authorization. Our influenza test kit 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;

 

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

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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.

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;

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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 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;

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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, Health Canada, Singapore’s Health Sciences Authority 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 authorization, 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 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.

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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 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 example, On October 8, 2021, we issued a press release commenting on the recent recall by Copan Italia SPA of its FLOQSwabs, a component of our COVID-19 test kits identified on the label as “3 Swab,” that we distributed from April 22, 2021 through September 22, 2021 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.

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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 EUAs, 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 EUAs, 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 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

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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 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 data privacy and security 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, 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.

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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. Additionally, 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 imposes several obligations on covered businesses, including requiring specific disclosures related to a business’s collection, use, and sharing of personal data, new operational practices, and requirements to respond to requests from California residents related to their personal data. The CCPA contains significant potential penalties for noncompliance (up to $7,500 per violation). In addition, it is anticipated that the California Privacy Rights Act of 2020, or CPRA, effective January 1, 2023, will expand the CCPA in certain critical ways, including by establishing a new California Privacy Protection Agency to implement and enforce the new law. Other states have enacted data privacy laws. For example, Virginia recently passed its Consumer Data Protection Act, and Colorado recently passed the Colorado Privacy Act, both of which differ from the CPRA and become effective in 2023. In Canada, where we operate, we are also/may be subject to the Personal Data Protection and Electronic Documents Act, or PIPEDA, and various related provincial laws. 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. For example, we are also/may be subject to PCI DSS, a multifaceted security standard designed to protect payment card data as mandated by payment card industry entities. We may also rely on vendors to process payment card data, who may be subject to PCI DSS. 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, regulations, standards, and other obligations concerning data privacy and security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. 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 obligations is expensive and difficult. Because the interpretation and application of laws, regulations, standards and other obligations relating 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. Preparing for and attempting to comply with these obligations requires significant resources and, potentially, changes to our technologies, systems, and practices and those of any third parties that process personal data on our behalf. 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 data privacy and security 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. Additionally, any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers, collaborators, or partners; interruption or stoppage in clinical trials; inability to process personal data or operate in certain jurisdictions; limited

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ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or revision or restructuring our 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.

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 who prescribe, purchase or recommend medical devices, including discounts, providing items or services for free or engaging such people as consultants, advisors or speakers, may be subject to scrutiny if they do not fit squarely within any available exception or safe harbor and would be subject to a facts and circumstances analysis to determine compliance with the Anti-Kickback Statute. Our business may not in all cases meet all of the criteria for statutory exception or regulatory safe harbor protection from anti-kickback liability;

 

the FCA, which prohibits, among other things, persons or entities from knowingly presenting, or causing 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. 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. Actions under the FCA may be brought by the government or as a qui tam action by a private person in the name of the government. These people, sometimes known as “relators” or, more commonly, as “whistleblowers,” may share in any monetary recovery. Many medical device manufacturers have been investigated and have reached substantial financial settlements with the federal government under the FCA for a variety of alleged improper activities, including causing false claims to be submitted as a result of the marketing of

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their products for unapproved and thus non-reimbursable uses and interactions with prescribers and other customers, including those that may have affected their billing or coding practices and submission of claims to the federal government. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory monetary penalties for each false or fraudulent claim or statement. Because of the potential for large monetary exposure, healthcare and medical device companies often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages and per claim penalties that may be awarded in litigation proceedings. Settlements may require companies to enter into corporate integrity agreements with the government, which may impose substantial costs on companies to ensure compliance. Medical device manufacturers and other healthcare companies also are subject to other federal false claims laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;

 

HIPAA, which imposes criminal and civil liability for, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making a 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;

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, and their implementing regulations, also impose obligations, including mandatory contractual terms, on covered entities subject to the rule, such as health plans, healthcare clearinghouses and certain healthcare providers, as well as their business associates that perform certain services for them or on their behalf involving the use or disclosure of individually identifiable health information with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

various state laws govern the privacy and security of personal information, including the California Consumer Protection Act, or CCPA, which became effective January 1, 2020, and gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways 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 data breaches;

 

the federal Physician Payments Sunshine Act, implemented as Open Payments, requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually, with certain exceptions to CMS, information related to payments or other “transfers of value” made to physicians, as defined by such law, other healthcare providers (such as physicians assistants and nurse practitioners), and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members; and

 

analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require medical device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state beneficiary inducement laws, which are state laws that

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require medical device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

State and federal regulatory and enforcement agencies continue to actively investigate violations of healthcare laws and regulations, and the U.S. Congress continues to strengthen the arsenal of enforcement tools. Most recently, the Bipartisan Budget Act of 2018, or the BBA, increased the criminal and civil penalties that can be imposed for violating certain federal health care laws, including the Anti-Kickback Statute. Enforcement agencies also continue to pursue novel theories of liability under these laws. In particular, government agencies have increased regulatory scrutiny and enforcement activity with respect to manufacturer reimbursement support activities and patient support programs, including bringing criminal charges or civil enforcement actions under the Anti-Kickback Statute, FCA and HIPAA’s healthcare fraud and privacy provisions.

Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices of our test kits, and financial arrangements with physicians, other healthcare providers, and other customers, could be subject to challenge under one or more such laws. If an arrangement were deemed to violate the Anti-Kickback Statute, it may also subject us to violations under other fraud and abuse laws such as the federal civil FCA and civil monetary penalties laws. Moreover, such arrangements could be found to violate comparable state fraud and abuse laws.

Achieving and sustaining compliance with applicable federal and state anti-fraud and abuse laws may prove costly. If we or our employees are found to have violated any of the above laws we may be subjected to substantial criminal, civil and administrative penalties, including imprisonment, exclusion from participation in federal healthcare programs, such as Medicare and Medicaid, and significant fines, monetary penalties, forfeiture, disgorgement and damages, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action or investigation against us for the violation of these healthcare fraud and abuse laws, even if successfully defended, could result in significant legal expenses and could divert our management’s attention from the operation of our business. Companies settling FCA, Anti-Kickback Statute or civil monetary penalties law cases also may enter into a Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General, or the OIG, in order to avoid exclusion from participation (such as loss of coverage for their products) in federal healthcare programs such as Medicare and Medicaid. Corporate Integrity Agreements typically impose substantial costs on companies to ensure compliance. Defending against any such actions can be costly, time-consuming and may require significant personnel resources, and may harm our business, financial condition and results of operations.

In addition, the medical device industry’s relationship with physicians is under increasing scrutiny by the OIG, the U.S. Department of Justice, or the DOJ, the state attorney generals and other foreign and domestic government agencies. Our failure to comply with requirements governing the industry’s relationships with physicians or an investigation into our compliance by the OIG, the DOJ, state attorney generals and other government agencies, could harm our business, financial condition and results of operations.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could harm our business, financial condition and results of operations.

We are exposed to the risk that our employees, independent contractors, consultants, commercial partners, distributors and vendors may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or disclosure of unauthorized activities to us that violates: (1) the laws of the FDA and other similar regulatory bodies, including those laws requiring the reporting of true, complete and accurate information to such regulators, (2) manufacturing standards, (3) healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws, or (4) laws that require the true, complete and accurate reporting of financial information or data. These laws may impact, among other things, future sales,

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marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commissions, certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials.

In connection with our recent initial public offering, we adopted a code of business conduct and ethics that applies to our directors, officers and employees, 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 these activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, disgorgement, imprisonment, additional integrity reporting and oversight obligations, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against any such actions or investigations, we could incur substantial costs, including legal fees and reputational harm, and divert the attention of management in defending ourselves against any of these claims or investigations, which could harm our business, financial condition and results of operations.

Healthcare reform initiatives and other administrative and legislative proposals may harm our business, financial condition, results of operations and cash flows in our key markets.

There have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control or manage the increased costs of healthcare and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our test kits or the coverage and reimbursement available for our test kits and could limit the acceptance and availability of our test kits. The adoption of proposals to control costs could harm our business, financial condition and results of operations.

Since the start of the COVID-19 pandemic, Congress has passed several bills addressing coverage and payment for COVID-19 diagnostic tests and related services, including mandates for coverage and payment of certain tests. Further federal legislative action to address the ongoing pandemic is expected. Future legislation may change current laws to adversely affect coverage and reimbursement of our test kits, which could harm our business.

For example, in the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together, the Affordable Care Act or the ACA, was a sweeping measure that expanded healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and people, the provision of subsidies to eligible people enrolled in plans offered on the health insurance exchanges and the expansion of the Medicaid program.

There have been executive, judicial and Congressional challenges to certain aspects of the ACA. For example, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Act includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain people who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” In addition, the Further Consolidated Appropriations Act of 2020 permanently eliminates, effective January 1, 2020, the ACA-mandated medical device tax and the “Cadillac” tax on high-cost employer-sponsored health coverage and, effective January 1, 2021, also eliminates the annual fee imposed on certain health insurance providers based on market share. On June 17, 2021, the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021, President

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Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed 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 possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how such challenges and the healthcare reform measures of the Biden administration will affect the ACA and our business.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, includes reductions to Medicare 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 2031 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2022. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare 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.

Further, Congress is considering additional health reform measures. Future federal or state legislative or administrative changes may harm our business and financial results, and we cannot predict how future healthcare reform measures will affect our business.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may harm:

 

our ability to set a price that we believe is fair for our test kits, once approved;

 

our ability to generate revenue and achieve or maintain profitability; and

 

the availability of capital.

Various new healthcare reform proposals are emerging at the federal and state level, and additional legislative measures to address the COVID-19 pandemic are expected. For example, beginning January 15, 2022, pursuant to guidance issued by the Biden administration, health plans are required to provide coverage for at-home COVID-19 testing during the public health emergency without imposing any cost-sharing requirements (including deductibles, copayments, and coinsurance), prior authorization, or other medical management requirements. Medicare beneficiaries will be eligible for free at home COVID-19 testing in the spring of 2022. Any new federal and state healthcare initiatives that may be adopted could limit the amounts that federal and state governments will pay for healthcare products and services, and could harm our business, financial condition and results of operations.

Our operations involve hazardous materials and we and third parties with whom we contract must comply with environmental laws and regulations, which can be expensive and restrict how we do business, and could expose us to liability if our use of such hazardous materials causes injury.

Our manufacturing processes currently require the controlled use of potentially harmful chemicals. We cannot eliminate the risk of accidental contamination or injury to contracted employees from offshore or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could negatively impact our reputation, financial condition, results of operations and cash flows. In the event of an accident or if we otherwise fail to comply

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with applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.

In addition, because our test kit contains electronic components and batteries which are purchased from third-party vendors, we may be required under rules promulgated by the SEC governing disclosure of the use of “conflict minerals” (tin, tungsten, tantalum and gold) to determine whether those minerals are necessary to the functionality or production of our test kits and, if so, conduct a country of origin inquiry with respect to all such minerals. If any such minerals may have originated in the Democratic Republic of the Congo, or DRC, or any of its adjoining countries, or covered countries, then we must conduct diligence on the source and chain of custody of those conflict minerals to determine if they originated in one of the covered countries and, if so, whether they financed or benefited armed groups in the covered countries. Disclosures relating to the products that may contain conflict minerals, the country of origin of those minerals and whether they are “DRC conflict free” must be provided in a Form SD (and accompanying conflict minerals report, if required, to disclose the diligence undertaken by us in sourcing the minerals and our conclusions relating to such diligence). If we are required to submit a conflict minerals report, that report must be audited by an independent auditor pursuant to existing government auditing standards. Compliance with this disclosure rule may be very time-consuming for our management and personnel (as well as time-consuming for our suppliers) and could involve the expenditure of significant amounts of money by us and them. Disclosures mandated by this rule, which can be perceived by the market to be “negative,” may cause customers to refuse to purchase our test kits. The cost of compliance with the rule could adversely affect our results of operations.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent or other intellectual property protection for any test kits we develop or for our platform, or if the scope of the patent and other intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize test kits and platform similar or identical to ours, and our ability to successfully commercialize any test kits we may develop, and our platform, may be harmed.

As with other medical device companies, our success depends in large part on our ability to obtain, maintain and solidify a proprietary position for our current and any future test kits, which will depend upon our success in obtaining effective patent protection in the United States and other countries that cover, and other intellectual property with respect to, such test kits, their manufacturing processes and their intended methods of use and enforcing those patent claims once granted as well as our other intellectual property. In some cases, we may not be able to obtain issued patent claims or other intellectual property covering our technologies which are sufficient to prevent third parties, such as our competitors, from utilizing our platform. Any failure to obtain or maintain patent and other intellectual property protection with respect to our current and any future test kits or other aspects of our business could harm our business, financial condition and results of operations.

Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our patents. Additionally, we cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.

The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek and obtain patent protection. In addition, our ability to obtain and maintain valid and enforceable patents depends in part on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, the publication of discoveries in

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scientific literature often lags behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to file for patent protection of such inventions.

Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are therefore reliant on our licensors or licensees, and may be reliant on future licensors or licensees, to protect certain of our intellectual property used in our business. If our licensors or licensees fail to adequately protect this intellectual property or if we do not have exclusivity for the marketing of our test kits, whether because our licensors do not grant us exclusivity or they do not enforce the intellectual property against our competitors, our ability to commercialize products could suffer.

Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example, with respect to proper priority claims, inventorship and the like, although we are unaware of any such defects that we believe are of importance. If we or any current or future licensors or licensees fail to establish, maintain, protect or enforce such patents and other intellectual property rights, such rights may be reduced or eliminated. If any current or future licensors or licensees are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. If there are material defects in the form, preparation or prosecution of our patents or patent applications, such patents or applications may be invalid and/or unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may materially harm our business.

The strength of patent rights generally, and particularly the patent position of medical device companies, involves complex legal and scientific questions and can be uncertain, and has been the subject of much litigation in recent years. This uncertainty includes changes to the patent laws through either legislative action to changes to statutory patent law or court action that may reinterpret existing law or rules in ways affecting the scope or validity of issued patents or the chances that patent applications will result in issued claims and the scope of any such claims. Our current or future patent applications may fail to result in issued patents in the United States or foreign countries with claims that cover our current and any future test kits. Even if patents do successfully issue from our patent applications, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or held unenforceable. Any successful challenge to our patents could deprive us of exclusive rights necessary for the successful commercialization of our current and any future test kits, which may harm our business. Furthermore, even if they are unchallenged, our patents may not adequately protect our current and any future test kits, provide exclusivity for such test kits or prevent others from designing around our claims. If the scope of any patent protection we obtain is not sufficiently broad, or if we lose any of our patent protection, our ability to prevent our competitors from commercializing similar or identical technology and test kits would be adversely affected. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our current and any future test kits is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our current and any future test kits.

Patents have a limited lifespan. In the United States, the natural expiration of a utility patent is generally 20 years after its effective filing date and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is generally 15 years after its issue date. However, the actual protection afforded by a patent varies from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our current and any future test kits and services, we may be open to competition, which may harm our business prospects. Further, if we encounter delays in our development efforts, the period of time during which we could market our current and any future test kits and services under patent protection would be reduced and, given the amount of time required for the development, testing and regulatory review of planned or future test kits, patents protecting our current and any future test kits might expire before or shortly after such test kits are commercialized. For information regarding the expiration dates of patents in our patent portfolio, see Part I, Item 1 “Business—Intellectual Property” elsewhere in this Annual Report. As our patents

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expire, the scope of our patent protection will be reduced, which may reduce or eliminate any competitive advantage afforded by our patent portfolio. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing test kits similar or identical to ours.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications we license or own, currently or in the future, issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. Any patents that we own now or in the future may be challenged, narrowed, circumvented or invalidated by third parties. Consequently, we do not know whether our current and any future test kits or other technologies will be protectable or remain protected by valid and enforceable patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or test kits in a non-infringing manner which could harm our business, financial condition and results of operations.

Some of our patents and patent applications may in the future be jointly-owned with third parties. If we are unable to obtain an exclusive license to any such third-party joint-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing test kits and technology. In addition, we may need the cooperation of any such joint-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could harm our business, financial condition and results of operations.

Additionally, we may find it necessary or prudent to acquire or obtain licenses from third-party intellectual property holders. However, we may be unable to acquire or secure such licenses to any intellectual property rights from third parties that we identify as necessary for our current and any future test kits. The acquisition or licensing of third-party intellectual property rights is a competitive area, and our competitors may pursue strategies to acquire or license third-party intellectual property rights that we may consider attractive or necessary. Our competitors may have a competitive advantage over us due to their size, capital resources and greater development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to acquire or license third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment or at all. If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of the relevant test kits, which could harm our business, financial condition and results of operations.

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.

We have obtained licenses that give us rights to third-party intellectual property that is necessary or useful to our business. The license agreements covering our test kits impose various obligations on us. One or more of our licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license. If we materially breach the obligations in our license agreements, the licensor typically has the right to terminate the license and we may not be able to market products that were covered by the license, which could adversely affect our competitive business position and harm our business prospects. In addition, any claims brought against us by our licensors could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations.

Patents covering our current, and any future test kits, or our technologies could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad, which could harm our business, financial condition and results of operations.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and internationally and may not provide us with adequate proprietary protection or competitive advantage against competitors with similar products. We may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office, or

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the USPTO, or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or IPR, or interference proceedings or other similar proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, such patent rights, allow third parties to commercialize our platform or our current and any future test kits and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize test kits without infringing third-party patent rights. Moreover, we may have to participate in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge features of patentability with respect to our patents and patent applications. Such challenges may result in loss of patent rights, in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and test kits, or limit the duration of the patent protection of our current and any future test kits or technologies. Such proceedings also may result in substantial cost and require significant time from our management, even if the eventual outcome is favorable to us.

In addition, if we initiate legal proceedings against a third-party to enforce a patent covering our current and any future test kits, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Defenses of these types of claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. Third parties may also raise claims challenging the validity or enforceability of our patents before administrative bodies in the United States or abroad, even outside the context of litigation, including through re-examination, post-grant review, IPR, derivation proceedings and equivalent proceedings in foreign jurisdictions (such as opposition proceedings). Such proceedings could result in the revocation of, cancellation of or amendment to our patents in such a way that they no longer cover our current and any future test kits or technologies. The outcome for any particular patent following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant or other third-party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our current and any future test kits and technology. Such a loss of patent protection would harm our business, financial condition and results of operations.

We rely substantially on our trademarks and trade names. If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be harmed.

We rely substantially upon trademarks to build and maintain the integrity of our brand. Our registered and unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we rely upon to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion and asserting claims against such third parties may be prohibitively expensive. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks against us. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names or other intellectual property may be ineffective, could result in substantial costs and diversion of resources and could harm our business, financial condition and results of operations.

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The medical device industry is characterized by intellectual property litigation and in the future could become subject to, litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages or prevent us from marketing our existing or future test kits.

Litigation regarding patents, trademarks, trade secrets, and other intellectual property rights is prevalent in the medical device and diagnostic sectors and companies in these sectors have used intellectual property litigation to gain a competitive advantage. Our commercial success depends in part upon our ability and that of our contract manufacturers and suppliers to manufacture, market, and sell our planned test kits, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. Because we have not conducted a formal freedom to operate analysis for patents related to our test kits, we may not be aware of issued patents that a third-party might assert are infringed by our current or any future test kits, which could materially impair our ability to commercialize our current or any future test kits. Even if we diligently search third-party patents for potential infringement by our current or any future test kits, we may not successfully find patents that our current or any future test kits may infringe. If we are unable to secure and maintain freedom to operate, others could preclude us from commercializing our current or future test kits. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current and any future test kits and technology, whether or not we are actually infringing, misappropriating or otherwise violating the rights of third parties. Additional third parties may assert infringement claims against us based on existing or future intellectual property rights, regardless of merit. If we are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue developing and marketing our current and any future test kits and technology. We may also elect to enter into such a license to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us, and could require us to pay significant royalties and other fees. We could be forced, including by court order, to cease commercializing the infringing technology or test kits. In addition, we could be found liable for monetary damages, which may be significant. If we are found to have willfully infringed a third-party patent, we could be required to pay treble damages and attorneys’ fees. A finding of infringement could prevent us from commercializing our planned test kits in commercially important territories, or force us to cease some of our business operations, which could harm our business. Many of our employees were previously employed at, and many of our current advisors and consultants are employed by, universities or other biotechnology, medical device or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, advisors and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we, or these employees, have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. These and other claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our business to the infringement claims discussed above.

Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial negative impact on the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property related proceedings could harm our business, financial condition and results of operations.

Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be harmed.

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Obtaining and maintaining our intellectual property, including patent, protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by government agencies, and our intellectual property, including patent, protection could be reduced or eliminated for non-compliance with these requirements.

Obtaining and maintaining our intellectual property, including patent, protection depends on compliance with various procedural measures, document submissions, fee payments and other requirements imposed by government agencies, and our intellectual property, including patent, protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other government fees on intellectual property registrations and applications will be due to be paid to the applicable government agencies, including with respect to patents and patent applications the USPTO and similar agencies outside of the United States, over the lifetime of our intellectual property registrations and applications, including our patents and patent applications. The various applicable government agencies, including with respect to patents and patent applications the USPTO and similar agencies outside of the United States, require compliance with several procedural, documentary, fee payment and other similar provisions during the application process. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in the abandonment or lapse of the intellectual property registration or application, resulting in a partial or complete loss of intellectual property rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of an intellectual property registration or application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, potential competitors might be able to enter the market with similar or identical test kits or technology, which could harm our business, financial condition and results of operations.

We have limited foreign intellectual property rights and may not be able to protect our intellectual property and proprietary rights throughout the world, which could harm our business, financial condition and results of operations.

We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents or trademarks on our current and any future test kits in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions or utilizing our trademarks in all countries outside the United States, or from selling or importing test kits made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own test kits and, further, may export otherwise infringing test kits to territories where we have patent protection but enforcement is not as strong as that in the United States. These test kits may compete with our current and any future test kits, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing test kits in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

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Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our current and any future test kits.

Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third-party was the first to invent the claimed invention. A third-party that files a patent application in the USPTO after March 2013, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third-party. This will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we were the first to file any patent application related to our current and any future test kits.

The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, IPR and derivation proceedings.

Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third-party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third-party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third-party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. In addition, future actions by the U.S. Congress, the federal courts and the USPTO could cause the laws and regulations governing patents to change in unpredictable ways. Any of the foregoing could harm our business, financial condition and results of operations.

In addition, recent U.S. Supreme Court rulings have made and will likely continue to make changes in how the patent laws of the United States are interpreted. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. We cannot predict how this and future decisions by the courts, the U.S. Congress or the USPTO may impact the value of our patents. Any similar adverse changes in the patent laws of other jurisdictions could also harm our business, financial condition, results of operations and prospects.

We may be subject to claims challenging the ownership or inventorship of our patents and other intellectual property and, if unsuccessful in any of these proceedings, we may be required to obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, or to cease the development, manufacture and commercialization of one or more of our current and any future test kits.

We may be subject to claims that current or former employees, collaborators or other third parties have an interest in our patents, trade secrets or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our current and any future test kits. Litigation may be necessary to defend against these and other claims challenging inventorship of our patents, trade secrets or other intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our current and any

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future test kits. If we were to lose exclusive ownership of such intellectual property, other owners may be able to license their rights to other third parties, including our competitors. We also may be required to obtain and maintain licenses from third parties, including parties involved in any such disputes. Such licenses may not be available on commercially reasonable terms, or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture and commercialization of one or more of our current and any future test kits. The loss of exclusivity or the narrowing of our patent claims could limit our ability to stop others from using or commercializing similar or identical technology and test kits. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could harm our business, financial condition and results of operations.

Third-party claims of intellectual property infringement, misappropriation or other violation against us or our collaborators may prevent or delay the sale and marketing of our current and any future test kits.

The medical device industry is highly competitive and dynamic. Due to the focused research and development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscape is in flux, and it may remain uncertain in the future. As such, we could become subject to significant intellectual property-related litigation and proceedings relating to our or third-party intellectual property and proprietary rights.

Our commercial success depends in part on our and any potential future collaborators’ ability to develop, manufacture, market and sell any test kits that we may develop and use our proprietary technologies without infringing, misappropriating or otherwise violating the patents and other intellectual property or proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us or any potential collaborators to alter our development or commercial strategies, obtain licenses or cease certain activities. The medical device industry is characterized by extensive litigation regarding patents and other intellectual property rights, as well as administrative proceedings for challenging patents, including interference, inter partes or post-grant review, derivation and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions.

Third parties, including our competitors, may currently have patents or obtain patents in the future and claim that the manufacture, use or sale of our current and any future test kits infringes upon these patents. We have not conducted an extensive search of patents issued or assigned to other parties, including our competitors, and no assurance can be given that patents containing claims covering our current and any future test kits, parts of our current and any future test kits, technology or methods do not exist, have not been filed or could not be filed or issued. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future test kits infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. As the number of competitors in our market grows and the number of patents issued in this area increases, the possibility of patent infringement claims against us escalates.

In the event that any third-party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed by our current and any future test kits, which could harm our ability to commercialize any test kit we may develop and any other technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. If we are found to infringe third-party intellectual property rights, including patents, and we are unsuccessful in demonstrating that such patents or other intellectual property rights are invalid or unenforceable, such third parties may be able to block our ability to commercialize the applicable test kits or technology unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay significant license

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fees and/or royalties, and the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same technology. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, we may be unable to commercialize our current and any future test kits, or such commercialization efforts may be significantly delayed, which could in turn significantly harm our business.

Defense of infringement claims, regardless of their merit or outcome, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may be enjoined from further developing or commercializing the infringing test kits and/or have to pay substantial damages for use of the asserted intellectual property, including treble damages and attorneys’ fees were we found to willfully infringe such intellectual property. Claims that we have misappropriated the confidential information or trade secrets of third parties could harm our business, financial condition and results of operations. We also might have to redesign our infringing test kits or technologies, which may be impossible or require substantial time and monetary expenditure.

Engaging in litigation to defend against third-party infringement claims is very expensive, particularly for a company of our size, and time-consuming. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial negative impact on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings against us could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could harm our business, financial condition and results of operations.

We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our patents, or the patents of any future licensing partners, or we may be required to defend against claims of infringement. In addition, our patents or the patents of any such licensing partners also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. In an infringement proceeding, a court may decide that our patent is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial negative impact on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace. Any of the foregoing could harm our business, financial condition and results of operations.

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We may be subject to claims that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Such claims could harm our business, financial condition and results of operations.

As is common in the medical device industry, our employees, consultants and advisors may be currently or previously employed or engaged at universities or other medical device or healthcare companies, including our competitors and potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may in the future become subject to claims that we or these people have, inadvertently or otherwise, used or disclosed intellectual property, including trade secrets or other proprietary information, of their current or former employer. Also, we may in the future be subject to claims that these people are violating non-compete agreements with their former employers. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could harm our business, financial condition and results of operations. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could harm our business, financial condition and results of operations.

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.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

others may be able to make test kits that are similar to our current and any future test kits or utilize similar technology but that are not covered by the claims of our patents or that incorporate certain technology in our current and any future test kits that is in the public domain;

 

we, or our current and future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions;

 

we, or our current and future licensors or collaborators, may fail to meet our obligations to the U.S. government regarding any future patents and patent applications funded by U.S. government grants, leading to the loss or unenforceability of patent rights;

 

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 

it is possible that our current or future pending patent applications will not lead to issued patents;

 

it is possible that there are prior public disclosures that could invalidate our patents, or parts of our patents;

 

it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue with claims covering our current and any future test kits or technology similar to ours;

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it is possible that our patents or patent applications omit people that should be listed as inventors or include people that should not be listed as inventors, which may cause these patents or patents issuing from these patent applications to be held invalid or unenforceable;

 

issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;

 

the claims of our patents or patent applications, if and when issued, may not cover our current and any future test kits or technologies;

 

the laws of foreign countries may not protect our proprietary rights or the rights of future licensors or collaborators to the same extent as the laws of the United States;

 

the inventors of our patents or patent applications may become involved with competitors, develop test kits or processes that design around our patents, or become hostile to us or the patents or patent applications on which they are named as inventors;

 

our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive test kits for sale in our major commercial markets;

 

we have engaged in scientific collaborations in the past and will continue to do so in the future and our collaborators may develop adjacent or competing test kits that are outside the scope of our patents;

 

we may not develop additional proprietary technologies that are patentable;

 

the patents of others may harm our business; or

 

we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third-party may subsequently file a patent covering such intellectual property.

Any of the foregoing could harm our business, financial condition and results of operations.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patent protection for our current and any future test kits, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position, especially where we do not believe patent protection is appropriate or obtainable. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through non-disclosure and confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties.

We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any

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of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third-party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third-party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions.

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 confidence in these people, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could harm our business, financial condition and results of operations.

If our third-party manufacturing partner, Jabil, does not respect our intellectual property and trade secrets and produce competitive test kits using our designs or intellectual property, our business, financial condition and results of operations would be harmed.

We conduct most of our manufacturing activities through Jabil at its Dominican Republic facilities. Although the Jabil MSA generally precludes Jabil from misusing our intellectual property and trade secrets, or using our designs to manufacture test kits for our competitors, we may be unsuccessful in monitoring and enforcing our intellectual property rights and may find counterfeit goods in the market being sold as our current and any future test kits or test kits similar to ours produced for our competitors using our intellectual property. Although we take steps to stop counterfeits, we may not be successful and network operators who purchase these counterfeit goods may experience product defects or failures, harming our reputation and brand and causing us to lose future sales. Any of the foregoing could harm our business, financial condition and results of operations.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including limited trading volume. For example, from February 5, 2021 to November 8, 2021, our stock price ranged from a high of $37.98 to a low of $4.23. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report, these factors including:

 

the receipt of additional or amended EUAs from the FDA for our COVID-19 test kit and the timing thereof;

 

our ability to obtain and maintain regulatory approvals for our test kits;

 

changes in laws or regulations applicable to our test kits;

 

adverse developments concerning Jabil, Switch, or any of our third-party collaborators and suppliers, including our sole-source suppliers;

 

our inability to obtain adequate product supply for any approved test kit or inability to do so at acceptable prices;

 

our ability to reliably manufacture and distribute our test kits;

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the degree and rate of physician and market adoption of any of our test kits, and initially our COVID-19 test kit;

 

announcements by us or our competitors of significant business developments, diagnostic technologies, acquisitions, or new offerings;

 

negative publicity associated with issues related to our test kits;

 

changes in the anticipated future size and growth rate of the COVID-19 and influenza diagnostic testing markets as a result of widely administered use of efficacious vaccines or other treatments;

 

the development of new vaccines and treatments for COVID-19 or the announcement of impending approval of such new vaccines or treatments;

 

the loss or termination of any rights under the Jabil MSA or Switch Distribution Agreement;

 

our inability to establish collaborations, if needed;

 

future sales of our common stock or other securities, by us or our stockholders, as well as the anticipation of lock-up releases;

 

changes in senior management or key personnel;

 

the trading volume of our common stock;

 

performance or news releases by other companies in our industry including about adverse developments related to safety, effectiveness, accuracy and usability of their products, reputational concerns, reimbursement coverage, regulatory compliance, and product recalls;

 

general economic, regulatory and market conditions, including economic recessions or slowdowns;

 

actual or anticipated fluctuations in our financial condition and results of operations, including as a result of anticipated or unanticipated demand based on seasonal factors;

 

variance in our financial performance from expectations of securities analysts or investors;

 

changes in our projected operating and financial results;

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

significant lawsuits, including patent or stockholder litigation;

 

general political and economic conditions, including the COVID-19 pandemic; and

 

other events or factors, many of which are beyond our control.

Broad market and industry fluctuations, as well as general economic, pandemic, political, regulatory, and market conditions, may negatively impact the market price of our common stock. In addition, given the relatively small public float of shares of our common stock on the Nasdaq Global Select Market, or Nasdaq, the trading market for our shares may be subject to increased volatility. In the past, securities class action litigation has often been brought against companies that have experienced volatility or following a decline in the market price of its securities. This risk is especially relevant for us, because medical device companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

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Substantial future sales and issuances of our common stock could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock.

In addition, certain of our stockholders have registration rights that would require us to register shares owned by them for public sale in the United States. We have also filed a registration statement to register shares reserved for future issuance under our equity compensation plans. As a result, subject to the satisfaction of applicable exercise periods and applicable volume and restrictions that apply to affiliates, the shares issued upon exercise of outstanding stock options or upon settlement of outstanding restricted stock unit awards are available for immediate resale in the United States in the open market.

Sales of our shares could also impair our ability to raise capital through the sale of additional equity securities in the future and at a price we deem appropriate. These sales could also have an adverse effect on the trading price of our common stock.

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

Our executive officers, directors and current beneficial owners of 5% or more of our common stock beneficially own a significant percentage of our outstanding common stock. These stockholders, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and may be restricted by the terms of any then-current debt instruments. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

We are an emerging growth company and a smaller reporting company and our compliance with the reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements of Section 404 reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and extended adoption period for accounting pronouncements.

We are also a “smaller reporting company,” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

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Investors may find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president, or by a majority of the total number of authorized directors;

 

advance notice requirements for stockholder proposals and nominations for election to our board of directors;

 

a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

a requirement of approval of not less than two-thirds of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our certificate of incorporation; and

 

the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business antitakeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer, or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for the following types of actions or

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proceedings under Delaware statutory or common law: (1) any derivative action or proceeding brought on our behalf, (2) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, or other employees to us or our stockholders, (3) any action or proceeding asserting a claim against us or any of our current or former directors, officers, or other employees, arising out of or pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, (4) any action or proceeding to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws, (5) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware, and (6) any action asserting a claim against us or any of our directors, officers, or other employees governed by the internal affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants.

These provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation and our amended and restated bylaws will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation and our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and the provisions may not be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees and may discourage these types of lawsuits. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find either exclusive forum provision contained in our amended and restated certificate of incorporation or amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving such action in other jurisdictions, all of which could seriously harm our business.

General Risk Factors

We have incurred and may continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we have incurred and will continue to incur significant legal, accounting, and other expenses that we did not incur as a private company. We expect such expenses to further increase after we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Accordingly, we may continue to incur operating losses for the foreseeable future and we may not achieve profitability in the future and that, if we do become profitable, we may not sustain profitability. Our failure to achieve and sustain profitability in the future will make it more difficult to finance our business and accomplish our strategic objectives, which would have a material adverse effect on our business, financial condition and results of operations and cause the market price of our common stock to decline. In addition, failure of our test kits to significantly penetrate the target markets would negatively affect our business, financial condition and results of operations.

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As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an emerging growth company if we are not a non-accelerated filer at such time.

In the future, if we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness or significant deficiency in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. For example, in connection with the revenue accounting standard, Accounting Standards Codification, or ASC, Topic 606, management makes judgments and assumptions based on our interpretation of the new standard. The revenue standard is principle-based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice and guidance may evolve as we apply the standard. If our assumptions underlying our estimates and judgments relating to our critical accounting policies change or if actual circumstances differ from our assumptions, estimates or judgments, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

Changes in tax law and regulations may have a material adverse effect on our business, financial condition and results of operations.

The rules dealing with U.S. federal, state and local income taxation are constantly under review by the Internal Revenue Service, the U.S. Treasury Department and other governmental bodies. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. Future changes in tax laws could have a material adverse effect on our business, financial condition, results of operations, and cash flow. For example, proposals have recently been made in Congress (which have not yet been enacted) to make certain tax law changes affecting corporations. We urge investors to consult with their legal and tax advisers regarding the implication of potential changes in tax laws on an investment in our common stock.

Our failure to meet Nasdaq’s continued listing requirements could result in a delisting of our common stock.

If we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we can provide no

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assurance that any action taken by us to restore compliance with listing requirements would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the listing requirements of Nasdaq.

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We can face criminal liability and other serious consequences for violations, which can harm our business.

We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, and anti-corruption and anti-money laundering laws and regulations, including the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct or may in the future conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors and other third-party collaborators from authorizing, promising, offering, providing, soliciting or receiving, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties outside of the United States to sell our test kits internationally once we enter a commercialization phase, and/or to obtain necessary permits, licenses, patent registrations and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors and other third-party collaborators, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences.

We are subject to numerous laws and regulations related to anti-bribery and anti-corruption laws, such as the FCPA, in which violations of these laws could result in substantial penalties and prosecution.

For any operations outside the United States, we are similarly subject to various heavily-enforced anti-bribery and anti-corruption laws, such as the FCPA and similar laws around the world. These laws generally prohibit U.S. companies and their employees and intermediaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business or gaining any advantage. We face significant risks if we, which includes our third-party business partners and intermediaries, fail to comply with the FCPA or other anti-corruption and anti-bribery laws. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. To that end, our internal control policies and procedures and employee training and compliance programs designed to deter prohibited practices ultimately may not be effective in preventing our employees, contractors, business partners, intermediaries or agents from violating or circumventing our policies and/or the law.

Responding to any enforcement action or related investigation may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees. Any violation of the FCPA or other applicable anti-bribery, anti-corruption or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could harm our business, financial condition and results of operations.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against companies following a decline in the market price of its securities. This risk is especially relevant for us because medical device companies have experienced significant stock price volatility in recent years, and our stock price has been volatile since our

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initial public offering. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

If securities or industry analysts publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline.

Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, our common stock price and trading volume could decline.

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We expect that only a limited number of analysts will cover our company following our initial public offering. If the number of analysts that cover us declines, demand for our common stock could decrease and our common stock price and trading volume may decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own.

Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline.

Item 1B. Unresolved Staff Comments.

Not applicable

Item 2. Properties.

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. In July 2021, we leased an additional 13,267 square feet of office, research and development space in Emeryville, California pursuant to a lease agreement that expires in June 2024. In August 2021, we leased an additional 14,835 square feet of office and laboratory space in San Jose, California which serves as our quality headquarters. Pursuant to the same lease agreement, in December 2021, we leased additional square feet of office and laboratory space in San Jose, California. In March 2022, we leased an 82,000 square foot facility in Vista, California for office, development, research and laboratory space and expect to assume full occupancy by August 2022 after completing tenant improvements. 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.

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. There are currently no material claims, actions or proceedings pending against us or our assets, the ultimate disposition of which we believe could have an adverse effect on our results of operations, financial condition or cash flows.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

 

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “LHDX” since February 5, 2021. Prior to that date, there was no public trading market for our common stock.

 

Holders of Common Stock

At March 28, 2022, there were 39,825,333 shares of our common stock outstanding held by approximately 60 stockholders of record.  The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

Dividends

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We do not anticipate paying any dividends in the foreseeable future, and we currently intend to retain all available funds and any future earnings for use in the operation of our business, to finance the growth and development of our business and for future repayment of debt. Future determinations as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report.

Stock Performance Graph

Not applicable.

Recent Sales of Unregistered Securities

None.

 

Use of Proceeds From Registered Securities

 

On February 9, 2021, we sold 10,350,000 shares of our common stock in connection with our IPO, including 1,350,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at public offering price of $17.00 per share for an aggregate offering price of approximately $175.9 million. The offer and sale of all the shares in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-252164) that was declared effective by the SEC on February 4, 2021. BofA Securities, Inc. and William Blair & Company, L.L.C. acted as lead bookrunning managers and LifeSci Capital LLC acted as co-manager.  

 

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The underwriting discounts and commissions for our IPO totaled $12.3 million. We incurred additional costs of approximately $3.7 million in offering expenses, which when added to the underwriting discounts and commissions paid by us, amounts to total fees and costs of approximately $16.0 million. Thus, net offering proceeds to us, after deducting underwriting discounts, commissions and offering expenses, were $159.9 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates. There has been no material change in the use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b)(4) on February 8, 2021.

Issuer Purchases of Equity Securities

None.

Item 6. Reserved.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and the related notes included elsewhere in this Annual Report. This discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual Report titled “Risk Factors.”

A discussion regarding our financial condition and results of operations for the years ended December 31, 2021 and 2020, including a year-to-year comparison between 2021 and 2020, is presented below.

Overview

We are a medical technology company on a mission to bring central laboratory quality testing for infectious diseases into the home and point of care settings. We aim to have disposable, single use test kit platform replace central lab testing for accurately diagnosing infectious diseases leading to faster treatment and better disease control outcomes. We believe that society benefits from real-time and accurate disease detection in order to deploy time-sensitive therapeutic treatments for the individual and reduce spread of infection in the community. Currently, the United States relies on centralized lab testing for accurate disease detection. We believe testing labs are too geographically centralized, rely too heavily on instrumented equipment, and are expensive and difficult to access. With our PCR-quality technology, we offer decentralized and accessible single-use testing for infectious diseases. Our test kits are coupled with our digital platform, LUCI PASS, which is designed to securely deliver a clinically relevant test result to users, healthcare providers, and to required public health authorities. We plan on developing and commercializing lab quality single-use test kits for several infectious diseases and have started by commercializing our PCR-quality COVID-19 test kits.

The COVID-19 pandemic has placed unprecedented pressure on the current U.S. healthcare system. We believe the pandemic demonstrated that the infectious disease testing infrastructure in the United States was too quickly overwhelmed to efficiently and reliably detect COVID-19 early enough to drive effective treatment and better patient outcomes. To suppress the spread of infection in the population, we believe testing should be fast, accurate, and away from other people so as to reduce potential transmission. While PCR lab testing for COVID-19 is trusted and accurate, it is slow, inconvenient and centralized. Rapid at-home antigen testing for COVID-19 is fast and decentralized but the test method has accuracy challenges, especially in the face of variants. There are widespread reports of people receiving negative test results from rapid antigen test kits only to receive a positive PCR result days later from the lab. We believe false negative results from rapid antigen testing can create a false sense of security, confuse the public, and lead to increased infection rates.

With our platform, we are reimagining current infectious disease testing through innovative test kits that are designed to deliver on-the-spot testing with PCR-quality in a single-use, portable, and easy-to-use format. Our platform is designed to produce assays that combine the accuracy and reliability of PCR tests and the accessibility and ease of use of antigen tests. Our molecular test kits are designed to be diagnostically definitive, unlike the antigen tests on the market today. Importantly, our tests also provide a platform for both symptomatic and asymptomatic individuals to easily check their COVID-19 infection status in 30 minutes or less, thus providing a testing solution that can be utilized at high scale as we begin navigating a new normal living with COVID-19 as an endemic disease.

While people have tested to prevent spread of infection through isolation and hoped for recovery, we believe that moving forward, people will seek PCR-quality at-home tests to treat infection as quickly as possible. We believe this new “test to treat” paradigm will become increasingly important as COVID-19 becomes endemic. This is because new therapies for COVID-19 infection are now available contingent upon accurate and early testing. We believe our test kits can play an important role in facilitating a “test to treat” paradigm because our tests are PCR-quality and therefore able to detect infection early, which can lead to early therapy and potentially better outcomes. This is because PCR lab testing is understood to detect viral genetic material at the earliest stages of

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infection because it amplifies trace amounts of virus DNA. Rapid antigen tests are understood to be less sensitive because antigen tests do not amplify the virus. A person must have first produced enough antigens in their body to return a positive result, which could be up to seven days into their infectious stage and mostly past the time for an anti-viral to be effective. We believe this leads to potential delays in detection and a potential loss of trust in rapid antigen test results.

Our first commercially available PCR-quality diagnostic test was the LUCIRA COVID-19 All-In-One Test Kit, which received EUA from the FDA for prescription use in at-home and POC settings. Our COVID-19 test kit was the first at-home self-test to receive FDA EUA authorization, and remains the only FDA EUA authorized single-use molecular test for at-home use. On April 9, 2021, we received our first FDA EUA authorization for OTC non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged 2-13 (with parent collection) and launched LUCI PASS, our digital platform designed to securely record and share verified test results via text messaging. The LUCIRA CHECK IT COVID-19 Test Kit utilizes identical components to the LUCIRA COVID-19 All-In-One Test Kit and both are referred to as test kits or COVID-19 test kits. We have since received authorization from Health Canada, PSAR approval by Singapore’s Health Sciences Authority, approval from the Taiwan Ministry of Health and Welfare for emergency use, and approved registration from Israel. In the second half of 2022, we hope to obtain several new regulatory approvals including extending our EUA authorization into full FDA approval via de novo application, CE Mark, and submissions to the United Kingdom and Australia to further extend access to international markets.

Our PCR-quality 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 STIs and other respiratory infections. We plan on seeking EUA authorization from FDA for prescription use, authorization from Health Canada and European Medicines Agency, and CE Mark, to commercialize a COVID/flu combo test in the first half of 2022.

Since inception through December 31, 2021, we generated $93.4 million of revenue from the sales of our test kits. Prior to the closing of our IPO, we had financed our operations principally from net proceeds of approximately $137.3 million from sales of our preferred stock, issuances of convertible debt and common stock issuances. On February 9, 2021, we closed our IPO of 10,350,000 shares of common stock, including 1,350,000 shares issued pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $17.00 per share. The net proceeds to us from the IPO were $159.9 million, after deducting underwriting discounts and commissions of $12.3 million and offering expenses of $3.7 million.

On February 4, 2022, we entered into a Loan and Security Agreement, or Loan Agreement, with Hercules Capital, Inc., or Hercules and Silicon Valley Bank, or SVB. The Loan Agreement provides for term loans in an aggregate principal amount of up to $80.0 million available in four tranches with the first tranche for $30.0 million funded to us at closing. The term loans will mature on February 1, 2026. In connection with the entry into the Loan Agreement, we issued a warrant for 59,642 shares of common stock to each of Hercules and SVB. Each warrant is exercisable for a period of seven years from issuance at a per-share exercise price equal to $5.03. For a more detailed description of the Loan Agreement and warrants, see Note 13 to our audited financial statements included elsewhere in this Annual Report.

We have historically incurred substantial net losses as we continue to develop and begin commercializing our COVID-19 test kit and we may incur additional losses and increases expenses in future periods. As of December 31, 2021, we had an accumulated deficit of $128.5 million.

Since the second quarter of 2020, we have primarily devoted our resources to the research, development, manufacturing and commercialization of our COVID-19 test kit. Research and development activities related to our test kits, including the COVID-19 test kit, include clinical, regulatory and manufacturing process initiatives. We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts to promote adoption of our COVID-19 test kit, build relationships with our customers, obtain regulatory clearances or approvals for current and any future test kits, qualify manufacturing expansion, and conduct clinical trials. In addition, we expect our general and administrative expenses to continue to increase due to the additional costs associated with scaling our business operations,

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including personnel costs related to increased headcount for administrative, accounting, information technology, legal and compliance functions as well as facilities related costs. As a result, we will require substantial capital to fund manufacturing expansion, inventory purchases and expenses related to our operating activities, including selling, general and administrative expenses, as well as research and development.

In 2020, we entered into several license and manufacturing and services agreements, and in 2021, we entered into several distribution agreements. For a more detailed description of our license and manufacturing, services and distributions agreements, see Part I, Item 1, “Business— Intellectual Property— License Agreement with Eiken Chemical Co., Ltd.,” “Business—Manufacturing and Supply,” “Business—Intellectual Property—Distribution Agreement with Switch” and Note 2 and Note 5 to our audited financial statements included elsewhere in this Annual Report.

Factors Affecting Our Business

We believe the following significant factors affect our business:

 

Approval and Market Adoption of Our Test Kits. Our commercial success, including acceptance and use of our test kits, will depend upon a number of factors, some of which are beyond our control, including the receipt of regulatory approvals for additional indications of our COVID-19 test kit and new products and timing thereof, size of the market opportunity, demand from the public and members of the medical community for our test kits and rate of adoption of our test kits. The commercial success of our test kits will be dependent upon sales to physicians and healthcare providers, businesses, consumers and international markets. Our ability to successfully execute on this strategy, and thereby increase our revenue, will in part drive our results of operations and impact on our business.

 

Cost of Revenue. The results of our business will depend in part on our ability to establish and increase our gross margins by effectively managing our costs to produce our test kits. To better meet the market demand for decentralized diagnostic testing, a key part of our growth strategy includes expanding our current manufacturing capacity and adding automation to the manufacturing process. Our test kits have been designed for automated production. We plan to expand manufacturing to additional locations to further our manufacturing capacity and reach.

 

Status of COVID-19 Pandemic. Given the unpredictable nature of the COVID-19 pandemic, the size of the COVID-19 diagnostic testing market and the timing of its development are highly uncertain. There are currently three COVID-19 vaccines authorized for emergency use or FDA-approved. Although breakthrough cases occur with highly transmissible COVID-19 variants, such as Omicron, the widely administered use of efficacious vaccines or new therapeutic treatment for COVID-19 may reduce the demand for COVID-19 diagnostic tests and, as a result, the COVID-19 diagnostic testing market may not substantially grow. However, we believe COVID-19, like influenza, will remain endemic for the foreseeable future and there will be a continued need for COVID-19 testing. We believe this is largely due to the COVID-19 pandemic resulting in hyper-sensitivity to symptoms, breakthrough cases and broader awareness of the disease. Our future success with our COVID-19 test kit is substantially dependent on the manner in which the market for COVID-19 diagnostics develops and grows.

 

Seasonality. Our ability to accurately forecast demand for our test kits could be negatively affected by many factors, including seasonal demand. 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. 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.

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Results of Operations

The following table sets forth the significant components of our results of operations for the years presented.

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Net sales

 

$

93,055

 

 

$

269

 

 

$

92,786

 

 

 

34,493

%

Cost of products sold

 

 

81,392

 

 

 

1,941

 

 

 

79,451

 

 

 

4,093

%

Impairment of long-lived assets

 

 

1,439

 

 

 

 

 

 

1,439

 

 

 

100

%

Gross profit (loss)

 

 

10,224

 

 

 

(1,672

)

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

39,840

 

 

 

24,620

 

 

 

15,220

 

 

 

62

%

Selling, general and administrative

 

 

35,521

 

 

 

5,633

 

 

 

29,888

 

 

 

531

%

Total operating expenses

 

 

75,361

 

 

 

30,253

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(65,137

)

 

 

(31,925

)

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant income

 

 

597

 

 

 

2,145

 

 

 

(1,548

)

 

 

(72

%)

Interest expense

 

 

(3

)

 

 

(53

)

 

 

50

 

 

 

94

%

Interest income

 

 

14

 

 

 

 

 

 

14

 

 

 

100

%

Remeasurement of derivative liabilities and

   convertible notes

 

 

(281

)

 

 

(7,515

)

 

 

7,234

 

 

 

96

%

Total other income (expense), net

 

 

327

 

 

 

(5,423

)

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(64,810

)

 

 

(37,348

)

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(64,827

)

 

$

(37,348

)

 

 

 

 

 

 

 

 

Net Sales

We currently derive all of our revenue from the sales of our COVID-19 test kits, which we account for in accordance with the provisions of Accounting Standards Codifications, or ASC, Topic 606, Revenue from Contracts with Customers. Product revenue is recognized upon the transfer of control of our test kits to the customer, which occurs at a point in time, typically upon shipment to the customer, unless terms of contractual arrangements with customers state otherwise in which case the control is transferred upon completion of delivery and customer acceptance of products.

The increase in revenue in 2021 was primarily due to increased volume in units sold driven primarily by increased manufacturing output as demand continued to be strong. We did not commence revenue generating activities until December 2020, following receipt of our first EUA for our test kit in November 2020. We generated net sales of $0.3 million from the sale of COVID-19 test kits in 2020.

Our commercial strategic objective is to deploy our COVID-19 test kit to new and existing customers who will continue to require accurate and immediate diagnoses as COVID-19 moves to the endemic stage. Throughout 2021 we discovered that customers specifically sought our testing solution.

We believe these customers will be durable, repeat long-term customers of our testing solutions because of their need for accuracy, immediacy, and portability of COVID-19 testing. In the future we expect their needs will evolve into a combo COVID-19/flu PCR-quality test. We believe these durable customers fall into four customer

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segments: (1) U.S. healthcare systems and providers; (2) sophisticated business and governments; (3) self-directed consumers in the home; and (4) international customers with local market needs.

In April 2021, we received an EUA for an OTC indication for our COVID-19 test kit. We generated net revenue of $93.1 million from the sale of COVID-19 test kits during 2021.

We may experience fluctuations in net sales as a result of changes in customer and user demand for our test kits based on seasonality, which for COVID-19 remains unknown. Our revenue may also fluctuate from quarter-to-quarter due to a variety of factors, including our ability to successfully expand our commercial sales function to meet anticipated customer demand, the number of businesses and healthcare providers who are aware of and use our test, and the availability of reimbursement.

Cost of Products Sold

Costs of products sold includes cost of raw materials and supplies for our finished test kits, direct labor, contract manufacturing fees, in-bound and internal shipping and handling costs incurred in manufacturing our test kits, royalties, allocated overhead, and depreciation expense.

Much like our revenue, we began to generate cost of products sold in December 2020, after we received an EUA from the FDA for POC and prescription-at-home use of our COVID-19 test kit. The increase in cost of products sold was due to increased volume in units sold. We did not commence revenue generating activities until December 2020. For 2021, we sold $1.0 million of inventory that was previously written off prior to the receipt of the EUA.

We expect that cost of products sold will increase on an absolute basis as the number of COVID-19 test kits we sell increases. On a per unit basis, the cost of our test kit may decrease over time due to anticipated volume discounts on outsourced manufacturing costs, materials and shipping costs, and through other volume efficiencies we may gain as the number of test kits manufactured increases. We may experience fluctuations in our cost of products sold, which similar to net sales volumes, may be impacted by changes in customer and user demand for our test kits based on seasonality, which for COVID-19 remains unknown.

Impairment of Long-Lived Assets

During 2021, certain facts and circumstances indicated that costs of certain assets, primarily those associated with dry room facilities affixed to the Auburn Hills Michigan manufacturing facility, may not be recoverable before the end of their previously estimated useful life. Based on these facts and circumstances, we conducted an impairment analysis, which resulted in recording an impairment charge of $1.4 million during 2021, related to these assets.

Gross Profit (Loss)

Gross profit increased during 2021 as compared to 2020, as a result of the increase in net sales of our COVID-19 test kit following the EUA approval received in November 2020 and efficiencies resulting from increased manufacturing output.

We expect our gross profit to be affected by a variety of factors, including sales volume of our test kit, pricing pressures, the success of our cost-reduction strategies, the cost of test kit materials, manufacturing costs, and headcount. We expect our margin to increase to the extent we are successful in our ability to lower the costs associated with the production of our test kits, that includes increasing our production output in a lower cost environment and utilizing high volume manufacturing equipment in much of the production process. If these efforts are successful, we believe we will lower production costs and will be able to increase our gross margin. While our gross margin may increase, we also anticipate it will likely fluctuate from quarter to quarter.

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Research and Development Expenses

We primarily perform our own research and development while obtaining supplemental resources from third parties to conduct our pre-clinical studies, clinical trials and manufacturing of test batches of test kits. The costs of these activities consist primarily of personnel related expenses, including stock-based compensation expense, third-party consultants, costs associated with regulatory compliance and laboratory supplies and materials, along with other direct and allocated expenses such as facility costs, depreciation, and other shared expenses. We expense research and development costs in the periods in which they are incurred. At any one time, we may be working on the development of multiple test kits. Our internal resources, employees and allocated expenses are not directly tied to any one test kit and are typically deployed across multiple test kits. As such, we do not track internal costs on a specific test kit basis.

Research and development expenses increased $15.2 million, or 62%, in 2021 compared to 2020. This increase was primarily due to increased expenses related to continued development and clinical activities to support new products and to support manufacturing activities, including the redevelopment of our manufacturing and quality release process in the Dominican Republic. We supported research and development activities such as test kit development, testing, and validation of manufacturing activities related to our COVID-19 test kit through increased personnel-related expenses of $3.8 million, third-party professional services of $3.4 million, depreciation expense of $1.0 million, and supplies and materials of $3.9 million.

We expect that our research and development expenses will continue to increase in absolute dollars, but will vary as a percentage of revenue, as we continue to invest in development activities related to our current and future test kits and as our revenue increases as a result of sales of our COVID-19 test kits.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel costs, including stock-based compensation expense, accounting and legal expenses, consulting costs, insurance and allocated overhead including rent, depreciation and utilities.

Selling, general and administrative expenses increased $29.9 million, or 531%, in 2021 compared to 2020. This increase was primarily due to commercially launching our COVID-19 test kit and being a public company. We had higher headcount and personnel-related expenses of $13.9 million which includes an expense of $4.3 million related to the departure of a former executive, professional expenses of $5.9 million to support our commercial activities, office related expenses of $1.8 million, which primarily relate to additional leased locations, and public company compliance and insurance of $4.6 million.

We expect that our selling, general and administrative expenses will increase as we invest in the infrastructure of our commercial and sales organization to support the commercialization of our COVID-19 test kit. We expect our general and administrative expenses will increase in support of our expanding operations including increased headcount and related personnel costs, investments in corporate and research facilities, information technology, increased compliance related costs accounting, audit, legal and consulting services expenses.

Other income (expense), net

Other income (expense), net consists primarily of grant income, offset by interest expense and adjustment upon remeasurement of derivative liabilities and convertible notes.

Grant Income

We earn grant income for performing tasks under research and development agreements with governmental agencies, such as the National Institutes of Health, or NIH, in respect of work performed on STI developments. Income derived from reimbursement of direct out-of-pocket expenses, overhead allocations and fringe benefits for research costs associated with government contracts are recorded within grant income. Grant

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income is recorded at the gross amount of the reimbursement. The direct costs associated with these reimbursements are reflected as a component of Research and development expense in our Statements of Operations.

Grant income decreased $1.5 million, or 72%, in 2021 compared to 2020. This decrease was primarily due to the stoppage of BARDA billing in June 2020 as we shifted our near-term business strategy from the development of influenza test kits to respond to the COVID-19 pandemic.

Interest Income (Expense), net

Interest income consists of interest earned on our invested cash balances following our IPO. Interest expense consists of contractual and effective interest incurred on our bank financing arrangements and outstanding convertible notes during the relevant periods.

Interest income (expense), net increased during 2021 resulting from interest earned on invested cash balances following the IPO in the first quarter of 2021, as compared to interest expense for 2020, resulting from interest incurred on our outstanding convertible notes.

We expect our interest income (expense), net may fluctuate depending on the amount of interest income earned on available invested cash balances and the degree offset by interest expense incurred on outstanding balances under our bank financing arrangement.

Remeasurement of Derivative Liabilities and Convertible Notes

During 2020 and portions of 2021, prior to our IPO, we issued certain convertible notes which contained embedded features that met the definition of embedded derivatives. Accordingly, we classify the convertible notes and related embedded features as liabilities on our Balance Sheets and record changes in fair value at each balance sheet date with the corresponding change recorded as Other income (expense), net on the Statement of Operations.

For 2021, we recorded a change in the fair value related to the remeasurement of derivative liabilities and convertible notes upon conversion of the notes to common stock at the closing of our IPO in the first quarter of 2021. For 2020, we recorded a change in the fair value related to the remeasurement of derivative liabilities and convertible notes related to the conversion of certain of these notes to shares of our preferred stock. 

Provision for Income Taxes

The increase in provision for income taxes in 2021 was due to an increase in state franchise taxes. The effective tax rate for 2021 and 2020 differed from the U.S. federal statutory rate of 21% primarily due to no federal taxable income for both fiscal years.

Our effective annual tax rate may increase if we generate higher federal and state pretax income or establish nexus in additional states as we continue to expand our operations and sales into markets.

Liquidity and Capital Resources

Based on our current planned operations, we expect that our existing cash, cash generated from revenue, and cash draws from the bank financing arrangement (see Note 13 to our audited financial statements included elsewhere in this Annual Report) will enable us to fund our business operations for at least 12 months from the date hereof. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Sources of Liquidity

Our primary source of operating cash is cash collected from customers related to sales of our COVID-19 test kit, which we expect will increase as we expand to meet customer demand for our test kits. We may supplement

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our cash operating needs by entering into additional loan and other financing arrangements, additional public offerings of our common stock or convertible notes. There can be no assurance that such sources of cash will be readily available during times required to meet our cash operating requirements or at terms favorable to us.

We have incurred net losses since our inception. For 2021 and 2020, we incurred a net loss of $64.8 million and $37.3 million, respectively. We may incur additional losses and increased operating expenses in future periods. As of December 31, 2021, we had an accumulated deficit of $128.5 million. To date, we have generated only limited grant income and product revenue, and we may never achieve revenue sufficient to offset our expenses or at all. As of December 31, 2021, we had $106.0 million in cash.

In December 2020, we issued and sold convertible notes, or the 2020B Notes, in the aggregate principal amount of $20.0 million in a private placement, which, in addition to the accrued interest thereon, automatically converted into shares of our common stock at a conversion price equal to 80% of the IPO price per share. On February 9, 2021, we closed our IPO of 10,350,000 shares of common stock, including 1,350,000 shares issued pursuant to the full exercise of the underwriters’ option to purchase additional shares in the IPO, at a price to the public of $17.00 per share. The net proceeds to us from the IPO were $159.9 million, after deducting underwriting discounts and commissions of $12.3 million and offering expenses of $3.7 million.

In February 2022, we entered into the Loan Agreement with Hercules and SVB providing for term loans in an aggregate principal amount of up to $80.0 million available in four tranches with the first tranche for $30.0 million funded to us at closing. The term loans will mature on February 1, 2026. In connection with the entry into the Loan Agreement, we issued a warrant for 59,642 shares of common stock to each of Hercules and SVB. Each warrant is exercisable for a period of seven years from issuance at a per-share exercise price equal to $5.03. Subject to certain conditions as required under the Loan Agreement, we will draw upon these term loads to fund our operations as needed to support our planned growth and expansion to support the expected increase in demand for our test kits. See Note 13 to our audited financial statements included elsewhere in this Annual Report.

Uses of Liquidity

Our primary uses of cash are to fund our operations as we continue to grow our business. We may require a significant amount of cash to fund capital expenditures, inventory purchases and timing of accounts receivable as we grow our commercial infrastructure. We may continue to incur operating losses in the near term as our operating expenses will be increased to support the growth of our business. We expect that our selling, general and administrative expenses, and research and development expenses will continue to increase as we seek additional regulatory approvals and further develop test kits, increase our test kit manufacturing volume, expand our marketing efforts and increase our internal sales force to drive increased adoption of our test kits.

We may also have cash requirements related to capital expenditures to support the planned growth of our business, including investments in corporate facilities and equipment.

In January 2015, we entered into a lease for office, research and development space located in Emeryville, California that expires in March 2022. Pursuant to the same lease agreement, we leased additional square feet of office and development space in Emeryville, California that expires in January 2024. In July 2021, we leased an additional 13,267 square feet of office, research and development space in Emeryville, California that expires in June 2024, and in August 2021, we leased an additional 14,835 square feet of office and laboratory space in San Jose, California which serves as our quality headquarters. Pursuant to the same lease agreement, in December 2021, we leased additional square feet of office and laboratory space in San Jose, California. In March 2022, we leased an 82,000 square foot facility in Vista, California for office, development, research and laboratory space and expect to assume full occupancy by August 2022 after completing tenant improvements. For the 12 month period ending December 31, 2022, we project that our fixed commitments will include $1.7 million of lease payments.

Pursuant to the Eiken Agreement we entered into in July 2020, we are obligated to make milestone payments upon the achievement of specified regulatory milestones as well as royalty payments. In April 2021, we paid the first installment of the world-wide license in the amount of $9 thousand. The second installment for the world-wide license of $9 thousand was paid in July 2021. See Part I, Item 1, “Business–Intellectual Property–

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License Agreement with Eiken Chemical Co., Ltd.” and Note 5 to our audited financial statements included elsewhere in this Annual Report. On March 8, 2022, we provided notice of termination of the Eiken Agreement. Termination will be effective May 12, 2022. We terminated the Eiken Agreement because certain Eiken Licensed Patents have expired, all of which are locations in which we operate. Following termination of the Eiken Agreement, we will not be required to make any future royalty payments under the Eiken Agreement.

As of December 31, 2021, we had non-cancellable purchase commitments of $95.0 million, consisting primarily of $68.5 million of raw material purchase commitments and fixed assets related to expanding our manufacturing capacity, and $26.5 million pursuant to the Jabil MSA and Jabil TSA. Under the Jabil MSA, 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, when available, 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.

In July 2021, we entered into the Distribution Agreement with Switch, as amended in December 2021, under which we appointed Switch as a non-exclusive distributor for our CHECK IT test kit in Canada and agreed to provide more than two million test kits in 2022. Under the Distribution Agreement, Switch is required to provide us with forecasts of the quantity of test kits that Switch expects to order for each of the coming 12 calendar months through December 2022 and each six-month period following December 2022, each, a Rolling Forecast. For each calendar month in the Rolling Forecast, Switch is required to purchase at least the quantity of test kits set forth in the Rolling Forecast for such month. The on-going purchases of our test kits and subsequent sale under the Switch distribution agreement is expected to support our cash operating needs as we expand our sales efforts. See Part I, Item 1, “Business–Intellectual Property–Distribution Agreement with Switch” and Note 2 to our audited financial statements included elsewhere in this Annual Report.

We also enter into contracts in the normal course of business with various vendors that generally provide for contract termination following a certain notice period. These contracts do not contain any minimum purchase commitments. Payments due upon cancellation consist only of payments for services provided, expenses incurred up to the date of cancellation and de minimis termination penalties.

We expect that our near and longer-term liquidity requirements will continue to consist of working capital and general corporate expenses associated with the growth of our business. Based on our current planned operations, we expect that our existing cash, cash generated from revenue, and cash draws from the bank financing arrangement (see Note 13 to our audited financial statements included elsewhere in this Annual Report) will enable us to fund our operating expenses for at least 12 months from the date of this filing. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we would use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. Furthermore, we may elect to raise additional capital on an opportunistic basis to fund operations. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We may raise additional capital through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. 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.

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,

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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 not able to secure adequate additional funding when needed, we will need to re-evaluate our operating plan and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, limit, suspend or curtail planned test kit development programs and commercialization efforts, cease operations entirely. Having insufficient funds may also require us to relinquish rights to technology that we would otherwise prefer to develop and market ourselves, or on less favorable terms than we would otherwise choose. The foregoing actions and circumstances could materially adversely impact our business, results of operations and future prospects.

Cash Flows

The following table summarizes our cash flows for the years indicated:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(100,878

)

 

$

(32,524

)

Investing activities

 

 

(15,391

)

 

 

(18,812

)

Financing activities

 

 

161,701

 

 

 

107,786

 

Increase in cash and restricted cash equivalents

 

$

45,432

 

 

$

56,450

 

 

Cash Flows Used in Operating Activities

Net cash used in operating activities for 2021 was $100.9 million, consisting of our net loss of $64.8 million and changes in our net operating assets and liabilities of $57.2 million, partially offset by adjustments for non-cash charges of $21.2 million. The non-cash charges were primarily driven by $8.1 million in stock-based compensation expense, $3.7 million in depreciation and amortization, $1.4 million in impairment on long-lived assets, $6.5 million in inventory obsolescence adjustment, $0.4 million of allowance for doubtful accounts, $0.8 million in noncash lease expense and the loss incurred of $0.3 million on the remeasurement to fair value of the 2020B Notes. The net cash used by changes in our operating assets and liabilities were primarily driven by $52.4 million of inventory purchases, $27.3 million of accounts receivable as we entered our first full year of commercialization and $8.4 million of prepaid expenses and other assets, partially offset by $39.1 million increases in accounts payable, accrued liabilities, and customer deposits. The increases in accounts payable and accrued liabilities were largely due to increased expenditures in operations, research and development, and selling, general and administrative activities.

Net cash used in operating activities for 2020 was $32.5 million, consisting primarily of our net loss of $37.3 million and changes in our net operating assets and liabilities of $3.8 million, partially offset by adjustments for non-cash charges of $8.5 million. The non-cash charges were primarily driven by the loss incurred of $7.5 million on the remeasurement to fair value of the 2020B Notes and to a lesser extent by $0.7 million in stock-based compensation expense and depreciation and amortization expense. The net cash used by changes in our operating assets and liabilities were primarily driven by $4.9 million of inventory purchases and $6.4 million of prepaid expenses and deferred costs related to our IPO, partially offset by collections of $1.6 million in grant income receivable and $6.5 million increases in accounts payable and accrued liabilities. The increases in accounts payable and accrued liabilities were largely due to increased expenditures in research and development and selling, general and administrative activities.

Cash Flows Used in Investing Activities

Net cash used in investing activities for 2021 and 2020 was $15.4 million and $18.8 million, respectively, consisting of purchases of property and equipment. The decrease was primarily due to investing in our manufacturing capabilities to support the commercialization of our COVID-19 test kit.

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Cash Flows Provided by Financing Activities

Net cash provided by financing activities during 2021 was $161.7 million, consisting primarily of $159.9 million in proceeds from the issuance and sale of shares of our common stock as part of our IPO on February 9, 2021.

Net cash provided by financing activities during 2020 was $107.8 million, consisting primarily of $76.1 million in proceeds from the issuance and sale of shares of our preferred stock and $31.1 million from the issuance of convertible debt.

Critical Accounting Policies and Significant Management Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements included elsewhere in this Annual Report that have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial condition and results of operations. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances; recoverability of inventory; the accrual for certain liabilities including certain research and development expenses; and valuations of equity awards used to determine stock-based compensation; and the amounts of deferred tax assets and liabilities including the related valuation allowance. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

We believe our critical accounting policies relating to revenue recognition, inventory, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Balance Sheets and Statements of Operations.

While our significant accounting policies are more fully described in Note 2 to our audited financial statements, included elsewhere in this Annual Report, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, we perform the following five steps:

 

(i)

identify the contract(s) with a customer;

 

(ii)

identify the performance obligations in the contract;

 

(iii)

determine the transaction price;

 

(iv)

allocate the transaction price to the performance obligations in the contract; and

 

(v)

recognize revenue when (or as) the entity satisfies a performance obligation.

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Under ASC 606, assuming all other revenue recognition criteria have been met, we recognize revenue for arrangements upon the transfer of control of our products to our customers, which is upon the shipment of the product to the customer under our standard terms and conditions, unless underlying customer agreements specify otherwise. There are no further performance obligations by us to the customer after shipment of the product. Control of our products is transferred at a point in time.

Revenue is measured based on the amount of consideration that we expect to receive as reduced by estimated discounts and allowances.

 

Inventories Produced in Preparation for Product Launches

 

We capitalize our inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when positive results have been obtained for the clinical trials that we determine are necessary to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and we determine it is probable that these capitalized costs will provide future economic benefit in excess of capitalized costs. The factors considered by us in evaluating these uncertainties include the receipt and analysis of positive clinical test results for the underlying product, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the submission of the regulatory application. We closely monitor the status of each respective product within the regulatory approval process, including all relevant communication with regulatory authorities. If we are aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized.

 

For inventories that are capitalized in preparation of product launch, anticipated future sales, expected approval date and shelf lives are evaluated in assessing realizability. The shelf life of a product is determined as part of the regulatory approval process; however, in evaluating whether to capitalize pre-launch inventory production costs, we consider the product stability data of all of the pre-approval production to date to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs. Prior to obtaining the EUA for our COVID-19 test kit on November 17, 2020, we charged $2.3 million of preapproval inventory to research and development expense. After the receipt of the EUA in November 2020, we account for all production item purchases as inventory in accordance with its standard inventories policy. Preapproval inventories previously recorded as research and development expense that are subsequently sold had zero cost of product. As of December 31, 2021, we utilized all of the preapproval inventory.

 

Inventories

 

We value our inventory at the lower of cost or net realizable value and determine the cost of inventory using the first-in, first-out method. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors.

 

In order to assess the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared to current or committed inventory levels. We periodically review our inventories for shelf life, excess or obsolescence and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated us, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Amounts written-down due to unmarketable inventory are recorded in cost of revenue and a new lower-cost basis for the inventory is established.

Stock-Based Compensation

We measure stock options and other stock-based awards granted to employees, directors and other service providers based on their fair value on the date of grant and recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We recognize the

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impact of forfeitures on stock-based compensation expense as forfeitures occur. We apply the straight-line method of expense recognition to all awards with only service-based vesting conditions.

We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective assumptions including:

 

Expected Term—We have opted to use the “simplified method” for estimating the expected term of plain-vanilla options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). The expected term may have a significant effect on the value of the option, as the longer the term, the more time the option holder has to allow the stock price to increase, without a cash investment and thus, the more valuable the option.

 

Risk-Free Interest Rate—The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of our stock options.

 

Expected Dividend—We have not issued any dividends and do not anticipate to issue dividends on our common stock. As a result, we have estimated the dividend yield to be zero.

 

Expected Volatility—Due to our limited operating history and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The more volatility there is in the underlying stock price, the more valuable the option becomes because of the greater possibility of significant changes in stock price.

Determination of Fair Value of Common Stock

Prior to our IPO, as there had been no public market for our common stock to date, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Based on our stage of development and other relevant factors, for valuations prior to January 2020, we determined that the option pricing method, or OPM, was the most appropriate method for estimating our enterprise value to determine the fair value of our common stock. Starting in January 2020, we determined that the hybrid method was the most appropriate method for determining the fair value of our common stock. The hybrid method is a probability-weighted expected return method, or PWERM, where the equity value in one or more scenarios is calculated using an OPM.

The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

As a public trading market for our common stock was established upon the initial trading of our common stock on February 5, 2021, it is no longer necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the closing price of our common stock on the date of grant.

As of December 31, 2021, the unrecognized stock-based compensation expense related to employee stock options was $4.7 million and is expected to be recognized as expense over a weighted-average period of approximately 2.4 years.

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Provision for Income Taxes

We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. Our provision for income taxes primarily consists of state tax expense.

As part of the process of preparing our financial statements, we continuously monitor the circumstances impacting the expected realization of our deferred tax assets. We consider all available evidence, including historical operating results in each jurisdiction, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. A full valuation allowance is established to reduce our deferred tax assets to the amount that is more likely than not to be realized. These deferred tax assets primarily consist of net operating loss carryforwards and research and development tax credits. We intend to maintain such valuation allowance until sufficient evidence exists to support its reduction. Our deferred tax liabilities primarily consist of book and tax basis differences in fixed assets. The deferred tax assets, net of the valuation allowance, reduce the deferred tax liabilities in full, resulting in no deferred tax assets or liabilities recorded on the balance sheet. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Changes in these estimates may result in significant increases or decreases to our tax provision in a period in which such estimates are changed, which in turn would affect net income or loss.

We recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Any interest and penalties related to uncertain tax positions have not been material.

Recently Issued and Adopted Accounting Standards

See Note 2 to our audited financial statements included elsewhere in this Annual Report for more information.

Emerging Growth Company Status

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies who have adopted new or revised accounting pronouncements.

We will remain an emerging growth company until the earlier of (1) (a) December 31, 2026, (b) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion or (c) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 7A.

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Item 8. Financial Statements and Supplementary Data.

 

LUCIRA HEALTH, INC.

INDEX TO FINANCIAL STATEMENTS

 

 

Page

Report of Independent Registered Public Accounting Firm (BDO USA, LLP; San Jose, California; PCAOB ID#243)

119

Audited Financial Statements as of and for the Years Ended December 31, 2021 and 2020

 

Balance Sheets

120

Statements of Operations

121

Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

122

Statements of Cash Flows

123

Notes to Financial Statements

124

 

 

 

118


 

 

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

Lucira Health, Inc.

Emeryville, California

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Lucira Health, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2020.

San Jose, California

March 31, 2022

 

119


 

 

LUCIRA HEALTH, INC.

BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

105,982

 

 

$

58,212

 

Accounts receivable, net

 

 

27,245

 

 

 

293

 

Inventory

 

 

50,776

 

 

 

4,865

 

Other receivable

 

 

8,188

 

 

 

798

 

Prepaid expenses

 

 

10,274

 

 

 

3,496

 

Other current assets

 

 

3,817

 

 

 

229

 

Restricted cash equivalents

 

 

 

 

 

2,338

 

Total current assets

 

 

206,282

 

 

 

70,231

 

Property and equipment, net

 

 

30,974

 

 

 

19,408

 

Operating lease right-of-use assets

 

 

2,714

 

 

 

748

 

Other assets

 

 

384

 

 

 

2,316

 

Total assets

 

$

240,354

 

 

$

92,703

 

Liabilities, Redeemable Convertible Preferred Stock, and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

19,371

 

 

$

3,981

 

Accrued liabilities

 

 

29,162

 

 

 

4,445

 

Operating lease liabilities, current

 

 

1,609

 

 

 

431

 

Customer deposits

 

 

189

 

 

 

 

Total current liabilities

 

 

50,331

 

 

 

8,857

 

Convertible notes payable

 

 

 

 

 

24,694

 

Operating lease liabilities, net of current portion

 

 

1,220

 

 

 

380

 

Total liabilities

 

 

51,551

 

 

 

33,931

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock $0.001 par value; 0 and 103,355,827

shares authorized as of December 31, 2021 and 2020, respectively;

0 and 23,978,747 shares issued and outstanding as of December 31, 2021 and 2020,

respectively; aggregate liquidation preference of $0 as of December 31, 2021

 

 

 

 

 

121,080

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock $0.001 par value; 10,000,000 and 0 shares authorized as

of December 31, 2021 and 2020, respectively; 0 shares issued

and outstanding as of December 31, 2021 and 2020

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 and 150,000,000 shares authorized as of

December 31, 2021 and 2020, respectively; 39,663,645 and 2,712,694

shares issued and outstanding as of December 31, 2021 and 2020, respectively

 

 

40

 

 

 

3

 

Additional paid-in capital

 

 

317,304

 

 

 

1,403

 

Accumulated deficit

 

 

(128,541

)

 

 

(63,714

)

Total stockholders’ equity (deficit)

 

 

188,803

 

 

 

(62,308

)

Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)

 

$

240,354

 

 

$

92,703

 

 

The accompanying notes are an integral part of these financial statements.

120


 

LUCIRA HEALTH, INC.

STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Net sales

 

$

93,055

 

 

$

269

 

Cost of products sold

 

 

81,392

 

 

 

1,941

 

Impairment of long-lived assets

 

 

1,439

 

 

 

 

Gross profit (loss)

 

 

10,224

 

 

 

(1,672

)

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

39,840

 

 

 

24,620

 

Selling, general and administrative

 

 

35,521

 

 

 

5,633

 

Total operating expenses

 

 

75,361

 

 

 

30,253

 

Loss from operations

 

 

(65,137

)

 

 

(31,925

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Grant income

 

 

597

 

 

 

2,145

 

Interest expense

 

 

(3

)

 

 

(53

)

Interest income

 

 

14

 

 

 

 

Remeasurement of derivative liabilities and convertible notes

 

 

(281

)

 

 

(7,515

)

Total other income (expense), net

 

 

327

 

 

 

(5,423

)

Loss before provision for income taxes

 

 

(64,810

)

 

 

(37,348

)

Provision for income taxes

 

 

17

 

 

 

 

Net loss

 

$

(64,827

)

 

$

(37,348

)

Net loss per share of common stock, basic and diluted

 

$

(1.86

)

 

$

(15.58

)

Weighted-average number of shares used in net loss per share of

   common stock, basic and diluted

 

 

34,768,542

 

 

 

2,396,798

 

 

The accompanying notes are an integral part of these financial statements.

121


 

LUCIRA HEALTH, INC.

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands except for share data)

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Convertible Preferred

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Stockholders'

 

 

 

Stock

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

(Deficit)

 

Balance as of January 1, 2020

 

 

6,712,085

 

 

$

30,960

 

 

 

 

 

2,257,740

 

 

$

2

 

 

$

699

 

 

$

(26,366

)

 

$

(25,665

)

Issuance of Series B redeemable convertible preferred stock, net of $34 issuance costs

 

 

3,754,084

 

 

 

17,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series C redeemable convertible preferred stock, net of $186 issuance costs

 

 

10,919,468

 

 

 

58,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible notes to Series C redeemable convertible preferred stock

 

 

2,593,110

 

 

 

13,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

454,954

 

 

 

1

 

 

 

267

 

 

 

 

 

 

268

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

437

 

 

 

 

 

 

437

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,348

)

 

 

(37,348

)

Balance as of December 31, 2020

 

 

23,978,747

 

 

$

121,080

 

 

 

 

 

2,712,694

 

 

$

3

 

 

$

1,403

 

 

$

(63,714

)

 

$

(62,308

)

Conversion of redeemable convertible preferred stock into common stock

 

 

(23,978,747

)

 

 

(121,080

)

 

 

 

 

23,978,747

 

 

 

24

 

 

 

121,056

 

 

 

 

 

 

121,080

 

Conversion of convertible notes into common stock

 

 

 

 

 

 

 

 

 

 

1,470,947

 

 

 

2

 

 

 

24,980

 

 

 

 

 

 

24,982

 

Issuance of common stock upon IPO, net of $16 million of issuance costs

 

 

 

 

 

 

 

 

 

 

10,350,000

 

 

 

10

 

 

 

159,888

 

 

 

 

 

 

159,898

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

1,100,196

 

 

 

1

 

 

 

1,540

 

 

 

 

 

 

1,541

 

Issuance of common stock under Employee Stock Purchase Plan (ESPP)

 

 

 

 

 

 

 

 

 

 

39,811

 

 

 

 

 

 

332

 

 

 

 

 

 

332

 

Issuance of common stock for settlement of restricted stock units

 

 

 

 

 

 

 

 

 

 

11,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,105

 

 

 

 

 

 

8,105

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,827

)

 

 

(64,827

)

Balance as of December 31, 2021

 

 

 

 

$

 

 

 

 

 

39,663,645

 

 

$

40

 

 

$

317,304

 

 

$

(128,541

)

 

$

188,803

 

 

The accompanying notes are an integral part of these financial statements.

122


 

LUCIRA HEALTH, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(64,827

)

 

$

(37,348

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

8,105

 

 

 

437

 

Allowance for doubtful accounts

 

 

358

 

 

 

 

Depreciation and amortization

 

 

3,671

 

 

 

280

 

Long-lived asset impairment

 

 

1,439

 

 

 

 

Inventory obsolescence charges

 

 

6,508

 

 

 

 

Remeasurement of derivative liabilities and convertible notes payable

 

 

281

 

 

 

7,515

 

Noncash interest expense

 

 

3

 

 

 

46

 

Noncash lease expense

 

 

802

 

 

 

311

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(52,419

)

 

 

(4,865

)

Accounts receivable

 

 

(27,310

)

 

 

(293

)

Other receivable

 

 

(7,390

)

 

 

(798

)

Prepaid expenses

 

 

(6,778

)

 

 

(3,302

)

Other current assets

 

 

(1,656

)

 

 

(172

)

Accounts payable

 

 

14,921

 

 

 

3,196

 

Customer deposits

 

 

189

 

 

 

 

Accrued liabilities

 

 

23,975

 

 

 

2,768

 

Operating lease liabilities

 

 

(750

)

 

 

(299

)

Net cash used in operating activities

 

 

(100,878

)

 

 

(32,524

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(15,391

)

 

 

(18,812

)

Net cash used in investing activities

 

 

(15,391

)

 

 

(18,812

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock on IPO, net of issuance costs

 

 

159,898

 

 

 

 

Proceeds from issuance of redeemable convertible preferred stock, net

   of issuance costs

 

 

 

 

 

76,142

 

Proceeds from issuance of convertible notes payable

 

 

 

 

 

31,113

 

Proceeds from exercise of stock options

 

 

1,471

 

 

 

531

 

Proceeds from the issuance of common stock under Employee Stock Purchase Plan (ESPP)

 

 

332

 

 

 

 

Net cash provided by financing activities

 

 

161,701

 

 

 

107,786

 

Net increase in cash and restricted cash equivalents

 

 

45,432

 

 

 

56,450

 

Cash and restricted cash equivalents, beginning of year

 

 

60,550

 

 

 

4,100

 

Cash and restricted cash equivalents, end of year

 

$

105,982

 

 

$

60,550

 

Reconciliation to amounts on the Balance Sheets:

 

 

 

 

 

 

 

 

Cash

 

$

105,982

 

 

$

58,212

 

Restricted cash equivalents

 

 

 

 

 

2,338

 

Total cash and restricted cash equivalents

 

$

105,982

 

 

$

60,550

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

28

 

 

$

10

 

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment included in accounts payable and accrued liabilities

 

$

1,285

 

 

$

508

 

Deferred offering costs included in accrued liabilities

 

$

 

 

$

487

 

Acquisition of right-of-use asset through operating lease obligation

 

$

2,768

 

 

$

 

Vesting of early exercise options

 

$

69

 

 

$

 

Conversion of redeemable convertible notes payable principal and interest for common stock on IPO

 

$

24,982

 

 

$

 

Conversion of convertible redeemable preferred stock into common stock on IPO

 

$

121,080

 

 

$

 

Conversion of convertible notes payable principal and interest for redeemable convertible preferred stock

 

$

 

 

$

13,978

 

 

The accompanying notes are an integral part of these financial statements.

123


 

LUCIRA HEALTH, INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Unless otherwise indicated, financial information except share and per share data, including dollar values stated in the text of the notes to financial statements, is expressed in thousands.

Note 1. Organization

Description of Business

Lucira Health, Inc. (the “Company”) was incorporated under the laws of the state of Delaware on February 20, 2013 under the name DiAssess Inc. The Company changed its name to Lucira Health, Inc. in January 2020. The Company is located in Emeryville, California.

The Company is a medical technology company focused on the development and commercialization of transformative and innovative infectious disease test kits. The Company has developed a testing platform that produces high-complexity-laboratory-accurate molecular testing in a single-use and user-friendly test kit that is powered by two AA batteries and fits in the palm of a hand. The Company’s initial focus is within respiratory diseases, and initially for COVID-19 and influenza Types A and B indications.

On November 17, 2020, the Company received an Emergency Use Authorization (“EUA”) from the Food and Drug Administration (“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 point-of-care (“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. People who are suspected of COVID-19 are those who are either symptomatic or are thought to have been exposed to COVID-19. On April 9, 2021, the Company received its first FDA EUA authorization for over-the-counter (“OTC”) non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged two to 13 (with parent collection).

Reverse Stock Split

On January 28, 2021, the Company’s board of directors approved a 1-for-4.3103 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock and each series of its redeemable convertible preferred stock to be consummated prior to the effectiveness of the Company’s initial public offering (“IPO”) on February 4, 2021. The par value and authorized shares of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock, preferred stock, options to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented. The Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware on January 28, 2021 that automatically effectuated the Reverse Stock Split without any further action required.

Initial Public Offering

On February 9, 2021, the Company closed its IPO of 10,350,000 shares of its common stock, including 1,350,000 shares of common stock issued pursuant to the full exercise of the underwriters’ option to purchase additional shares in the IPO, at a price to the public of $17.00 per share. The net proceeds to the Company from the IPO were $159.9 million, after deducting underwriting discounts and commissions of $12.3 million and offering expenses of $3.7 million. In connection with the IPO, all shares of Series A, Series B and Series C redeemable convertible preferred stock and outstanding convertible notes converted into 25,449,694 shares of common stock.

124


 

Liquidity and Going Concern

The Company has incurred recurring losses and negative cash flows from operating activities since inception. As of December 31, 2021, the Company had cash of $106.0 million and had an accumulated deficit of $128.5 million. Since inception through December 31, 2021, the Company generated $93.3 million of revenue from the sales of its test kits. On February 4, 2022, the Company closed a debt financing of up to $80.0 million. The first tranche of $30.0 million was funded upon close. See Note 13 Subsequent Events.

The Company believes that cash as of December 31, 2021, cash to be collected from customers related to sales of the Company’s COVID-19 test kit, and cash draws from the bank financing arrangement (see Note 13) will be sufficient to fund its planned operations for a period of at least 12 months from the date of the issuance of the accompanying financial statements.

The ability to continue as a going concern is dependent upon the Company generating revenue and profit in the future and/or upon obtaining necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company may raise additional capital through the issuance of equity securities, debt financings or other sources in order to further implement its business plan. However, if such financing is not available when needed and at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of new test kits.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The Company performed an evaluation of its activities through the date of filing this Annual Report and has concluded that there were no subsequent events or transactions that occurred subsequent to the balance sheet date and prior to the filing of this Annual Report, except for the transactions disclosed in Note 13 Subsequent Events.

Use of Estimates

The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses as well as the related disclosure of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from those estimates. The Company’s Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results. The full extent to which the COVID-19 pandemic could continue to directly or indirectly impact the Company’s business, results of operations and financial condition, including revenues, expenses, reserves and allowances, manufacturing and distribution will depend on future developments that remain uncertain at this time, particularly as virus variants continue to spread.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net loss, total assets, total liabilities, or stockholders’ equity.

Concentration of Credit Risk and Significant Suppliers and Distributors

Financial instruments that potentially subject the Company to credit risk consist principally of cash held by financial institutions, grant income receivables and account receivables. Substantially all of the Company’s cash is held at one financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits.

125


 

As of and during the year ended December 31, 2021, Customers A, B and C represented 18%, 17% and 12%, respectively, of the Company’s accounts receivable, and Customers C and A accounted for 11% and 10%, respectively, of the Company’s revenue.

As of and during the year ended December 31, 2020, there was only one customer which represented 100% of the Company’s accounts receivable and revenue.

The Company is dependent on one contract manufacturer for commercial manufacturing of the Company’s test kits, key suppliers for certain laboratory materials and inventory items and certain key partners for distribution and fulfillment of customer orders. An interruption in the supply of these materials or disruption of the fulfillment and distribution operations, could temporarily impact the Company’s ability to manufacture its commercial inventory and perform development, testing and clinical trials related to its products.

On July 14, 2021, the Company entered into a Distribution Agreement with Switch Health Solutions Inc. (“Switch”), which agreement was subsequently amended on December 21, 2021 (such agreement as amended, the “Distribution Agreement”). Under the Distribution Agreement, the Company appointed Switch as a non-exclusive distributor for the Company’s CHECK IT COVID-19 Test Kits (the “Test Kits”) in Canada. 

Under the Distribution Agreement, Switch is required to provide the Company with forecasts of the quantity of Test Kits that Switch expects to order for each of the coming 12 calendar months through December 2022 and each six-month period following December 2022 (each, a “Rolling Forecast”). For each calendar month in the Rolling Forecast, Switch is required to purchase at least the quantity of Test Kits set forth in the Rolling Forecast for such month.

If the Company fails to fulfill the quantity of Test Kits set forth in any part of the Rolling Forecast for which Switch submits a purchase order(s), then Switch will not be required to purchase the remaining quantity of Test Kits set forth in the Rolling Forecast. If Switch fails to purchase the quantity of Test Kits in any month, or in the aggregate for the 12 month period, in each case as set forth in the Rolling Forecast, then Switch is liable to the Company for a low double-digit percentage of the total price applicable to the quantity of Test Kits set forth in the Rolling Forecast for the two months following such failure by Switch.

The Distribution Agreement is for a one-year term and either party has the right to renew the Distribution Agreement for successive periods of one-year each by providing written notice to the other party prior to the expiration of the current term. Either party may terminate the Distribution Agreement (a) for uncured material breach by the other party, (b) if the other party enters into insolvency or bankruptcy or a trustee or receiver or the equivalent is appointed for the other party or proceedings are instituted against the other party relating to dissolution, liquidation, winding up, bankruptcy, insolvency, etc. or (c) for convenience upon 30 days’ notice to the other party. Additionally, either party may terminate immediately upon written notice if a regulatory or governmental agency or court takes action the result of which would prohibit or significantly restrict the sale, distribution, use or manufacture of the Test Kits in accordance with the Distribution Agreement.

Fair Value Measurements

The carrying value of the Company’s cash, accounts receivable, prepaid expenses, other current assets and accrued liabilities approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

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Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2—Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s derivative liabilities and convertible notes were measured at fair value on a recurring basis and were classified as Level 3 liabilities.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist primarily of amounts due to the Company related to product sales. It is the practice of the Company to provide for uncollectible accounts in the year the accounts are determined to be uncollectible.

The following table summarizes the activity in the allowance for doubtful accounts:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Beginning balance

 

$

 

 

$

 

Amounts charged to costs and expenses

 

 

358

 

 

 

 

Write-offs

 

 

(259

)

 

 

 

Ending balance

 

$

99

 

 

$

 

 

Cash and Restricted Cash Equivalents

The Company considers highly liquid investments purchased with a remaining maturity date upon acquisition of three months or less to be cash equivalents and are stated at cost, which approximates fair value. As of December 31, 2021 and 2020, there were no cash equivalents.

As of December 31, 2020, the Company held a restricted cash balance of $2.3 million which was used to secure a letter of credit in relation to the Company’s contract manufacturer to secure certain purchases made on the Company’s behalf. The cash was deposited in a money market account with maturities of three months or less and classified as restricted cash equivalents on the Company’s Balance Sheets. The letter of credit matured in November 2021 and as of December 31, 2021, the Company held 0 restricted cash.

Inventories Produced in Preparation for Product Launches

The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when positive results have been obtained for the clinical trials that the Company determines are necessary to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and the Company has determined it is probable that these capitalized costs will provide future economic benefit in excess of capitalized costs. The factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive clinical test results for the underlying product, results from meetings with the relevant regulatory authorities

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prior to the filing of regulatory applications, and the submission of the regulatory application. The Company closely monitors the status of each respective product within the regulatory approval process, including all relevant communication with regulatory authorities. If the Company is aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized.

For inventories that are capitalized in preparation of product launch, anticipated future sales, expected approval date and shelf lives are evaluated in assessing realizability. The shelf life of a product is determined as part of the regulatory approval process; however, in evaluating whether to capitalize pre-launch inventory production costs, the Company considers the product stability data of all of the pre-approval production to date to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs. As of December 31, 2020, the Company held $1.3 million that met criteria for capitalization. As of December 31, 2021, the Company utilized all of the preapproval inventory write-offs for cost of sales of $1.0 million and for selling, general and administrative and research and development activities of $0.3 million.

Inventories

The Company values its inventory at the lower of cost or net realizable value and determines the cost of inventory using standard costs which closely resembles the first-in, first-out method. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors. Inventory held as of December 31, 2021 is in the form of raw materials, work in process and finished goods.

In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. The Company periodically reviews its inventories for shelf life, excess or obsolescence and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by the Company, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Amounts written-down due to unmarketable inventory are recorded in cost of revenue and a new lower-cost basis for the inventory is established. The Company recorded $6.5 million of inventory obsolescence charges during the year ended December 31, 2021 related to an issue during transit and quality control exceptions related to one of the key raw material components of its product.

Warranty

The Company offers a standard product warranty that our products will perform as intended upon the date of original delivery for a reasonable period of time, which typically coincides with product shelf life. The Company has the obligation, at its option, to either refund, repair or replace a defective product. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of products sold. The estimate of future warranty costs is based on historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies. The Company regularly reviews these estimates to assess the appropriateness of our recorded warranty liabilities and adjust the amounts as necessary. As of December 31, 2021 and 2020, the accrued liability for warranty returns was not significant.

Property and Equipment, Net

Property and equipment are stated at cost, net of depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining term of the related lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the Balance Sheets and any resulting gain or loss is reflected in Other income (expense), net in the Statements of Operations in the period realized.

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Leases

The Company determines if an arrangement is a lease at inception and if so, determines whether the lease qualifies as operating or finance. Operating leases are included in Operating lease right-of-use (“ROU”) assets and Operating lease liabilities on the Balance Sheets. The Company did not have any finance leases as of December 31, 2021 and 2020.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. When the Company’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at commencement dates in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and exclude lease incentives when paid by the Company or on the Company’s behalf. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components. The Company elected to not separate lease and non-lease components for all of its building leases. The Company also made an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and not recognize ROU assets or lease liabilities for such leases.

Impairment of Long-Lived Assets

The Company’s long-lived assets are comprised principally of its property and equipment, including leasehold improvements and ROU assets.

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. The Company identifies impairments related to long-lived assets when management determines that the remaining carrying value will not be realized through future use. The Company evaluates events or circumstances, including competition in the markets where it operates, that would indicate the carrying value of assets may not be fully recoverable. If an event or circumstance is identified indicating carrying value may not be recoverable, the sum of future undiscounted cash flows is compared to the carrying value. If the carrying value exceeds the future undiscounted cash flows, the carrying value of the asset is reduced to fair value, with the difference recorded as an impairment charge. Assets are evaluated for impairment on an individual basis, which management believes is the lowest level for which there are identifiable cash flows. The Company evaluates assets for impairment by assessing if long-lived assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful life as its primary indicator of potential impairment. The fair value of assets is determined as the present value of the estimated future cash flows, adjusted as necessary for market participant factors. Any required impairment loss would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense. During the year ended December 31, 2021, a $1.4 million impairment of long-lived assets charge was recorded, there was 0 impairment charge recorded during the same period in 2020. See additional discussion in Note 4, Other Financial Information.

Redeemable Convertible Preferred Stock

The Company’s shares of preferred stock were assessed at issuance for classification and redemption features requiring bifurcation. The Company’s preferred stock was not mandatorily redeemable. The Company presents as temporary equity any stock which (i) the Company undertakes to redeem at a fixed or determinable price on the fixed or determinable date or dates; (ii) is redeemable at the option of the holders, or (iii) has conditions for redemption which are not solely within the control of the Company. The Company’s preferred stock was redeemable if the Company had not been dissolved within 90 days following the occurrence of certain deemed liquidation events, which the Company determined was not solely within its control and thus had classified shares of redeemable convertible preferred stock as temporary equity until such time as the conditions were removed or lapse. The Company initially recorded redeemable convertible preferred stock at fair value, net of issuance costs.

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In connection with the IPO on February 9, 2021, all outstanding shares of redeemable convertible preferred stock converted into 23,978,747 shares of common stock.

Deferred Offering Costs

The Company capitalized certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings, including the IPO, as deferred offering costs until such financings are consummated. After consummation of the financing, these costs are recorded as a reduction of the proceeds received from the equity financing. There was $2.2 million of deferred offering costs related to the Company’s IPO recorded as Other assets on the Company’s Balance Sheet as of December 31, 2020. The Company recorded additional offering costs between December 31, 2020 and February 9, 2021 and recorded $3.7 million as an offset to the IPO proceeds.

Revenue Recognition

The Company recognizes revenue under Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), “Revenue from Contracts with Customers” when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:

 

(i)

identify the contract(s) with a customer;

 

(ii)

identify the performance obligations in the contract;

 

(iii)

determine the transaction price;

 

(iv)

allocate the transaction price to the performance obligations in the contract; and

 

(v)

recognize revenue when (or as) the entity satisfies a performance obligation.

Under ASC 606, assuming all other revenue recognition criteria have been met, the Company will recognize revenue for arrangements upon the transfer of risk and title of the Company’s products and upon customer obtaining control of the product, which occurs at a point in time and is generally upon shipment to the customer, unless terms of contractual arrangements with customers state otherwise in which case the control is transferred upon completion of delivery and customer acceptance of products. Upon transfer of risk and title to the customer, no further performance obligations by the Company to the customer after shipment of the product are present.

Revenue is measured based on the amount of consideration that the Company expects to receive as reduced by estimated discounts and allowances. The Company's performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in ASC 606, therefore, the Company is not required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

All of the Company’s revenue has been derived from sales of its test kits through its healthcare, business-to-business, international and direct-to-consumer (e-commerce) channels. Since receiving the initial EUA in the fourth quarter 2020, the Company marketed its test products to physicians and licensed healthcare providers through its healthcare channel in the United States. On April 9, 2021, the Company received its first FDA EUA authorization for OTC non-prescription use and expanded its marketing to include domestic testing providers, distributors, businesses within its business-to-business channel, and direct-to-consumer through its partnerships with e-commerce sales and distribution platforms. In 2021, the Company also sold tests internationally through international distributors in Canada, Taiwan, Singapore, and Israel through its international channel.

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The following table sets forth the Company’s net sales by channel:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Healthcare

 

$

27,205

 

 

$

269

 

Business-to-business

 

 

41,439

 

 

 

 

International

 

 

18,262

 

 

 

 

Direct-to-consumer (e-commerce)

 

 

6,149

 

 

 

 

Net sales

 

$

93,055

 

 

$

269

 

 

Collection of the Company’s net revenue generally occurs within 30 days of billing. Contracts do not contain significant financing components based on the typical period of time between delivery of products and collection of consideration. Collections of revenue from customers in the Company’s e-commerce channel generally occurs instantaneously or within a few days as customers pay using credit cards. Customers in certain countries outside of the United States pay in advance of product delivery. In those instances, payment and delivery typically occur in the same month.

Costs to obtain or fulfill a contract are currently expensed when incurred because our performance obligation is satisfied at a point in time. These costs are recorded as Cost of products sold in the Statements of Operations.

The Company invoices its customers upon shipment of product and records its sales upon shipment in accordance with its standard terms and conditions, unless underlying customer contracts specify otherwise. In those instances, the Company records revenue upon delivery and upon customer acceptance of products to customers when control of products is transferred to customers.

 

When necessary, the Company invoices and collects sales tax from its customers for sales of products. The Company has elected to exclude sales tax from the measurement of the transaction price.

 

The following table sets forth the Company’s net sales by geographic area based on the customers’ locations:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

United States

 

$

74,793

 

 

$

269

 

Canada

 

 

13,066

 

 

 

 

All other countries

 

 

5,196

 

 

 

 

Net sales

 

$

93,055

 

 

$

269

 

 

Shipping and Handling Costs

Shipping and handling costs are included in cost of goods sold.

Research and Development Grants

In July 2018, the Company entered into an agreement with the Biomedical Advanced Research and Development Authority (“BARDA”), a division within the U.S. Department of Health and Human Services (“HHS”), for an award of up to $10 million to demonstrate the feasibility of a novel in-home, disposable, point-of-care rapid diagnostic assay for the detection of Influenza A and B for work performed through July 2020. In September 2019, the Company amended its agreement with BARDA to increase the award to $21.5 million and extend the reporting period through July 2022.  

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The Company earns grant income for performing tasks under research and development agreements with governmental agencies. Grant income derived from reimbursement of direct out-of-pocket expenses, overhead allocations and fringe benefits for research costs associated with government contracts and grants are recorded at the gross amount within grant income. The costs associated with these reimbursements are reflected as a component of research and development expense in the Company’s Statements of Operations.  

The Company recognized grant income from BARDA of $0.0 million and $1.8 million during the years ended December 31, 2021 and 2020, respectively. In July 2021, BARDA terminated the influenza contract for convenience. The Company recognized grant income from other governmental agencies of $0.6 million and $0.3 million during the years ended December 31, 2021 and 2020, respectively.

The Company records a receivable included in Other current assets on the Balance Sheets, which consists of billed and unbilled amounts earned from various government grants for costs incurred prior to the period end under reimbursement contracts. The amounts are billed to the respective government agencies. As collection is deemed probable, 0 allowance for doubtful accounts has been established. If amounts become uncollectible, they are recorded as operating expense in the Company’s Statements of Operations. As of December 31, 2021 and 2020, $0.2 million and $0.2 million were unbilled, respectively. 

Research and Development

Costs associated with research and development activities are expensed as incurred and include, but are not limited to, personnel-related expenses including stock-based compensation expense, materials, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead including rent and utilities.

The Company records accrued expenses for estimated costs of its research and development activities conducted by third-party service providers, which include clinical trial activities. The Company records the estimated costs of research and development activities based upon the estimated value of services or supplies provided but not yet invoiced and include these costs in accrued liabilities in the Balance Sheets and within research and development expense in the Statements of Operations. The Company records accrued expenses for these costs based on factors such as estimates of the work completed or supplies received and in accordance with agreements established with these vendors. Any payments made in advance of services or supplies provided are recorded as prepaid assets, which are expensed as the services or supplies are received.

The Company estimates the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. Such estimates in determining the accrued balance in each reporting period are subject to management judgment. As actual costs become known, the Company adjusts its accrued estimates.

Advertising and Marketing Costs

Costs associated with advertising and marketing activities are expensed as incurred. Total advertising and marketing costs were $1.7 million and immaterial for the years ended December 31, 2021 and 2020, respectively, and are included in Selling, general and administrative expenses in the accompanying Statements of Operations.

Stock-Based Compensation

The Company’s stock-based awards consist of stock options issued to employees and non-employees and restricted stock units issued to employees. The Company measures the estimated fair value of the stock-based awards on the date of grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective awards. The Company records expense for awards with service-based vesting using the straight-line method. The Company accounts for forfeitures as they occur.

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The Company classifies stock-based compensation expense in its Statements of Operations in the same manner in which the award recipient’s cash compensation costs are classified.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model requires the use of a number of complex assumptions including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends, and expected term of the option. Prior to the Company’s initial public offering, the Company was a private company and lacked company-specific historical and implied fair value information. Therefore, the Board of Directors (the “Board”) of the Company considered numerous objective and subjective factors to determine the fair value of the Company’s common stock options at each meeting in which awards were approved. The factors considered include, but are not limited to (i) the results of contemporaneous independent third-party valuations of the Company’s common stock and the prices, rights, preferences and privileges of the Company’s redeemable convertible preferred stock relative to those of its common stock; (ii) the lack of marketability of the Company’s common stock; (iii) actual operating and financial results;(iv) current business conditions and projections; (v) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions, and (vi) precedent transactions involving the Company’s shares.

The Company determined the expected stock volatility using a weighted-average of the historical volatility of a group of guideline companies that issued options with substantially similar terms, and expects to continue to do so until such time as the Company has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the simplified method for awards that qualify as “plain-vanilla” options. The expected term was estimated using the simplified method for employee stock options since the Company does not have adequate historical exercise data to estimate the expected term. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be 0.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the

133


 

period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents of potentially diluted securities outstanding for the period determined using the treasury-stock and if-converted methods. Potentially dilutive common stock equivalents are comprised of redeemable convertible preferred stock, and options outstanding under the Company’s stock option plan. For the years ended December 31, 2021 and 2020, there was no difference in the number of shares used to calculate basic and diluted shares outstanding as the inclusion of the potentially dilutive securities would be anti-dilutive.

The following table summarizes the Company’s net loss per share:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Numerator

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders basic

   and diluted

 

$

(64,827

)

 

$

(37,348

)

Denominator

 

 

 

 

 

 

 

 

Weighted-average number of common shares

   outstanding, basic and diluted

 

 

34,768,542

 

 

 

2,396,798

 

Net loss per share attributable to common

   stockholders, basic and diluted

 

$

(1.86

)

 

$

(15.58

)

 

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Redeemable convertible preferred stock

 

 

 

 

 

23,978,747

 

Common shares issuable upon conversion of convertible note

 

 

 

 

 

1,470,947

 

Options to purchase common stock

 

 

3,712,274

 

 

 

4,470,249

 

Unvested restricted stock units

 

 

3,387,505

 

 

 

 

Employee stock purchase plan

 

 

45,275

 

 

 

 

Early exercised options subject to future vesting

 

 

86,131

 

 

 

117,451

 

Total

 

 

7,231,185

 

 

 

30,037,394

 

 

Segment Reporting

The Company has determined that the Chief Executive Officer is its Chief Operating Decision Maker. The Company’s Chief Executive Officer reviews financial information presented on an aggregate basis for the purposes of assessing the performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single operating and reportable segment, which is the business of designing, manufacturing and selling of disposable test kits.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements, or Accounting Standard Updates (“ASU”) are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

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The Company is an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. This means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company has the option to adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and can do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company has elected to use the extended transition period for complying with new or revised accounting standards unless the Company otherwise early adopts select standards.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes specific exceptions to the general principles in Topic 740, improves application of income tax-related guidance and reduces complexity related to the accounting for income taxes. The standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within that year. The Company early adopted ASU 2019-12 effective January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt this ASU beginning January 1, 2023. The Company is evaluating the potential impact of this standard on its financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is evaluating the potential impact of this standard on its financial statements.

Note 3. Fair Value Measurements

The Company did not have any financial instruments measured at fair value on a recurring basis as of December 31, 2021.

 

The Company’s restricted cash equivalent was measured at fair value on recurring basis as of December 31, 2020 and is classified as Level 1 input. The restricted cash equivalent is a money market account that the Company opened in August 2020 with a maturity date of 12 months. The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.

 

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Fair Value Measurements as of

December 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash equivalents

 

$

2,338

 

 

$

 

 

$

 

 

 

 

2,338

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes payable

 

$

 

 

$

 

 

$

24,694

 

 

 

 

 

 

 

 

 

 

24,694

 

 

The change in the fair value of the derivative liabilities and convertible notes accounted for at fair value is summarized below for the years ended December 31:

 

 

 

Year ended December 31

 

 

 

2021

 

 

2020

 

Fair value at beginning of the year

 

$

24,694

 

 

$

 

Initial fair value of instruments issued

 

 

 

 

 

31,139

 

Change in fair value of instruments and accrued interest, net

 

 

288

 

 

 

7,533

 

Extinguishment of instruments held at fair value

 

 

(24,982

)

 

 

(13,978

)

Fair value at end of the year

 

$

 

 

$

24,694

 

 

The convertible notes issued in June and July of 2020 were recorded at the fair value which was the principal balance of the notes at a fixed price of 80% of the price paid per share for equity securities by the Series C holders. The Company determined this approach to be the most suitable method as the time between issuance and Series C issuance was two months and a next equity financing was highly probable at time of issuance.

In order to determine the fair value of the convertible notes issued in December 2020, (“2020B Notes”), the Company utilized the probability-weighted expected return method (“PWERM”). See additional information on the 2020B Notes in Note 7. The PWERM relies on a forward-looking analysis to determine the fair value. Under this method, discrete future outcomes, including an IPO and non-IPO scenarios, are weighted based on the estimated the probability of each scenario. The PWERM is used when discrete future outcomes can be predicted with reasonable certainty based on a probability distribution. The fair value estimate relied upon in the PWERM scenario was based on likelihood of achieving four liquidity events, i) an initial public offering ii) merger or acquisition of the Company given prevailing market conditions iii) change of control iv) maturity of the convertible notes. Estimates and assumptions impacting the fair value measurement include future value under the various conversion scenarios, discount rate, discount period, discount factor and probability of occurrence of each scenario, as best estimated by management. The estimated future value of the notes for each scenario is then discounted to present value using a discount rate. The future value was determined based on the estimated term to the event from valuation date as determined by management. The exit value in an IPO scenario is based on banker indications as well as an analysis of guideline companies that went public within the past few years that are broadly comparable to the Company. The exit value of an M&A scenario is determined by management with an estimated premium applied to the IPO value estimate. The discount rate, discount period, and probability of the occurrence of liquidity scenarios are estimates made by the management. See Note 7 Convertible Notes Payable for additional information.

The convertible notes were measured at fair value upon extinguishment on February 9, 2021 in connection with the Company’s IPO.

 

Note 4. Other Financial Information

Inventory

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December 31,

 

 

 

2021

 

 

2020

 

Raw materials

 

$

35,923

 

 

$

4,725

 

Work in process

 

 

10,539

 

 

 

140

 

Finished goods

 

 

4,314

 

 

 

 

Total

 

$

50,776

 

 

$

4,865

 

 

Other Receivables

 

 

December 31,

 

 

 

2021

 

 

2020

 

Other receivable

 

$

8,188

 

 

$

798

 

The other receivable balance as of December 31, 2021 represents amounts due from Jabil, the manufacturer of the Company’s test kits in connection with procurement of component parts.

Prepaid Expenses

 

 

December 31,

 

 

 

2021

 

 

2020

 

Prepaid expenses

 

$

10,274

 

 

$

3,496

 

 

As of December 31, 2021, prepaid expenses includes $9.4 million of advanced payments related to procurement of inventories of components such as circuit boards to be used in assembling test kits.

Property and Equipment, Net

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Construction in progress

 

$

3,466

 

 

$

15,308

 

Machinery and equipment

 

 

29,333

 

 

 

4,679

 

Website development costs

 

 

1,110

 

 

 

 

Furniture and fixtures

 

 

200

 

 

 

88

 

Leasehold improvements

 

 

1,702

 

 

 

501

 

Total, at cost

 

 

35,811

 

 

 

20,576

 

Accumulated depreciation and amortization

 

 

(4,837

)

 

 

(1,168

)

Property and equipment, net

 

$

30,974

 

 

$

19,408

 

 

 

Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was approximately $3.7 million and $0.3 million, respectively. Construction in progress is related to the setup of manufacturing infrastructure and the purchase of long lead time manufacturing equipment as the Company grows its manufacturing capacity and invests in semi-automation. Construction in progress amounts recorded are not subject to depreciation as such assets are not yet available for their intended use.

During the year ended December 31, 2021, the Company identified a trigger for impairment assessment related to certain long-lived assets in the Auburn Hills, Michigan manufacturing facility. This facility is operated by Jabil, the commercial manufacturing provider of the Company’s COVID-19 test kit. Facts and circumstances indicate that the costs of certain assets, primarily those associated with a dry room affixed to the Auburn Hills facility, will not be recovered before the end of their previously estimated useful life. As a result, the Company has

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recorded an impairment charge of $1.4 million during the year ended December 31, 2021, related to these assets. The Company has terminated its manufacturing activities at this facility as of December 31, 2021.

The following table sets forth the Company’s long-lived assets, including right-of-use assets by geographic area:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

United States

 

$

16,730

 

 

$

7,528

 

Dominican Republic

 

 

15,753

 

 

 

12,432

 

All other countries

 

 

1,205

 

 

 

196

 

Total long-lived assets

 

$

33,688

 

 

$

20,156

 

 

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Professional fees

 

$

612

 

 

$

1,577

 

Accrued manufacturing and inventory purchases

 

 

17,200

 

 

 

1,165

 

Canada Importation Taxes

 

 

1,551

 

 

 

 

Payroll liabilities

 

 

4,466

 

 

 

604

 

Royalty liabilities

 

 

1,662

 

 

 

 

Accrued sales tax

 

 

2,215

 

 

 

204

 

Early exercise liability

 

 

189

 

 

 

263

 

Accrued deferred offering costs

 

 

 

 

 

487

 

Other

 

 

1,267

 

 

 

145

 

Total

 

$

29,162

 

 

$

4,445

 

 

Note 5. Commitments and Contingencies

Commitments

License Agreement with Eiken Chemical Co., Ltd.

In July 2020, the Company entered into a patent license agreement (“Eiken Agreement”), with Eiken Chemical Co., Ltd. (“Eiken”). Pursuant to the terms of the Eiken Agreement, Eiken granted the Company a royalty bearing non-transferable, non-assignable, sublicensable (to the Company’s affiliates), non-exclusive license under certain patents, which the Company refers to collectively as the Eiken Licensed Patents, relating, in part, to loop-mediated isothermal amplification, 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 the Company collectively refers to as the Initial Licensed Products, in the United States. The Company also has limited have-made rights with respect to the Eiken Licensed Patents.

Under the terms of the Eiken Agreement, the Company also has 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, the Company also has 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 the Company 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.

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As partial consideration of the rights granted to the Company under the Eiken Agreement, the Company made payments of $24 thousand during the years ended December 31, 2021 and 2020, which was recorded as research and development expense on the Statements of Operations. In April 2021, the Company paid the first installment of the world-wide license in the amount of $9 thousand. The second installment for the world-wide license of $9 thousand was paid in July 2021. In addition, the Company is obligated to pay a royalty in the low single-digit percentage on total net sales of all Licensed Products, that will be recorded as a Cost of products sold. Royalty expense for the year ended December 31, 2021 was $2.7 million and included in Cost of products sold on the Statements of Operations.

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. The Company 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 the Company commences sale of such Licensed Product, (2) a breach by the Company or its 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 the Company in violation of the Eiken Agreement or (5) a challenge by the Company or its affiliates of the validity of any of the Eiken Licensed Patents.

Technology Services Agreement with Jabil

On September 10, 2020, the Company entered into a technical services agreement (“Jabil TSA”), with Jabil, Inc. (“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 the Company’s COVID-19 test kit and any of its future product candidates.

The Company is 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 the Company 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.

Manufacturing Services Agreement with Jabil

On September 10, 2020, the Company entered into a manufacturing services agreement (“Jabil MSA”) with Jabil, pursuant to which Jabil will manufacture, test, pack and ship certain electronic assemblies and systems in accordance with the Company’s specifications. Jabil may not subcontract any of its manufacturing services under the Jabil MSA without the Company’s prior written consent. The Company is 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, when available, which will be used to constitute written purchase orders from the Company, and the Company is 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. As of December 31, 2021, the Company has an outstanding non-cancellable purchase commitment of $26.5 million related to the Jabil MSA.

The Company is obligated to pay Jabil upon the completion of test kit purchase orders 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

139


 

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 the Company that production qualification can commence, or after the addition of new equipment or labor. The parties will review the prices on a quarterly basis and may revise them based on applicable costs and expenses.

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.

Other Commitments

As of December 31, 2021, the Company has additional outstanding non-cancellable purchase commitments for $68.5 million for raw material purchases and fixed assets related to expanding the Company’s manufacturing capacity.

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not been subject to any claims or required to defend any action related to its indemnification obligations.

The Company’s amended and restated certificate of incorporation contains provisions limiting the liability of directors, and its amended and restated bylaws provide that the Company will indemnify each of its directors to the fullest extent permitted under Delaware law. The Company’s amended and restated certificate of incorporation and amended and restated bylaws also provide the Board with discretion to indemnify its officers and employees when determined appropriate by the Board. In addition, the Company has entered and expects to continue to enter into agreements to indemnify its directors and executive officers.

Legal Proceedings

From time to time, the Company may become involved in legal proceedings arising out of the ordinary course of its business. Management is currently not aware of any matters that will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Note 6. Leases

The Company has operating leases for corporate offices, operations and research and development facilities. These leases have remaining lease terms of 1 to 3 years. The lease of operations and research and development facilities includes costs for utilities and common area maintenance which are not included in the calculation of lease payments.

In July 2021, the Company entered into an operating lease agreement for space within a building in Emeryville, California. The lease commenced in July 2021 and has a lease term expiring in June 2024 with two options to extend the lease term for a period of 3 years each.

In August 2021, the Company entered into an operating lease agreement for space within a building in San Jose, California. The lease commenced in August 2021 and has a 2-year term with an auto renewal for another 2-year period upon expiration of every such bi-annual term. The Company amended the original operating lease for San Jose, in September 2021 and December 2021, to increase the amount of leased space.

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Leases with an initial term of 12 months or less are not recorded on the Balance Sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease terms. Operating leases with terms greater than 12 months are included in operating lease ROU assets and operating lease liabilities in the Company’s Balance Sheets as of December 31, 2021 and 2020. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Maturities of lease liabilities as of December 31, 2021, are as follows:

 

 

 

Operating

 

 

 

Leases

 

Year ending December 31:

 

 

 

 

2022

 

$

1,659

 

2023

 

 

1,205

 

2024

 

 

147

 

2025

 

 

 

2026

 

 

 

Total

 

 

3,011

 

Less: imputed interest

 

 

(182

)

Operating lease liabilities

 

$

2,829

 

 

The Company made operating lease payments of $0.9 million and $0.4 million during the years ended December 31, 2021 and 2020, respectively, which are included as cash flow from operating activities on the statements of cash flows.

Additional information related to the Company’s leases was as follows for the years ended December 31:

 

 

 

2021

 

 

2020

 

Operating lease cost

 

$

943

 

 

$

435

 

Short-term lease cost

 

$

1,663

 

 

$

536

 

Weighted-average remaining lease term (years)

 

 

1.82

 

 

 

2.36

 

Weighted-average discount rate

 

 

7.15

%

 

 

13.14

%

 

 

Note 7. Convertible Notes Payable

2020A Notes

The Company entered into convertible promissory notes (the “2020A Notes”) in June and July 2020, with several lenders, including current investors. The lenders provided in aggregate $11.1 million in cash consideration to the Company. The 2020A Notes accrued simple interest at 4% per annum that was due and payable upon the request of the holders of a majority of the then outstanding principal amount of the 2020A Notes on or after June 12, 2021.

Pursuant to the 2020A Notes, the outstanding principal balance and unpaid accrued interest was automatically convertible into equity shares in the next equity financing round of at least $10 million (“2020A Qualified Financing”) at a price per share equal to the lower of (i) 80% of the price paid per share for equity securities by the investors in the 2020A Qualified Financing or (ii) the quotient resulting from dividing $95 million by the number of shares of outstanding common shares on a diluted basis immediately prior to the closing of the 2020A Qualified Financing. If the next financing was not a 2020A Qualified Financing (“2020A Non-Qualified Financing”), the holders of a majority of the outstanding principal of the 2020A Notes also had the option to