UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)	FORM 10-K

 

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

 

For the fiscal year ended December 31, 2015

 

[  ]	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: 333-199619

Viatar CTC Solutions Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		26-1581305
State or other jurisdiction of Incorporation or organization		(I.R.S. Employer Identification No.)

 

116 John Street, Suite 10, Lowell, Massachusetts		01852
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code:  (617) 299-6590

 

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

 

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         [X] No

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      [X] Yes         [  ]   No

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.       [X]

 

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

 

Large accelerated filer [  ]		Accelerated filer [  ]
Non-accelerated filer  [  ] (Do not check if a smaller reporting company)		Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 [  ] Yes         [X] No

  

As of June 30, 2015, the aggregate market value of the Company’s common stock held by non-affiliates was approximately $26.5 million, based on the last price at which we had sold our common stock of $1.75 as of such date.

 

The number of shares of common stock of the Company outstanding as of March 28, 2016 is 18,605,426.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

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Table of Contents

 

		Page
PART I
Item 1.	Business.	4
Item 1A.	Risk Factors.	25
Item 1B.	Unresolved Staff Comments.	41
Item 2.	Properties.	41
Item 3.	Legal Proceedings.	42
Item 4.	Mine Safety Disclosures.	42
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	42
Item 6.	Selected Financial Data.	44
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	44
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	54
Item 8.	Financial Statements and Supplementary Data.	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	56
Item 9A.	Controls and Procedures.	56
Item 9B.	Other Information.	57
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance.	57
Item 11.	Executive Compensation.	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	61
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	62
Item 14.	Principal Accountant Fees and Services.	63
Item 15.	Exhibits, Financial Statement Schedules.	64

 

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Cautionary Statement Regarding Forward Looking Statements

 

The discussion contained in this Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements”. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of the filing of this Annual Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of the filing of this Annual Report or the date of documents incorporated by reference herein that include forward-looking statements.

PART I

 

Item 1. Business.

Overview

 

We are a medical technology company focused on developing and marketing products to collect cancer cells for molecular diagnostics by others and as cancer therapy, both of which are based on the principle of removing blood-borne circulating tumor cells (CTCs). These CTCs detach from solid tumors and enter the bloodstream carrying the DNA of the tumor and seeding new tumors. CTCs are rare and difficult to distinguish from other blood cells. However, we believe our technology is substantially more effective, both in a sensitivity and specificity context, at removing CTCs when compared to other available CTC capture technologies. We are seeking to commercialize two products which utilize our proprietary CTC removal technology:

·

The Viatar^TM Collection System for Molecular Analysis is designed to collect and purify a statistically significant quantity of CTCs from up to 50 mL of blood as the “front end” for DNA sequencing and other genetic analysis technologies used primarily for research. Due to the rapidly declining cost of DNA sequencing, it is gaining favor as the technology of choice for research and new drug development related to the many variants of mutations in cancer cells. This analysis is critical in understanding the complex biology of cancer as the disease progresses, developing new drugs and crafting a personalized approach to treatment.

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·

The Viatar^TM Therapeutic Oncopheresis System is designed to remove CTCs from a patient’s blood as a new cancer therapy for metastatic disease. The initial focus will be breast, colon or prostate cancer patients who have metastatic tumors and are refractory to standard of care chemotherapy or targeted therapy treatment. Metastatic tumors are responsible for 90% of cancer deaths, yet there are no effective or low-cost treatments. Unlike chemotherapy drugs, targeted therapy and immunotherapy drugs, which seek to treat metastatic cancer by targeting specific cells or pathways, the  Viatar ^TM  Therapeutic Oncopheresis System  seeks to reduce the tumor burden by the wholesale removal of CTCs via size-based filtration (similar to removal of toxins by dialysis). We believe this can augment the body’s immune system and slow the disease’s progression, thereby making some types of metastatic cancer a chronic rather than fatal condition.

  

We anticipate launching the Viatar^TM Collection System for Molecular Analysis during 2016 once we receive the following regulatory clearances: initially with a CE Mark in Europe and Canada, followed by a 510K designation in the United States. This product consists of a small, bench top base unit (pumps, hardware and control system) and a single use fluid circuit. It is designed for use in a laboratory setting at a hospital, research lab or outpatient oncology clinic. The output from our product will be a tube or slide containing CTCs suitable for DNA amplification and sequencing, or analysis by virtually all other companies’ CTC technology platforms. We are currently engaged in research collaborations with several CTC technology platform companies with the goal of marketing and selling the  Viatar ^TM  Collection System for Molecular Analysis  through private label and distribution arrangements.

We anticipate launching the Viatar^TM Therapeutic Oncopheresis System during 2017 with a CE Mark in Europe and Canada. Introduction in the United States will take several years, based on the anticipated PMA classification by the FDA. Our strategy is to conduct clinical trials outside the United States and then use the results of those trials to support approval of an investigational device exemption by the FDA. The Viatar ^TM Therapeutic Oncopheresis System will consist of a small base unit (pumps, hardware and control system) and an extracorporeal fluid circuit that is connected to a cancer patient’s central venous system. A treatment session will take approximately four hours, during which time the patient’s blood is circulated through our proprietary size-based filter. Most normal blood components—plasma, red blood cells and platelets—will be safely returned to the patient, while some white blood cells (WBCs) and numerous CTCs will be removed and discarded.

 

The Viatar^TM Therapeutic Oncopheresis System is designed for use in a chemotherapy, dialysis or apheresis clinic in a hospital or outpatient setting by nurses or technicians who are trained to administer infusion, dialysis or apheresis treatments. We anticipate marketing and selling the  Viatar ^TM  Therapeutic Oncopheresis System  on a direct basis through our own dedicated sales force in key large markets (such as the United States, Germany, France, Italy, UK and Japan), and through distributors in other markets.

We were a limited liability company organized in the State of Delaware on December 18, 2007 under the name “Vizio Medical Devices LLC” and converted into a Delaware corporation on February 25, 2014 upon filing a certificate of conversion and a certificate of incorporation under the name “Viatar CTC Solutions Inc.”  We became a public company in 2015 through a registration statement on Form S-1.  Our common stock is quoted on the OTC Markets’ OTCQB with the ticker symbol “VRTT”.

Before 2011, we were also pursuing a business plan relating to ambulatory removal of excess fluids for kidney failure and congestive heart failure patients. We discontinued those programs during the first quarter of 2013 due to technical difficulties and the scarcity of funds. In connection with the discontinuation of our dialysis and congestive heart failure programs, we disposed of our assets for those development programs through termination of all of our license and research agreements with Columbia University and others. As a result we no longer have any assets or rights to the numerous patents and patent applications which were previously associated with those development programs. We are not subject to any penalty or other payments due to the termination of those development programs.

 

Our headquarters facility is located at 116 John Street, Suite 10, Lowell, Massachusetts 01852, where we conduct research, development and manufacturing activities.

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Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this Annual Report. 

A former collaboration partner owns less than 0.0001% of Viatar LLC, which is accounted for as a non-controlling interest.

 

Industry Overview

 

Cancer Market Overview

 

Cancer is a group of diseases characterized by excessive, uncontrolled growth of cells at various sites in the body. Cancer is a difficult to treat disease, and currently represents one of the top ten causes of death in all regions around the world.

 

The 2011 Pulitzer Prize book for general nonfiction, entitled The Emperor of All Maladies: A Biography of Cancer, astutely noted: “Cancer, as we now know, is a disease caused by the uncontrolled growth of a single cell. This growth is unleashed by mutations—changes in DNA that specifically affect genes that incite unlimited cell growth… The secret to battling cancer, then, is to find means to prevent these mutations from occurring in susceptible cells, or to find means to eliminate the mutated cells without compromising normal growth. The conciseness of that statement belies the enormity of the task” (emphasis added).

 

Nowhere is this dilemma more evident than in finding the means to understand and mitigate the metastatic process, which accounts for over 90% of cancer-related mortality. While considerable progress has been made in the decades-long war on cancer, there is a striking paucity of good news in battling the metastatic process in solid tumor cancers. According to an article published by Mayo Clinic Proceedings, the handful of recently approved drugs which show some efficacy in targeting metastasized cancers cost upwards of $100,000 per patient and yet provide only a scant few months of longevity over legacy chemotherapy drugs.

 

According to the World Health Organization (“WHO”), the global incidence of new cancer cases in 2012 was estimated at approximately 14.1 million. Among genders, men had a higher incidence of all types of cancer than women –7.43 million as compared to 6.66 million – as well as a higher overall mortality from cancer. In the American, European and Western Pacific regions, cancer is the second leading cause of death after cardiovascular disease.

 

Lung, breast, colorectal, stomach and prostate cancers account for the majority of cancer deaths worldwide. Lung cancer is also the leading cause of cancer deaths among men in high-income countries, while breast cancer causes the majority of cancer deaths among women in these countries. In the US, cancer is the second leading cause of death, with one in four deaths attributed to it. Lung, colon, prostate and breast cancer account for the majority of cancer-related deaths in the US.

The following tables present the top five most common types of cancers worldwide and their associated mortality in 2012, based on WHO data:

 

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Type of Cancer		Incidence		Mortality
Lung		1.8 million		1.6 million
Breast		1.7 million		0.5 million
Colorectal		1.4 million		0.7 million
Stomach		1.0 million		0.7 million
Prostate		1.1 million		0.3 million
All types		14.1 million		8.2 million

According to the GLOBOCAN 2012: Estimated Cancer Incidence, Mortality and Prevalence Worldwide in 2012  published by the WHO International Agency for Research on Cancer, the incidence of cancer rises with increasing incomes, as the incidence rate of all cancers combined in high-income countries was more than double that of low-income countries. In upper-middle-income and high-income countries, prostate and breast cancers are the most commonly diagnosed in males and females respectively, while lung and colorectal cancers are the next most common types in both sexes. In the case of breast cancer, women in the European region had the highest rates followed by the Americas; however, breast cancer was also among the most commonly diagnosed type of cancer in low income countries as well. Men in the region of the Americas had the highest incidence rates of prostate cancer, followed by the European region; the lowest rate of prostate cancer occurred in the South-East Asia Region.

 

In the next few decades, the WHO predicts that cancer will be an increasingly important cause of morbidity and mortality worldwide, regardless of the region’s development level. As the global population ages and its longevity increases, annual cancer deaths are projected to increase to approximately 14.6 million in 2035.

 

The following table shows the projected growth in the incidence of cancer cases globally, based on geographic region using WHO data:

 

Region		2012 Incidence		2015 Projected Incidence
Africa		0.6 million		0.7 million
Americas		2.9 million		3.1 million
Europe		3.7 million		3.9 million
Eastern Mediterranean		0.6 million		0.6 million
Southeast Asia		1.7 million		1.8 million
Western Pacific		4.5 million		5.0 million
Global		14.1 million		15.2 million

 

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Overview of the Disease of Cancer

 

Cancer constitutes a heterogeneous class of diseases, characterized by uncontrolled cell growth that results from a combination of both environmental and hereditary risk factors. Many different tissue types can become malignant, such as breast, lung, liver, and skin, and even within a particular tumor there is heterogeneity, with certain cancer cells in a patient bearing mutations which are lacking in other cells nearby. Only in recent years have DNA sequencing and other genetic analysis techniques progressed enough to enable researchers to understand many cancers at a cellular and molecular level, attribute specific cancers to associated genetic changes, and determine the extent to which these changes are seen in a patient’s tumor. 

Cancer cells contain genetic alterations compared to normal human cells. Common genetic abnormalities correlated to cancer include gains or losses of genetic material on specific chromosomal regions, or loci, or changes in specific genes, or mutations, which ultimately result in detrimental cellular changes followed by cancerous or pre-cancerous conditions. In addition, mutations within gene sequences, or single nucleotide variations, can give rise to aberrant proteins that do not perform their functions correctly, leading to uncontrolled cell growth. Such genetic alterations can be a result of multiple factors, including genetic predisposition, environmental or lifestyle factors, or viral infections. Importantly, these genetic changes can be identified using DNA sequencing to help guide appropriate treatment

Primary tumors consist of two major types of cells: the malignant cells and the stroma cells. While stroma cells are normal cells that support and nourish the tumor, the malignant cells are a heterogeneous group of cancerous cells that also have the potential to give rise to disease metastasis via dissemination of CTCs. CTCs are recognized as cancer cells that detached from primary or secondary tumors and enter the bloodstream, traveling nearby or to distant organs and forming new tumors.

 

Primary tumors are rarely the determining survival factor among different types of cancers, since primary tumors can typically be removed effectively by localized surgical resection and/or radiation. Even if cancer is diagnosed at an early stage and treated by one of these methods, cancer is a major cause of mortality worldwide because of the lethal effect of tumors which metastasize. Metastasis is more difficult to treat than a primary tumor due to its systemic nature. CTCs that leave the primary tumor are able to colonize distant organs in the body and initiate the process of metastasis. The majority of CTCs die in the bloodstream, due to the harsh environment; very few of them are capable of metastasizing, and even fewer can form distant tumors of lethal size. Nevertheless, this small percentage of CTCs — estimated at 1-2% — is sufficient to initiate and continue the blood-borne metastasis process, which leads to the progression of the disease and is responsible for 90% of cancer-related deaths.

 

CTC Research and Applications

 

Just after the Civil War (1869), an autopsy discovered the existence of cancer cells in the blood of a patient who had died from a metastasized tumor. From the 1940s through the 1970s, researchers learned that: a gram of a metastasizing tumor produces roughly one million CTCs each day; CTCs are generated by virtually all 27 types of solid tumors; and CTCs are responsible for seeding metastatic secondary tumors at distant sites throughout a patient’s body, most often through the circulatory system. In other words, CTCs are both the messengers for propagating the disease and carry within their DNA the blueprint for a given cancer variant. These revelations led to multiple, but failed attempts to develop technologies to collect, process and analyze CTCs.

 

The field of CTC technology platforms is now experiencing a renaissance, beginning with FDA approval in 2004 of the Johnson & Johnson CellSearch device as a diagnostic tool with prognostic significance for patients with prostate, colon and breast cancer. The early promise of CellSearch spurred numerous researchers and companies in the US, Asia and Europe to develop some forty-five new diagnostic CTC technology platforms: most capture CTCs either by identifying proteins expressed by those cells (immunogenic-based) and/or by separating them based on size relative to other blood components (size-based filtration). The goal of this research has been to isolate a sufficiently large number of CTCs with high purity and in a viable, intact state.

 

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CTCs have tremendous utility in cancer research, aiding scientists in deciphering the complex biology of cancer as it progresses from a localized, primary tumor to metastasis. An enhanced scientific understanding of the characteristics of CTCs, as well as the factors that determine or influence their migration from tumors into circulation and to distant organs, provides valuable insights into the mechanism of metastasis and the development of new therapeutic approaches. Additionally, the detection and analysis of CTCs has significant potential in the diagnosis and management of cancer, because current tools — such as tumor tissue biopsy, imaging technologies and biomarker development — have numerous limitations.

 

Limitations of Traditional Cancer Diagnostic and Profiling Approaches

 

Cancer is difficult to diagnose and manage due to its heterogeneity at morphologic, genetic and clinical levels. Traditional methods of diagnosis for solid tumors, routinely used as the initial step in cancer detection, involve a tissue biopsy followed by a pathologist examining a thin slice of potentially cancerous tissue under a microscope. A recently obtained tissue sample is used in combination with chemical staining techniques to enable analysis of the biopsy. After staining, the pathologist determines through visual inspection whether the biopsy contains normal or cancerous cells, with those that are deemed cancerous being graded on a level of aggressiveness. Often an analysis of biomarkers relevant to that tumor type is also performed on the tissue, ranging from immunohistochemistry to mutation analysis by various means such as microarrays and DNA sequencing. After the diagnosis, a clinical workup is performed according to established guidelines for the specific cancer type. From there, the physician determines the stage of progression of the cancer based on a series of clinical measures, such as size, grade, metastasis rates, symptoms and patient history, and decides on a treatment plan that may include surgery, watchful waiting, radiation, chemotherapy, or stem cell transplant.

This type of analysis is dependent on the availability of a recently obtained tissue biopsy for the pathologist to analyze. Such a biopsy is often not available. A tumor may not be readily accessible for biopsy, a patient’s condition may be such that a biopsy is not advised, and for routine periodic patient monitoring to evaluate potential progression or recurrence, a biopsy is a fairly invasive procedure and not typically performed. As the length of time between when the original biopsy, diagnosis or surgery is conducted to the current evaluation of the patient increases, the likelihood that an original biopsy specimen is truly representative of the current disease condition declines, as does the usefulness of the original biopsydfdf for making treatment decisions. This risk intensifies in situations where a drug therapy is being administered, because the drug can put selective pressure on the tumor cells to adapt and change.

 

Similarly, the heterogeneity referred to above means that different parts or areas of the same tumor can have different molecular features or properties. In evaluating a biopsy specimen, the pathologist will take a few thin slices of the tumor for microscopic review rather than exhaustively analyzing the whole tumor mass. The pathologist can only report on the tumor sections analyzed and if other parts of the tumor have different features, such as biomarkers corresponding to specific treatments, they can be missed. A more representative analysis of the entire tumor, as well as any metastases if they are present, is very helpful.

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CTC Technology Applications

 

The accelerated pace of CTC research in the past few years has been driven by the pressing need to overcome the limitations of traditional cancer diagnostic and profiling approaches. The following table shows the current and potential applications for CTC removal and analysis technologies, both in research and clinical practice:

 

 

Mechanism of Metastatic Spread

 

In order to understand the technological challenges in capturing CTCs for diagnostics or therapy, it is important to appreciate the fact that CTCs are highly heterogeneous: both within a cancer type and depending on the stage of the disease.

CTCs detach from primary or secondary tumors - via mechanisms such as necroptosis, apoptosis or secretion - and enter the bloodstream (intravasation), traveling to distant organs (blood circulation) and forming new tumors (extravasation). CTCs can leave the primary tumor earlier in its formation process or after the tumor reaches a certain critical mass of cells. See diagram below.

 

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The mechanism of intravasation - the process by which CTCs enter the bloodstream - is believed to be facilitated by the epithelial-mesenchymal transition (EMT). This transition appears to occur in principal tumor cells that have stem cell-like properties and are therefore the most invasive ones. During EMT, tumor cells lose their epithelial characteristics and acquire migratory properties that enhance their invasiveness and permit them to enter the blood circulation. Researchers have identified various cell markers  in certain subpopulations of WBCs as well as reduced levels of epithelial cytokeratins.

 

While in the bloodstream, CTCs are believed to possess a semi-mesenchymal phenotype. However, the vast majority of CTCs will die within 24 hours in that harsh environment due to attacks by WBCs and the high shear rates in the heart; or persist in a dormant, inactive state for years. Very few CTCs are capable of metastasizing, and even fewer can form distant tumors. Nevertheless, this small percentage of CTCs – estimated at 1-2% – have been called the decathlon athletes of CTCs and are sufficient to initiate and continue the blood-borne metastatic process, which leads to the progression of the disease and is ultimately responsible for the overwhelming majority of cancer-related deaths.

 

In order to reach distant organs and form new tumors, CTCs need to extravasate – exit the blood vessels - and survive in the new environment; such cells may potentially acquire more aggressive phenotypes that initiate the tumor formation process, or may re-enter the blood circulation to travel to other organs or back to the initial tumor.

 

After CTCs extravasate in new locations, they are believed to undergo a reverse EMT process – the mesenchymal-to-epithelial transition (MET) – and assimilate in the new environment. While some CTCs have genes that might make them more benign or less likely to survive in other locations in the body, others have different patterns of gene expression that enable them to lodge themselves in new locations, establishing a new tumor. Such cells initiate micrometastases (fewer than 100 cells) that may eventually develop into overt metastases that are finally visible using current MRI, CT scan or ultrasound imaging techniques.

 

In theory, CTCs can reach the majority of organs in the body and initiate metastasis. However, research indicates that different types of cancer give rise to metastasis at different sites; for example, prostate cancer metastasizes preferentially in the bone, while breast cancer cells give rise to new tumors in the liver, lungs, or bone. This preferential behavior is due to the heterogeneity of tumors and their CTCs, and the consequently different ability of cells to extravasate and survive in new locations.

Characteristics of CTCs

 

The normal cellular components of blood principally consist of red blood cells (RBCs), leukocytes (white blood cells, or WBCs) and platelets. CTCs are abnormal blood cell components shed from tumors, and are invariably collected from a patient’s peripheral blood even though they are present throughout the circulatory system. Since all blood cells must pass through extremely narrow capillaries as they circulate through the body, CTCs in peripheral blood are found in extremely low numbers because they must circulate and survive through an obstacle course of harsh conditions, such as the heart, lungs and capillaries before they can appear in the peripheral blood.

 

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The following table shows the typical number and sizes of blood cells in typical humans:

 

Type of Cell		Average number of cells per milliliter of blood		Approximate cell diameter, in microns
RBC		5 billion		8
Platelets		300 million		2
WBC		7 million		10-15
CTC		<1,000		15-20

 

Aside from size and number, another important characteristic of blood cells is their deformability: the ability to change shape in order to traverse through the narrow capillaries which separate arterial blood (blood pumped out by the heart) from venous blood (blood returning to the heart after passing through a capillary). RBCs are known to be highly deformable, effectively and very quickly changing shape from a donut to a sausage as they pass through capillaries. Platelets and WBCs are less deformable than RBCs; but they nevertheless must and do traverse through capillaries, albeit at a slower rate. CTCs are the least deformable type of blood cells by several orders of magnitude, and it is that characteristic –in addition to size differences — which our technology exploits in a manner which is unique and different from all other CTC technologies.

 

In the early era of CTC research, CTCs were described as nucleated cells of epithelial origin that are typically significantly larger in diameter than normal blood cells. However, as scientific research revealed the heterogeneity of tumors, it became evident that the morphology of CTCs varies by disease type, its stage at the time of diagnosis, and its pre- or post-treatment state. Currently a common, definite set of criteria that define all CTCs has not been established. Additionally, due to the heterogeneity of tumor cells, scientists have not identified yet a universal set of markers that distinguishes CTCs from other types of blood cells. Recent studies also suggest that CTC markers differ from those of the primary tumor cells, and they may also change during the course of a given cancer therapy. As a result of these challenges, the molecular characterization of CTCs has been technically difficult. With the ever-declining cost of DNA sequencing, however, it is now possible to more completely characterize and differentiate CTCs once they are captured.

 

CTC Collection and Analysis Technologies

 

CTC collection and analysis technologies rely on one of several categories of methods, each of which exploits various physical or biological properties that distinguish these cells from RBCs, platelets and WBCs. The methods which are most commonly used for CTC detection are: size, density, electrical properties, and cell surface antigens, as well as automated scanning of all non-RBCs.

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The following table provides an overview of each method, some of the companies with CTC platform technologies, as well as their advantages and limitations.

 

 

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Our Technology

 

The common disadvantages of alternative technology platforms are the rarity of CTCs which are present in a standard blood sample of 10 mL or less (which hinders the sensitivity of any analysis); and the overwhelming number of WBCs as compared to CTCs (which reduces the specificity and purity of CTCs). The result is a wide variance in results using the same patient’s blood on different technology platforms, due to the difficulty in obtaining a statistically significant number of CTCs from such a small-sized sample. In other words, even if a given CTC technology platform can recover all of the CTCs which might be present in a single milliliter of blood (say, 1,000 cells), unless they represent 5-10% of the total cells in the sample being analyzed by DNA sequencing or other genetic analysis techniques, the mutations present in those CTCs will be lost in the background as noise in relation to the normal DNA sequence represented by the WBCs. So the problem to be solved is both quantity and purity of CTCs removed.

·

Our molecular diagnostic CTC technology platform—the Viatar^TM Collection System for Molecular Analysis —is unique because it utilizes a larger blood sample to collect a far greater absolute quantity of CTCs from circulating blood without clogging (up to 50 mL drawn from a patient, instead of just 10mL) than alternative technology platforms, while also enhancing purity by reducing the number of WBCs. The output from our device can then be used as the raw material for processing and analysis by all other diagnostic CTC technology platforms, as well as directly for DNA sequencing. As such, it is a “front-end” rather than a competitor to other companies’ CTC technology platforms for research and development, early diagnosis, survival prognosis and therapy monitoring.

·

Our therapeutic CTC technology platform—the Viatar^TM Therapeutic Oncopheresis System—will utilize wholesale removal of a significant quantity of CTCs as a cancer therapy by treating a patient’s entire blood volume (much like dialysis removes toxins).

 

Our perspective is that the existing CTC technology platforms are driven by the quest to solve a scarcity problem: how to find an extremely low number of CTCs out of the 5.4 billion cells (mostly RBCs) which inhabit a given milliliter of blood—an infinitesimal percentage indeed. Compounding the tenacity of that problem is their universal reliance on a standard blood draw sample of only 1 to 10 mL as the pool (blood) in which to go searching for the target species (CTCs). In essence, conventional wisdom defines CTCs as being rare because everyone is seeking to find and collect them from an extraordinarily small sample size. Yet for over forty years researchers have known with a good degree of precision that tumors generate millions of CTCs per day: hardly a rare or scarce amount.

 

We believe that rarity is in the eye of the beholder. Our proprietary CTC technology overcomes the conventional 10 mL limitation on sample size by capturing CTCs from up to 50 mLs of blood (for the diagnostic application), or up to 10 liters of blood (for the therapeutic application). This represents a significantly larger sample size, which inherently improves the sensitivity of other companies’ diagnostic CTC technology platforms or DNA sequencing; and enables a low-cost therapeutic application.

 

Two key features of our technology differentiate it from other CTC technology platforms:

·

Our cross-flow filtration technology exploits the differential size and deformability properties between CTCs and normal blood components. Small but numerous cells—RBCs (2 x 8 microns) and platelets (2 microns in diameter)—are separated using a filter with small pores (e.g., 8 microns). See diagram below. The larger component in normal blood—WBCs—are typically 10-15 microns in diameter; while CTCs are typically 15-20 microns in diameter and much less deformable. These are retained for further processing and analysis by other companies’ CTC technology platform or DNA sequencing (in the case of diagnostic applications), or removed and discarded (in the case of the therapeutic application). 

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·

Our filter is exceptionally thin compared to others’ filters. It is comprised of a micro-machined polymer that allows the passage of ~50 million RBCs, platelets and WBCs per second, while retaining viable CTCs for downstream analysis. Design algorithms balance blood flow across and through the filter, while maintaining low trans-membrane pressure. Since the force necessary to drive cells through a pore is a cube relationship to the depth of the pore, other companies’ thicker filters are significantly less efficient and can only process a small volume of blood before their pores become clogged with normal blood components. This is the defining technical feature that enables our technology to process a large volume of blood, as compared to other technologies, that are structurally limited to a very small sample size because they deploy dead-end filtration through a thicker membrane material.

The efficacy of our technology for molecular diagnostics has been demonstrated through in vitro and in vivo tests using both animal and human blood, including blood from cancer patients. We are currently conducting research collaborations with other companies’ CTC technology platforms to validate these results.

The efficacy of the concept of mechanically removing CTCs as a cancer therapy to slow the progression of metastatic cancer was demonstrated in a study published by others in 2011. Using magnetic filtration of the ascites of mice that were infected with human ovarian carcinoma, the researchers removed CTCs and showed that the median time to death increased by 32.4% with only one filtration session. Similarly, due to the reduction in malignant cell burden due to that one filtration session, tumor progression slowed to 10.77 times the rate of the control group, which received no treatment.

Additional support was published in 2015 by researchers who collected CTCs for 28 days from mice with breast cancer using an implanted “sponge”.  Upon autopsy, this technique (which is precisely analogous to Viatar’s therapeutic oncopheresis) showed: 88% reduction of tumor cells in the lungs; 30% fewer metastatic lesions in the lungs; and 75% reduction in the incidence of liver metastases.

 

The efficacy of a cancer therapy based on the concept of obstructing the metastatic process has been demonstrated by the various cancer immunotherapy drugs approved since 2010 by the FDA (e.g., Provenge, Yervoy, and Keytruda) which prolong the lives of patients with metastatic disease. The mode of action for each of them is to sensitize white blood cells to target and attack cell signal pathways in the tumor microenvironment which flourishes once CTCs leave the primary tumor and begin extravasation at distant sites. These immunotherapies are the most significant advance in oncology treatment in decades, and offer the first glimmer of hope in reducing the 90% fatality rate once a patient’s cancer has metastasized and reaches Stage IV. .

 

On a parallel track, numerous clinical studies published by others since the 2004 introduction of CellSearch demonstrate that a reduction in the absolute number of CTCs in a patient’s blood correlates with favorable overall survival. This proposition holds true for all major types of cancer over a range of different drug regimens. In other words, if a patient’s CTC count drops from a “danger zone” of 10 CTCs to a “safe zone” of 5 or fewer CTCs—due to any therapy—they will live longer.

 

The Viatar^TM Therapeutic Oncopheresis System is derived from those paradigms. It utilizes mechanical filtration of blood as the therapy to remove CTCs, and a dosage regimen that will be determined through human clinical trials to maintain the absolute number of CTCs in the “safe zone” which delimits the probability of favorable survival.

 

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Both of our oncology products are in the development stage, with significant design, materials validation, manufacturing scale-up and preclinical testing necessary before they can be used in human clinical trials. None of the capabilities of our two oncology products have been demonstrated yet in statistically significant clinical trials.

Commercialization Strategy

 

We anticipate launching the Viatar^TM Collection System for Molecular Analysis during 2016 once we receive the following regulatory clearances: initially with a CE Mark in Europe and Canada, and later with a 510K designation in the United States. This product consists of a small, bench top base unit (pumps, hardware and control system) and a single use fluid circuit. It is intended for use primarily for research in a laboratory setting at a hospital, research lab or outpatient oncology clinic. The output from our product is a tube of CTCs suitable for DNA amplification and sequencing, or analysis by virtually all other companies’ CTC technology platforms. We are currently engaged in research collaborations with several companies and researchers with the goal of understanding the suitability of our technology to meet their needs and determining whether modifications are practicable and/or necessary. Our ultimate objective is to market and sell the Viatar ^TM  Collection System for Molecular Analysis  through private label and distribution arrangements. We believe that these prospective diagnostic partners will value the ability to augment existing instrumentation without causing a significant retool from either a manufacturing or regulatory standpoint.

 

Our primary research collaboration is with ScreenCell. We entered into the collaboration agreement with ScreenCell on December 2, 2013. The collaboration is one year and extends for further one year periods unless terminated upon advanced notice. Under our collaboration agreement, each party is responsible for its costs and expenses (except that ScreenCell has purchased custom-designed filters from us). We share equally with ScreenCell the intellectual property rights arising from that collaboration.  During 2015 and 2014 ScreenCell purchased $65,910 and $9,000, respectively of filters from us, which constituted 100% of our sales.

We anticipate launching the Viatar^TM Therapeutic Oncopheresis System during 2017 with a CE Mark in Europe and Canada. Introduction in the United States will take several years, based on the anticipated PMA classification by the FDA. Our strategy is to conduct clinical trials outside the United States (targeted to begin in late 2016) and then use the results of those trials to support approval of an investigational device exemption by the FDA. The Viatar ^TM  Therapeutic Oncopheresis System  will consist of a small base unit (pumps, hardware and control system) and an extracorporeal fluid circuit that is connected to a cancer patient’s central venous system. A treatment session will take approximately four hours, during which time the patient’s blood is circulated twice through our proprietary size-based filter. Virtually all normal blood components—plasma, red blood cells, white blood cells and platelets—will be safely returned to the patient, while some white blood cells and numerous CTCs will be removed and discarded.

 

The Viatar^TM Therapeutic Oncopheresis System is intended for use in a chemotherapy, dialysis or apheresis clinic in a hospital or outpatient setting by nurses or technicians who are trained to administer infusion, dialysis or apheresis treatments. We anticipate marketing and selling the  Viatar ^TM  Therapeutic Oncopheresis System  on a direct basis through our own dedicated sales force in key large markets (such as the United States, Germany, France, Italy, UK and Japan), and through distributors in other markets.

 

Our Business Strategy

 

We plan to provide the cancer research community and clinicians with the raw material – CTCs – needed for a wide range of molecular diagnostic applications; and to provide a therapy for treating metastatic cancers.

 

CTC-based tests. In the case of molecular diagnostics using CTC-based tests, the value added by our technology is improved sensitivity and specificity beyond what is available from other companies’ CTC technology platforms. But we do not intend to develop our own analytic techniques or clinical tests for cancer: that is an arena in which billions of dollars are spent each year and it is well beyond the scope of our expertise or resources.

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Instead, our business strategy is to offer our CTC technology platform for molecular diagnostics as a “front end” component to (i) other companies’ CTC technology platforms (see the table at page 12 above), and (ii) direct DNA sequencing of CTCs using established tools and protocols (marketed by companies such as Illumina and Thermo Fisher). In this manner, our technology will enhance the breadth and utility of those applications and avoid trapping us in a situation of having to pick a winner from among the many analytic techniques which the cancer researcher community and clinicians have at their disposal. Given the rapid pace of technology change in cancer research, we believe that this will prove to be a durable strategy, especially as the cost of DNA sequencing continues to decline and it becomes the technology of choice for cancer research, new drug development and the treatment of cancers using a personalized approach.

 

The global market for CTC technology platforms is estimated at $910 million in 2012 according to a marketing intelligence report, “Circulating Tumor Cells and Cancer Stem Cells,” published by Kalorama Information (“Kalorama Information”). The key customers are researchers at major cancer medical centers, biotech and pharmaceutical companies who utilize them to identify and develop new cancer therapies based on the knowledge derived from CTC-driven research. Accordingly, that research segment is estimated to account for 97% of the global market ($885 million); with the clinical segment accounting for the remainder ($25 million) due to a limited number of clinically-validated and regulatory-approved CTC-based tests. Within that dominant research segment, approximately 73% is estimated to be research that is focused on breast and prostate cancers, with lung and colon cancers accounting for most of the remainder (22%). The geographic breakdown for CTC technology platforms in 2012 is estimated as 56% in the US, 31% in Europe and 13% in the rest of the world.

 

The global market for CTC technology platforms is projected to reach $3.6 billion in 2017, according to Kalorama Information. Most of this growth is projected to arise in the research segment (e.g., major cancer medical centers, biotech and pharmaceutical companies), given the long lead time for clinical adoption of new diagnostic tests (especially those which are used as companion diagnostics to new drugs). Other growth drivers are increasing cancer incidence, diagnosis and treatment rates. See the following table (annual data shown in millions of dollars):

 

Market Segment		2011				2012				2013				2017				Cumulative Annual Growth Rate (2012-2017)
Diagnostics			22				25				31				75				24.6	%
Research			830				885				960				3,480				31.5	%
Total			852				910				991				3,555				31.3	%

 

In the long term we anticipate that the clinical adoption of CTC-based diagnostics will become a major segment of the overall market for CTC technology platforms, and it will supplant the use of traditional imaging techniques (e.g., MRI, CT scans and ultrasound) for early diagnosis and tracking the progression of various cancers. But until that shift occurs, over the next five years our marketing strategy will be guided by the dominance of the research segment in the overall market for CTC technology platforms.

 

Current CTC-based tests used in the research segment range in price from approximately $500 to $5,000, depending on the CTC technology platform or DNA amplification and sequencing tools being used. While these prices for specific tests will undoubtedly decrease over time given the inexorable march of innovation, the overall market is expected to continue to expand. It is worth noting that these prices are based on list prices set by the manufacturers and negotiated discounts for major research customers; and do not entail reimbursement by third party payors such as Medicare, private health plans or foreign healthcare systems.

 

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Our strategy is to negotiate pricing for the Viatar^TM Collection System for Molecular Analysis with the objective that it constitutes 25% of the total end-user price of the CTC-based test regimen or DNA sequencing analysis used in the research segment. We believe that this is an appropriate metric for measuring the value attributable to our product in improving the results currently obtainable from CTC technology platforms when weighed against the overall pricing pressures and cost constraints that exist in the research segment. The clinical segment of CTC-based tests is anticipated to remain an immaterial portion of the global market for the next five years, and there is no clear viewpoint on the reimbursement terms that third party payors (such as Medicare, private insurance plans and foreign healthcare systems) will allow for CTC-based tests. Therefore, it is not possible for us to determine a revenue goal for the clinical segment of CTC-based tests.

CTC removal as a cancer therapy. The second leg of our business strategy is to deploy our unique CTC removal technology as an extracorporeal device for the wholesale removal of CTCs from metastatic cancer patients as a therapy to mitigate the growth and spread of secondary tumors: the Viatar ^TM Therapeutic Oncopheresis System.

The practice of separating or taking away (apheresis) a component or species from blood and returning the remainder to the circulation has been a mainstream medical therapy for over five decades. Examples include dialysis (removal of metabolic toxins from patients with end stage renal disease); plasmapheresis (collection of plasma and blood components such as immune globulin, rare WBC and RBC antibodies); LDL apheresis (removal of low density in patients with familial hypercholesterolemia, a rare genetic condition; stem cell harvesting (collection of circulating bone marrow cells for use in bone marrow transplantation); and leukapheresis (removal of various WBC sub-groups for transfusion into patients who need them).

 

We previously conducted animal testing in 2012 on a prototype extracorporeal CTC removal device, but subsequently changed the type of filter being used. Our current strategy is to build an apheresis system specifically targeted to remove CTCs as a cancer therapy (therapeutic oncopheresis) based on filtration of 45 mL per minute. This would translate into treating two times a cancer patient’s entire blood volume during a four hour session (which is equivalent in time duration to a single dialysis session). We anticipate launching the Viatar ^TM Therapeutic Oncopheresis System during 2017 with a CE Mark in Europe and Canada. Introduction in the United States will take several years, based on the anticipated PMA classification by the FDA.

 

Our strategy is to conduct clinical trials outside the United States and then use the results of those trials to support approval of an investigational device exemption by the FDA. These clinical trials will serve as the basis for regulatory approval and reimbursement. While it is not possible to predict what reimbursement schedule third party payors might set for the Viatar ^TM  Therapeutic Oncopheresis System, existing apheresis applications (except for dialysis) are reimbursed at approximately $1,500 to $1,800 per treatment session. Given the fact that the number of patients with metastatic cancer is significantly greater than all current apheresis treatments combined (including dialysis), we assume that third party payors will need to assess the therapeutic benefits of our technology versus other therapeutic modalities (including drugs which cost approximately $100,000 or more annually). Our strategic goal is to lower the cost of cancer care so that it can be affordable by healthcare systems and a broader range of patients. Toward that end, we plan to periodically revise our pricing schedule downward so that the Viatar ^TM  Therapeutic Oncopheresis System  remains a low-cost therapy.

 

Competition

 

Our principal competition comes from mainstream diagnostic and therapeutic methods, used by pathologists and oncologists for many years. These include on tumor tissue analysis (in the case of molecular diagnostics) and chemotherapy drugs (in the case of therapeutic oncopheresis). It may be difficult to change the methods or behavior of researchers and oncologists to incorporate our products into their practices.

 

We also face competition from companies that offer products or are conducting research to develop products for CTC-based testing in various cancers, including companies such as Johnson & Johnsons, Atossa Genetics, Alere, Illumina, Apocell, EPIC Sciences, Clearbridge Biomedics, Cynvenio Biosystems, Fluxion Biosciences, RareCells, ScreenCell and Silicon Biosystems.

 

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We expect that pharmaceutical and biopharmaceutical companies will increasingly focus attention and resources on the personalized cancer diagnostic and therapy sector as the potential and prevalence increases of molecularly targeted oncology therapies approved by the FDA along with companion diagnostics. For example, the FDA has recently approved three such agents—Xalkori ^® from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc., Zelboraf ^® from Daiichi-Sankyo/Genentech/Roche along with its companion B-raf kinase V600 mutation test from Roche Molecular Systems, Inc. and Tafinlar ^® from GlaxoSmithKline along with its companion B-raf kinase V600 mutation test from bioMerieux. These recent FDA approvals are only the second, third and fourth instances of simultaneous approvals of a drug and companion diagnostic. The first approval was the 1998 approval of Genentech’s Herceptin ^® for HER2 positive breast cancer along with the HercepTest from partner Dako A/S. Our competitors may invent and commercialize CTC technology platforms or tests that compete with ours.

There are a number of companies which are focused on the oncology diagnostic market, such as Biodesix, Caris, Clarient, Foundation Medicine, Response Genetics, Neogenomics, Agendia, Genomic Health, and Genoptix, and which are selling to the medical oncologists and pathologists. Large laboratory services companies, such as Sonic USA, Quest and LabCorp, provide more generalized cancer diagnostic testing.

Additionally, projects related to cancer diagnostics and genomics have received increased government funding, both in the United States and internationally. As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifying targeted treatment options will be developed and that these products may compete with ours. In addition, competitors may develop their own versions of our current and planned tests in countries where we did not apply for patents or where our patents have not issued and compete with us in those countries, including encouraging the use of their test by physicians or patients in other countries.

 

Third-Party Suppliers and Manufacturers

 

Some of the components used in our current or planned products are currently sole-source, and substitutes for these components might not be able to be obtained easily or may require substantial design or manufacturing modifications. Any significant problem experienced by one of our sole source suppliers may result in a delay or interruption in the supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. The inclusion of substitute components must meet our product specifications and could require us to qualify the new supplier with the appropriate government regulatory authorities.

 

We anticipate initially manufacturing our two oncology products at our facility in Lowell, MA and through contract assemblers also located in the United States.  We anticipate subsequently manufacturing the single use disposable portions of our products in foreign locations, such as Costa Rica, Thailand and/or Ireland.  Additional clean room space, production equipment and quality control equipment will be needed. We will source sub-components and sub-assemblies from third party manufacturers, depending on cost, quality and volume requirements. We anticipate renting additional space for our manufacturing and warehouse needs; most likely at or near our current location. There is sufficient commercial space at reasonable prices in the vicinity of our current location.

 

Intellectual Property

 

Our business is dependent on a combination of patent applications, trademarks, trademark applications, trade secrets and industry know-how, in order to protect the proprietary aspects of our technology and assure that we can manufacture and sell our products.

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The Company’s patent portfolio applicable to our oncology products consists of four patent applications (three in the United States and one international), with anticipated expiration dates of 2030 to 2034 (assuming they are issued). These are now in various stages of examination.  We also have a provisional US patent application which has not yet been published.  The table below sets forth the information regarding our published patent applications:

 

Description		Jurisdiction		Filed Date		Status
Methods, systems, and devices for separating tumor cells		European Community		3/31/2011		Pending
Methods, systems, and devices for separating tumor cells		US		1/24/2014		Pending
Extracorporeal fluidic device for collecting circulating tumor cells and method of use thereof		US		8/6/2014		Pending
Systems, methods and devices for removing circulating tumor cells from blood		US		3/10/2015		Pending
New patent just filed:  update				3/10/16

 

In connection with the discontinuation of our dialysis and congestive heart failure programs, we terminated all of our license and research agreements with Columbia University and others. There were no penalty or other payments made, and we no longer have any rights to the numerous patents and patent applications previously associated with those development programs.

 

We own the trade name Viatar in the United States, Canada, the 28 member countries of the European Community, Japan, India, Mexico and Russia. We also have trade name applications for Viatar pending in five other foreign countries.  We recently filed a trade name application for “Viatar the cancer dialysis company” in the United States.

Another CTC technology company, named Viator Technologies Inc. (“Viator”), agreed in 2014 to discontinue the use of that name in association with its CTC detection system because it was causing confusion with our Viatar trade name.

 

Government Regulation

 

Our products are classified as medical devices under the United States Food, Drug, and Cosmetic Act (FDCA). The FDCA requires these products, when sold in the United States, to be safe and effective for their intended use and to comply with the regulations administered by the United States Food and Drug Administration (FDA). Our medical device products are also regulated by comparable agencies in non-U.S. countries where our products may be sold.

 

The FDA’s regulatory requirements include:

 

	·	Establishment Registration. We must register with the FDA each facility where regulated products are developed or manufactured. The FDA periodically inspects these facilities.

 

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	·	Marketing Authorization. We must obtain FDA authorization to begin marketing a regulated, non-exempted product in the United States. For our Viatar TM  Collection System for Molecular Analysis, this authorization will be obtained by the submission and approval of a 510(k) pre-market notification, which generally provides data on the performance of the product to allow the FDA to determine substantial equivalence to a product already in commercial distribution in the United States. Our Viatar TM Therapeutic Oncopheresis System will probably go through a much stricter and time-consuming formal pre-market approval process which includes the review of non-clinical laboratory studies and clinical investigations, as well as an inspection by the FDA prior to market approval.

	·	Quality Management System. We are required to establish a quality management system that includes procedures for ensuring regulated products are developed, manufactured and distributed in accordance with specified standards. We also must establish procedures for investigating and responding to customer complaints regarding the performance of regulated products. In December 2013 we obtained an ISO 13485 certification, which utilizes many of the same standards for an FDA-approved quality management system; and have successfully completed annual audits since then.

 

	·	Labeling. The labeling for our products must contain specified information. In some cases, the FDA must review and approve the labeling and any quality assurance protocols specified in the labeling.

 

	·	Imports and Exports. The FDCA establishes requirements for importing products into and exporting products from the United States. In general, any limitations on importing and exporting products apply only to products that have not received marketing authorization.

 

	·	Post-Market Reporting. After regulated products have been distributed to customers, we may receive product complaints requiring us to investigate and report to the FDA certain events involving the products. We also must notify the FDA when we conduct recalls involving our products.

If the FDA finds that a manufacturer has failed to comply with FDA laws and regulations or that a medical device is ineffective or poses an unreasonable health risk, it can institute or seek a wide variety of enforcement actions and remedies, ranging from a public warning letter to more severe actions such as:

 

·

fines, injunctions and civil penalties;

·

recall or seizure of products;

·

operating restrictions, partial suspension or total shutdown of production;

·

refusing requests for 510(k) clearance or PMA approval of new products;

·

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

·

criminal prosecution. 

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The FDA also has the authority to require repair, replacement or refund of the cost of any medical device.

 

In the European Union, a single medical device regulatory approval process exists. Regulated products must meet minimum standards of performance, safety, and quality (known as the “essential requirements”), and then, according to their classification, comply with one or more of a selection of conformity assessment routes. Unlike United States regulations, which require most devices to undergo some level of premarket review by the FDA, the European Union regulations allow manufacturers to bring many devices to market using a process in which the manufacturer certifies that the device conforms to the essential requirements for that device. Certain products must go through a more formal pre-market review process. We do not anticipate that either of our products will require that more formal pre-market review process.

We are also required to report device failures and injuries potentially related to product use in a timely manner to the competent authorities of the European Union countries. A number of other countries, including Australia, Brazil, Canada, China and Japan, have also adopted or are in the process of adopting standards for medical devices sold in those countries.

 

We will also be subject to various healthcare related laws regulating fraud and abuse, pricing and sales and marketing practices and the privacy and security of health information, including the United States federal regulations described below. Many states, foreign countries and supranational bodies have also adopted laws and regulations similar to, and in some cases more stringent than, the federal regulations discussed above and below.   

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The Federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare or Medicaid.

·

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) prohibits knowingly and willfully (1) executing a scheme to defraud any health care benefit program, including private payors, or (2) falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. In addition, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, also restricts the use and disclosure of personal health information, mandates the adoption of standards relating to the privacy and security of individually identifiable health information and requires us to report certain breaches of unsecured, individually identifiable health information.

·

The Physician Payments Sunshine Act requires manufacturers of medical devices covered under Medicare and Medicaid to record transfers of value to physicians and teaching hospitals and to report this data beginning in 2013 to the Centers for Medicare and Medicaid Services for subsequent public disclosure. Similar reporting requirements have also been enacted on the state level, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals.

·

The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery.

 

 

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If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, exclusion from participating in government healthcare programs, contractual damages, reputational harm and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results.

 

Segment and Geographical Information

 

We operate in one reportable business segment and our current operations are solely in the United States.

 

Employees

As of March 28, 2016, we had a total of 8 full-time employees. In addition, we retain an engineering firm based in the United States for development and regulatory compliance relating to obtaining the CE Mark, from which there are approximately 20 engineers assigned to our project, as well as consultants for sales and marketing and certain regulatory review activities.   We plan to hire additional staff as we expand research, production, business development, administrative, and sales and marketing programs. None of our employees is represented by a labor union.

GLOSSARY OF TERMS

 

CTC: Cells that have shed into the blood stream from a primary tumor and circulate in it (CTCs). They are the seeds for subsequent growth of additional tumors (metastasis) in distant organs, triggering a mechanism that is responsible for the vast majority of cancer deaths.

 

DNA Sequencing: The process of determining the precise order of nucleotides within a DNA molecule. Nucleotides are the four bases—adenine, guanine, cytosine and thymine—in a strand of DNA. There are over 3 billion such base pairs in a DNA molecule. DNA sequencing is used to determine the complete genome, or blueprint, for a species; as well as variations (mutations) for a given disease condition.

DNA Amplification: The process of producing two identical replicas from one original DNA molecule. This process occurs in all living organisms and is the basis for biological inheritance and genetics. It is also used in DNA sequencing to enhance the quantity of molecules being analyzed.

 

510(k) Pre-Market Notification: A filing by a medical device manufacturer with the Food and Drug Administration (FDA) at least 90 days in advance of its intent to market a device. This allows the FDA to determine whether the proposed device is substantially equivalent to a device already on the market in 1976, or whether it is new and therefore requires further regulatory materials and review.

 

Mutation: A change of the nucleotide sequence in the DNA molecule of an organism; these can arise from replication errors during DNA amplification, or the insertion or deletion of segments of DNA. Mutations can either have no effect, alter the functioning of a gene, or prevent a gene from operating properly.

 

CE Mark: A CE logo and four digit identification number of the notified body which assessed the conformity of a product to the European directives, or regulatory system, which is applicable to a given medical device (and other products) in the European Economic Area. It is a symbol of free marketability in that region, and is recognizable worldwide as the European equivalent of compliance with FDA regulatory requirements. One key distinction, however, is that the CE system focuses primarily on safety, whereas the FDA focuses on both safety and efficacy of a given product.

 

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PMA Classification: The most stringent type of medical device marketing application required by the FDA (one category above 510(k) pre-market notification). Unlike the 510(k) pathway, the manufacturer must submit an exhaustive application to the FDA and must receive approval prior to beginning commercial marketing of a device. The PMA application includes information on how the device was designed and manufactured, as well as preclinical and clinical studies, demonstrating that it is safe and effective for its intended use.

Dialysis: A process for removing waste and excess water from the blood, which is used as an artificial replacement for lost kidney function in people with renal failure.

Apheresis: A medical technology in which the blood of a patient or donor is passed through an instrument that separates out one particular constituent and safely returns the remainder to the circulation. Dialysis is the most widely practiced and well-known form of apheresis.

Stroma cells: Connective tissue cells of any organ, which support the functional cells of that organ. Stroma provides an extracellular matrix on which tumors can grow.

Malignant cells: Cells which are not self-limited in growth, are capable of invading into adjacent tissues, and may be capable of spreading to distant organs. These cells typically have multiple mutations and reduced expression of DNA repair enzymes.

Metastasis: The spread of a cancer from one organ to another not directly connected with it. Cancer occurs after one single cell in a tissue is progressively genetically damaged to produce cells with uncontrolled proliferation. As these cells transform, they are able to invade into the blood circulation and invade a secondary site.

Oncopheresis: An apheresis process in which circulating cancer tumor cells are separated from the blood by means of an extracorporeal circuit, with the normal blood components being safely returned to the body.

EMT: Epithelial-mesenchymal transition, is a process by which epithelial cells lose their cell polarity and cell-cell adhesion, and gain migratory and invasive properties to become mesenchymal stem cells; these are stromal cells that can differentiate into a variety of cell types. EMT is implicated in the initiation of metastasis for cancer progression.

FDA: Food and Drug Administration, is an agency of the US federal government which regulates the sale of medical devices and drugs.

Leukapheresis: An apheresis process in which white blood cells are separated from blood. It may be used to decrease a very high white blood cell count, to obtain a patient’s own blood cells for later transplant, or to obtain cells for research purposes. It may also be used for oncopheresis, although it is expensive, cannot be repeated on a frequent basis, and results in the loss of vital, normal blood cells.

Necroptosis: A programmed form of passive cell death, which is regulated by certain proteins.

Apotosis: The process of programmed cell death. While 50 to 70 billion human cells die each day due to the normal cell growth/death cycle, defective apoptosis has been implicated in the progression of cancer.

Plasmapheresis: An apheresis process by which certain blood cells and plasma are separated from blood, with the plasma collected and frozen for use in the manufacture of a variety of medications; it is also used as a therapy to treat a variety of disorders, including lupus and myasthenia gravis.

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Item 1A. Risk Factors

An investment in the Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s common stock, an investor should carefully consider all of the material risks described below, together with the other information contained in this report. An investor should only purchase the Company’s securities if he or she can afford to suffer the loss of his or her entire investment.

Risks Relating to Our Financial Condition and Capital Requirements

We are an early stage company with a history of net losses; we expect to incur net losses in the future, and we may never achieve sustained profitability.

We have historically incurred substantial net losses, including net losses of $4.03 million in 2015 and $4.2 million in 2014 and we have never been profitable. At December 31, 2015, our total net loss since inception was approximately $22.18 million. Before 2011, we were pursuing a business plan relating to an ambulatory device for removal of excess fluids from kidney failure and congestive heart failure patients, which was unrelated to oncology. The portion of our accumulated deficit that relates to those activities during the period from inception through December 31, 2010 is approximately $9 million.

We expect our losses to continue as a result of costs relating to our research and development, clinical and regulatory activities, as well as sales and marketing costs.  These losses have had, 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 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 negatively affect our business, financial condition, results of operations and cash flows.

We will need to raise additional capital.

We will need to raise additional capital to expand our business to meet our long-term business objectives. Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, from an additional credit facility or strategic partnership coupled with an investment in us or a combination of both. We may be unable to raise sufficient additional financing on terms that are acceptable to us, if at all. Failure to raise additional capital in sufficient amounts would significantly impact our ability to expand our business. For further discussion of our liquidity requirements as they relate to our long-term plans, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Risks Relating to Our Business and Strategy

If we are unable to generate sufficient sales for our two oncology products once commercialized, our revenues will be insufficient for us to achieve profitability.

We are in varying stages of research and development for our two oncology products and have not commenced any sales of our products. If we are unable to generate sufficient sales for those products once they are commercialized, we will not produce sufficient revenues to become profitable.

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If we are unable to execute our sales and marketing strategy for our two oncology products and are unable to gain acceptance in the market, we may be unable to generate sufficient revenue to sustain our business.

Although we believe that our two oncology products represent a promising commercial opportunity, our products may never gain significant acceptance in the marketplace and therefore may never generate substantial revenue or profits for us. We will need to establish a market and build that market through collaborations with other companies, physician education, awareness programs and the publication of clinical trial results. Gaining acceptance in medical communities requires publication in leading peer-reviewed journals of results from studies using our planned products. The process of publication in leading medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our two oncology products.

Our ability to successfully market our two oncology products will depend on numerous factors, including:

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conducting clinical studies with our two medical devices in collaboration with key thought leaders to demonstrate their use and value in important medical decisions;

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whether our potential collaboration partners vigorously support our offerings;

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the success of the sales force which we intend to hire;

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whether healthcare providers believe our two oncology products provide clinical or therapeutic utility;

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whether the medical community accepts that such products are sufficiently meaningful in patient care and treatment decisions; and

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whether health insurers, government health programs and other third-party payors will cover and pay for such products and, if so, whether they will adequately reimburse us.

Failure to achieve widespread market acceptance of our two oncology products would materially harm our business, financial condition and results of operations.

If we cannot develop new products to keep pace with rapid advances in technology, medicine and science, our operating results and competitive position could be harmed.

In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. Several new cancer drugs have been approved, and a number of new drugs in clinical development may increase patient survival time. There have also been advances in methods used to identify patients likely to benefit from these drugs based on analysis of biomarkers and DNA sequencing. We must continuously develop new oncology products and enhance any existing products to keep pace with evolving standards of care. Our products could become obsolete unless we continually innovate and expand them to demonstrate benefit in the diagnosis and treatment of patients with cancer, which would have a material adverse effect on our business, financial condition and results of operations.

If our two oncology products do not continue to perform as expected, our operating results, reputation and business will suffer.

Our success depends on the market’s confidence that we can continue to provide reliable, high-quality products. We believe that our customers are likely to be particularly sensitive to safety issues, defects and errors. As a result, the failure of our two oncology products to perform as expected would significantly impair our reputation and public image, and we may be subject to legal claims arising from any safety issues, defects or errors.

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If our sole facility becomes damaged or inoperable, or we are required to vacate the facility, our ability to sell and provide our two oncology products and pursue our research and development efforts may be jeopardized.

We currently conduct virtually all of our business from our facility in Lowell, Massachusetts.  We do not have any other facilities. Our facility and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fire, storm, earthquake, flooding and power outages, which may render it difficult or impossible for us to run our business.  This may result in the loss of customers or harm to our reputation or relationships with scientific or clinical collaborators, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facility and the equipment we use to perform our research and development work could be costly and time-consuming to repair or replace.  We carry insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain profitability.

Our principal competition comes from mainstream diagnostic methods, used by pathologists and oncologists for many years, which focus on tumor tissue analysis. It may be difficult to change the methods or behavior of oncologists to incorporate our CTC molecular diagnostic system in their practices in conjunction with or instead of tissue biopsies and analysis. In addition, companies offering capital equipment and kits or reagents to local pathology laboratories represent another source of potential competition. These kits are used directly by the pathologist, which can facilitate adoption.

While virtually all of the companies which offer molecular diagnostic tests are potential customers and/or collaboration partners for our molecular diagnostic system, CTC analysis is a new area of science and we cannot predict what tests or technologies others will develop that may compete with or provide results similar or superior to the results we are able to achieve with our product.  Currently, among the category of companies which we regard as potential customers and/or collaboration partners are Janssen Diagnostics, LLC (a unit of Johnson & Johnson), which markets its CellSearch^® test; Atossa Genetics markets its ArgusCYTE^® test, as well as public companies such as Alere (Adnagen) and Illumina as well as many private companies, including Apocell, EPIC Sciences, Clearbridge Biomedics, Cynvenio Biosystems, Fluxion Biosciences, RareCells, ScreenCell and Silicon Biosystems. Many of these groups, in addition to operating research and development laboratories, are establishing CLIA-certified testing laboratories while others are focused on selling equipment and reagents.

CTC removal via therapeutic oncopheresis is a new field and we cannot predict whether oncologists will accept it as a valid treatment methodology for metastatic cancers; or whether pharmaceutical and biopharmaceutical companies will develop targeted drugs or vaccines that achieve similar or better outcomes.  Mechanical separation of one species of cells from the blood is a long-established technology, and several research groups are investigating methods of using leukapheresis (either alone or in conjunction with a separation medium such as beads) to remove CTCs from a cancer patient’s blood.  Although we believe that those methods will be too cumbersome, expensive and have adverse side effects, there can be no assurance that other technologies will be developed which compete effectively against our therapeutic oncopheresis system.

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We expect that pharmaceutical and biopharmaceutical companies will increasingly focus attention and resources on the personalized cancer diagnostic sector as the potential and prevalence of molecularly targeted oncology therapies approved by the FDA along with companion diagnostics increases. For example, the FDA has recently approved three such agents—Xalkori^® from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc., Zelboraf^® from Daiichi-Sankyo/Genentech/Roche along with its companion B-raf kinase V600 mutation test from Roche Molecular Systems, Inc. and Tafinlar^® from GlaxoSmithKline along with its companion B-raf kinase V600 mutation test from bioMerieux. These recent FDA approvals are only the second, third and fourth instances of simultaneous approvals of a drug and companion diagnostic, the first being the 1998 approval of Genentech’s Herceptin^® for HER2 positive breast cancer along with the HercepTest from partner Dako A/S.

Some of our present and potential competitors have widespread brand recognition and substantially greater financial and technical resources and development, production and marketing capabilities than we do. Others may develop lower-priced CTC-based tests that payors, pathologists and oncologists could view as functionally equivalent to the benefits that can be obtained using our molecular diagnostic system and DNA sequencing, which could force us to lower the list price of our medical device and impact our operating margins and our ability to achieve and maintain profitability. In addition, technological innovations that result in the creation of enhanced diagnostic tools that are more sensitive or specific than DNA sequencing may enable other clinical laboratories, hospitals, physicians or medical providers to provide specialized diagnostic tests in a more patient-friendly, efficient or cost-effective manner than is currently possible. If we cannot compete successfully against current or future competitors, we may be unable to increase or create market acceptance and sales of our current or planned medical devices, which could prevent us from increasing or sustaining our revenues or achieving or sustaining profitability.

We expect to continue to incur significant expenses to develop and market oncology products, which could make it difficult for us to achieve and sustain profitability.

In recent years, we have incurred significant costs in connection with the development of our oncology products.  For the year ended December 31, 2015, our research and development expenses were $2.44 million.  For the year ended December 31, 2014, our research and development expenses were $1.31 million. We expect our expenses to increase from that level for the foreseeable future as we conduct studies of our two oncology tests, establish a sales and marketing organization, drive adoption of and reimbursement for those products and develop new oncology products. As a result, we need to generate significant revenues in order to achieve sustained profitability.

Clinical studies are important in demonstrating to both customers and payors a medical device’s clinical relevance and value. If we are unable to identify collaborators willing to work with us to conduct clinical studies, or the results of those studies do not demonstrate that a medical device provides clinically meaningful health outcomes and value, commercial adoption of such device may be slow, which would negatively impact our business.

Clinical studies show when and how to use a given medical device, and describe the particular clinical situations or settings in which it can be applied and the expected results. Clinical studies also show the impact of the results on patient care and management. Clinical studies are typically performed with collaborating oncologists at medical centers and hospitals, and generally result in peer-reviewed publications. Sales and marketing representatives use these publications to demonstrate to customers how to use a medical device, as well as why they should use it. These publications are also used with payors to obtain coverage for a procedure or test utilizing a medical device, helping to assure there is appropriate reimbursement.

We will need to conduct clinical studies for our two oncology products to drive adoption in the marketplace and reimbursement. Should we not be able to perform these studies, or should their results not provide clinically meaningful data and value for oncologists, adoption of our tests could be impaired and we may not be able to obtain reimbursement for them.

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The loss of key members of our executive management team could adversely affect our business.

Our success in implementing our business strategy depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions, including Ilan Reich, our Chief Executive Officer and President, and Stephen Keaney, our Vice President of Research & Development.  The collective efforts of each of these persons and others working with them as a team are critical to us as we continue to develop our technologies, tests and research and development and sales programs. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our technologies and implementing our business strategy. We do not maintain “key person” life insurance on any of our employees.

In addition, we rely on collaborators, consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our collaborators, consultants and advisors are generally employed by employers other than us and may have commitments under agreements with other entities that may limit their availability to us.

The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employees could result in our inability to continue to grow our business or to implement our business strategy.

There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite technical skills, we may be unable to successfully execute our business strategy.

The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability to attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary to support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that we require and the competition for qualified personnel among life science businesses, we may not succeed in attracting or retaining the personnel we require to continue and grow our operations.

Our inability to attract, hire and retain a sufficient number of qualified sales professionals in key large markets, and engage qualified distributors in small markets, would hamper our sales for our molecular diagnostic system and our therapeutic oncopheresis system, as well as our ability to expand geographically and to successfully commercialize any other products or services we may develop.

To succeed in selling our two oncology products, we must build a sales force in key large markets and engage qualified distributors in small markets.  These personnel and entities need to have extensive experience in oncology and close relationships with medical oncologists, nurses, pathologists and other hospital personnel. To achieve our marketing and sales goals, we will need to build our sales and commercial infrastructure, with which to date we have had little experience. Sales professionals with the necessary technical and business qualifications are in high demand, and there is a risk that we may be unable to attract, hire and retain the number of sales professionals with the right qualifications, scientific backgrounds and relationships with decision-makers at potential customers needed to achieve our sales goals. We expect to face competition from other companies in our industry, some of whom are much larger than us and who can pay greater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing employees. If we are unable to hire and retain qualified sales and marketing personnel, and engage qualified distributors, our business will suffer.

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Our dependence on commercialization partners for sales of tests could limit our success in realizing revenue growth.

We intend to grow our business through the use of commercialization partners for the sales and marketing of our two oncology products, and to do so we must enter into agreements with these partners to sell, market or commercialize our medical devices. These agreements may contain exclusivity provisions and generally cannot be terminated without cause during the term of the agreement. We may need to attract additional partners to expand the markets in which we sell our medical devices. These partners may not commit the necessary resources to market and sell our two oncology products to the level of our expectations, and we may be unable to locate suitable alternatives should we terminate our agreement with such partners or if such partners terminate their agreement with us.  Any relationships we form with commercialization partners are subject to change over time.  If we cannot replace any diminution in revenues from a given distributor, our results will be weakened.

If current or future commercialization partners do not perform adequately, or we are unable to locate commercialization partners, we may not realize revenue growth.

We depend on third parties for the supply of blood samples and other biological materials that we use in our research and development efforts. If the costs of such samples and materials increase or our third party suppliers terminate their relationship with us, our business may be materially harmed.

We have relationships with suppliers and institutions that provide us with blood samples and other biological materials that we use in developing and validating our current test and our planned future tests. If one or more suppliers terminate their relationship with us or are unable to meet our requirements for samples, we will need to identify other third parties to provide us with blood samples and biological materials, which could result in a delay in our research and development activities and negatively affect our business. In addition, as we grow, our research and academic institution collaborators may seek additional financial contributions from us, which may negatively affect our results of operations.

We currently rely on third-party suppliers for critical materials needed to build our two oncology products, and any problems experienced by them could result in a delay or interruption of their supply to us.

We currently purchase raw materials for the single-use filter circuits in both of our oncology products under purchase orders and do not have long-term contracts with the supplier of these materials.  If suppliers were to delay or stop producing our materials, or if the prices they charge us were to increase significantly, or if they elected not to sell to us, we would need to identify other suppliers. We could experience delays in manufacturing critical components while finding another acceptable supplier, which could impact our results of operations. The changes could also result in increased costs associated with qualifying the new materials and in increased operating costs. Further, any prolonged disruption in a supplier’s operations could have a significant negative impact on our ability to manufacture those filter circuits in a timely manner.

Some of the components used in our current or planned products are currently sole-source, and substitutes for these components might not be able to be obtained easily or may require substantial design or manufacturing modifications. Any significant problem experienced by one of our sole source suppliers may result in a delay or interruption in the supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. The inclusion of substitute components must meet our product specifications and could require us to qualify the new supplier with the appropriate government regulatory authorities.

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

The marketing, sale and use of our two oncology products and any future products could lead to the filing of product liability claims against us if someone alleges that our medical devices failed to perform as designed. We may also be subject to liability for errors in the results we provide directly or indirectly to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.

Although we believe that our existing product and professional liability insurance is adequate, our insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could damage our reputation; result in the recall of medical devices; or cause current partners to terminate existing agreements and potential partners to seek other partners.  Any of these outcomes could impact our results of operations.

If we cannot support demand for our two oncology products once they achieve commercialization, including successfully managing the evolution of our technology and manufacturing platforms, our business could suffer.

As our volume of medical devices and single-use fluid circuits grows, we will need to increase our manufacturing capacity, implement automation, increase our scale and related processing, customer service, billing, collection and systems process improvements and expand our internal quality assurance program and technology to support those functions on a larger scale. Any increases in scale, related improvements and quality assurance may not be successfully implemented and appropriate personnel may not be available. As we commercialize additional medical devices, we may need to bring new equipment on line, implement new systems, technology, controls and procedures and hire personnel with different qualifications. Failure to implement necessary procedures or to hire the necessary personnel could result in a higher cost of processing or an inability to meet market demand. We cannot assure you that we will be able to manufacture our products once they achieve commercialization on a timely basis at a level consistent with demand, that our efforts to scale our commercial operations will not negatively affect the quality of our products or that we will respond successfully to the growing complexity of our business as it grows. If we encounter difficulty meeting market demand or quality standards for our two oncology products once they achieve commercialization, our reputation could be harmed and our future prospects and business could suffer, which may have a material adverse effect on our financial condition, results of operations and cash flows.

We may encounter manufacturing problems or delays that could result in lost revenue.

We currently manufacture our medical devices on a small scale basis at our Lowell facility and intend to continue to do so. We believe we currently have adequate manufacturing capacity for the first two years after commercialization.  If demand for our medical devices increases significantly, we will need to either expand our manufacturing capabilities or outsource to other manufacturers. If we or third party manufacturers engaged by us fail to manufacture and deliver our medical devices in a timely manner, our relationships with our customers could be seriously harmed. We cannot assure you that manufacturing or quality control problems will not arise as we attempt to increase the production or that we can increase our manufacturing capabilities and maintain quality control in a timely manner or at commercially reasonable costs. If we cannot manufacture our medical devices consistently on a timely basis because of these or other factors, it could have a significant negative impact on our ability to perform tests and generate revenues.

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International expansion of our business would expose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

Our business strategy contemplates international expansion, including partnering with cancer researchers and companies outside the United States, in particular Europe and Canada. Doing business internationally involves a number of risks, including:

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multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;

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failure by us or our distributors to obtain regulatory approvals for the sale or use of our current test and our planned future tests in various countries;

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difficulties in managing foreign operations;

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complexities associated with managing government payor systems, multiple payor-reimbursement regimes or self-pay systems;

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logistics and regulations associated with shipping products manufactured in one country to another, including infrastructure conditions and transportation delays;

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limits on our ability to penetrate international markets;

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financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;

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reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on our trade secrets, if available;

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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and

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failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate information and control over sales activities and distributors’ activities.

Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, have a material adverse effect on our financial condition, results of operations and cash flows.

Declining general economic or business conditions may have a negative impact on our business.

Continuing concerns over United States health care reform legislation and energy costs, geopolitical issues, the availability and cost of credit and government stimulus programs in the United States and other countries have contributed to increased volatility and diminished expectations for the global economy. These factors, combined with low business and consumer confidence and high unemployment, may precipitate an economic slowdown and recession. If the economic climate deteriorates, our business, including our access to patient samples and the addressable market for diagnostic tests that we may successfully develop, as well as the financial condition of our suppliers and our third-party payors, could be adversely affected, resulting in a negative impact on our business, financial condition and results of operations.

Intrusions into our computer systems could result in compromise of confidential information.

Despite the implementation of security measures, our technology or systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, or similar problems. Any of these might result in confidential medical, business or other information of other persons or of ourselves being revealed to unauthorized persons.

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There are a number of state, federal and international laws protecting the privacy and security of health information and personal data. As part of the American Recovery and Investment Act 2009, or ARRA, Congress amended the privacy and security provisions of the Health Insurance Portability and Accountability Act, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s healthcare information by healthcare providers, healthcare clearinghouses, and health insurance plans, collectively referred to as covered entities. The HIPAA amendments also impose compliance obligations and corresponding penalties for non-compliance on individuals and entities that provide services to healthcare providers and other covered entities, collectively referred to as business associates. ARRA also made significant increases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement authority to state attorneys general. The amendments also create notification requirements for individuals whose health information has been inappropriately accessed or disclosed: notification requirements to federal regulators and in some cases, notification to local and national media. Notification is not required under HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by the U.S. Department of Health and Human Services, or HHS. Most states have laws requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the United States implicate local and national data protection standards, impose additional compliance requirements and generate additional risks of enforcement for non-compliance. We may be required to expend significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws, to protect against security breaches and hackers or to alleviate problems caused by such breaches.

We depend on our information technology and telecommunications systems, and any failure of these systems could harm our business.

We depend on information technology and telecommunications systems for significant aspects of our operations. In addition, third-party vendors we may utilize for billing and collections may depend upon telecommunications and data systems provided by outside vendors and information we provide on a regular basis. These information technology and telecommunications systems support a variety of functions, including manufacturing, product tracking, quality control, customer service and support, billing and reimbursement, research and development activities, sales and marketing activities, regulatory and clinical activities, and our general and administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from manufacturing our products or managing our business operations.  Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.

Regulatory Risks Relating to Our Business

Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on our financial condition, results of operations and cash flows.

The 2010 Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, makes a number of substantial changes in the way health care is financed by both governmental and private insurers. Among other things, the ACA:

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Mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule annual Consumer Price Index update of 1.75% for the years 2011 through 2015. In addition, a permanent productivity adjustment is made to the fee schedule payment amount, which could range from 1.1% to 1.4% each year over the next 10 years. These changes in payments may apply to some or all of the tests based on DNA sequencing which utilize our molecular diagnostic system which is furnished to Medicare beneficiaries.

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Establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending if spending exceeds a target growth rate. The Independent Payment Advisory Board has broad discretion to propose policies, which may have a negative impact on payment rates for services, including clinical laboratory services and therapeutic treatments such as our therapeutic oncopheresis system, beginning in 2016, and for hospital services beginning in 2020.

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Requires each medical device manufacturer to pay an excise tax equal to 2.3% of the price for which such manufacturer sells its medical devices, beginning in 2013.  We believe that at this time this tax does not apply to our current test or to our products that are in development; nevertheless, this could change in the future if either the FDA or the Internal Revenue Service, which regulates the payment of this excise tax, changes its position.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. The Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers and suppliers of up to 2% per fiscal year, starting in 2013. The full impact on our business of the ACA and the sequester law is uncertain. In addition, the Middle Class Tax Relief and Job Creation Act of 2012, or MCTRJCA, mandated an additional change in Medicare reimbursement for clinical laboratory tests and therapeutic treatments. This legislation requires a rebasing of the Medicare Clinical Laboratory Fee Schedule to effect a 2% reduction in payment rates otherwise determined for 2013. This will serve as a base for 2014 and subsequent years. In January 2013, as a result of the changes mandated by the ACA and MCTRJCA, the Centers for Medicare & Medicaid Services, or CMS, reduced its reimbursement for laboratory tests for 2013 by approximately 3%.

Some of the tests and treatments that might utilize our two oncology products are subject to the Medicare Physician Fee Schedule and, under the current statutory formula, the rates for these services are updated annually. For the past several years, the application of the statutory formula would have resulted in substantial payment reductions if Congress failed to intervene. In the past, Congress passed interim legislation to prevent the decreases. On November 1, 2013, the CMS issued its 2014 Physician Fee Schedule Final Rule, or the 2014 Final Rule. In the 2014 Final Rule, CMS called for a reduction of approximately 23.7% in the 2014 conversion factor that is used to calculate physician reimbursement. If in future years Congress does not adopt interim legislation to block or offset, and/or CMS does not moderate, any substantial CMS-proposed reimbursement reductions, the resulting decrease in payments from Medicare could adversely impact our revenues and results of operations.

In addition, many of the Current Procedure Terminology, or CPT, codes that healthcare providers would use to bill for tests and treatments using our two oncology products once they are commercialized are subject to periodic revision.  We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. The expansion of government’s role in the U.S. health care industry as a result of the ACA’s implementation as well as changes to the reimbursement amounts paid by Medicare or other payors for our current test and our planned future cancer diagnostic tests may reduce our profits, if any and have a materially adverse effect on our business, financial condition, results of operations and cash flows.

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Our commercial success could be compromised if third-party payors, including managed care organizations and Medicare, do not provide coverage and reimbursement, breach, rescind or modify their contracts or reimbursement policies or delay payments for our two oncology products once they are commercialized.

Oncologists may not utilize our two oncology products once they are commercialized unless third-party payors, such as managed care organizations and government payors such as Medicare and Medicaid, pay a substantial portion of the price. Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that tests or treatments using our technologies are:

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not experimental or investigational;

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medically necessary;

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appropriate for the specific patient;

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cost-effective;

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supported by peer-reviewed publications; and

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included in clinical practice guidelines.

Uncertainty1 surrounds third-party payor reimbursement of any test or treatment incorporating new technology, including our two oncology products. Technology assessments of new medical devices conducted by research centers and other entities may be disseminated to interested parties for informational purposes. Third-party payors and health care providers may use such technology assessments as grounds to deny coverage for a test or procedure which uses those medical devices. Technology assessments can include evaluation of clinical studies, which define how a medical device is used in a particular clinical setting or situation.

Because each payor generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse our two oncology products once they are commercialized, seeking payor approvals is a time-consuming and costly process. We cannot be certain that coverage for our two oncology products will be provided in the future. If we cannot obtain coverage and reimbursement from private and governmental payors such as Medicare and Medicaid for our two oncology products once they are commercialized, our ability to generate revenues could be limited, which may have a material adverse effect on our financial condition, results of operations and cash flow. Further, healthcare providers which utilize our two oncology products once they are commercialized will likely experience delays and interruptions in the receipt of payments from third-party payors due to missing documentation and/or other issues, which could cause delay in collecting our revenue.

We will indirectly depend on Medicare and a limited number of private payors for a significant portion of our revenues and if these or other payors stop providing reimbursement or decrease the amount of reimbursement for our two oncology products once they are commercialized, our revenues could suffer.

We believe that our two oncology products once they are commercialized will be used by a significant number of patients with Medicare coverage.  While we will sell our medical devices to healthcare providers or clinical testing services, who in turn will bill Medicare for tests or treatments that utilize our medical devices, we cannot provide you with assurance that Medicare and other third-party payors will not change their coverage policies or cancel future contracts with such healthcare providers at any time, review and adjust the rate of reimbursement or stop paying for our medical devices altogether, which would reduce our total revenues.

Payors have increased their efforts to control the cost, utilization and delivery of health care services. In the past, measures have been undertaken to reduce payment rates for and decrease utilization of the clinical laboratory testing and therapeutic treatments generally. Because of the cost-trimming trends, third-party payors that may cover and provide reimbursement for our two oncology products may suspend, revoke or discontinue coverage at any time, or may reduce the reimbursement rates payable to healthcare providers who might utilize our medical devices.  Any such action could have a negative impact on our revenues, which may have a material adverse effect on our financial condition, results of operations and cash flows.

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Long payment cycles of Medicare, Medicaid and/or other third-party payors, or other payment delays, could hurt our cash flows and increase our need for working capital.

Medicare and Medicaid have complex billing and documentation requirements that the healthcare providers and clinical testing services who might utilize our medical devices must satisfy in order to receive payment, and the programs can be expected to carefully audit and monitor their compliance with these requirements. Those healthcare providers must also comply with numerous other laws applicable to billing and payment for healthcare services, including privacy laws. Failure to comply with these requirements may result in non-payment, refunds, exclusion from government healthcare programs, and civil or criminal liabilities, any of which may have a material adverse effect on our revenues and earnings. In addition, failure by third-party payors to properly process payment claims to those healthcare providers or clinical testing services in a timely manner could delay our receipt of payment for our products, which may have a material adverse effect on our cash flows.

If we do not receive regulatory approvals, we may not be able to commercialize our technology.

 

We may need FDA approval to market our products for diagnostic uses in the United States and approvals from foreign regulatory authorities to market products outside the United States. We have not yet filed an application with the FDA to obtain approval to market any of our proposed products. If we fail to obtain regulatory approval for the marketing of products, we will be unable to sell such products and will not be able to sustain operations.

 

If we seek to market our two oncology products in Europe, we need to receive a CE Mark. If we do not obtain a CE Mark for our products, we will be unable to sell these products in Europe and countries that recognize the CE Mark.

 

The regulatory review and approval process, which may include evaluation of preclinical studies and clinical trials of products, as well as the evaluation of manufacturing processes, is lengthy, expensive and uncertain. Securing regulatory approval for our oncology products may require the submission of extensive preclinical and clinical data and supporting information to regulatory authorities to establish such products’ safety and effectiveness for each indication.

 

Regulatory authorities generally have substantial discretion in the approval process and may either refuse to accept an application, or may decide after review of an application that the data submitted is insufficient to allow approval of the product. If regulatory authorities do not accept or approve our applications, they may require that we conduct additional clinical, preclinical or manufacturing studies and submit that data before regulatory authorities will reconsider such application. We may need to expend substantial resources to conduct further studies to obtain data that regulatory authorities believe is sufficient. Depending on the extent of these studies, approval of applications may be delayed by several years, or may require us to expend more resources than we may have available. It is also possible that additional studies may not suffice to make applications approvable. If any of these outcomes occur, we may be forced to abandon our applications for approval, which might cause us to cease operations.

We are subject to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.

We are subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. These health care laws and regulations include, for example:

•

the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal health care program such as the Medicare and Medicaid programs;

36

•

the federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaid patients to providers of “designated health services” with whom the physician or a member of the physician’s immediate family has an ownership interest or compensation arrangement, unless a statutory or regulatory exception applies;

•

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established federal crimes for knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items or services;

•

federal false claims laws, which, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to the federal government; and

•

state 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.

The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the ACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal health care fraud statutes. Where the intent requirement has been lowered, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, because of amendments enacted in 2009 as part of the Fraud Enforcement and Recovery Act, the government may now assert that 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 false claims statutes. Any action brought against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, and/or exclusion from participation in Medicare or state or federal health care programs, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

 Clinical research is heavily regulated and failure to comply with human subject protection regulations may disrupt our research program leading to significant expense, regulatory enforcement, private lawsuits and reputational damage.

Clinical research is subject to federal, state and, for studies conducted outside of the United States, international regulation. At the federal level, the FDA imposes regulations for the protection of human subjects and requirements such as initial and ongoing institutional board review; informed consent requirements, adverse event reporting and other protections to minimize the risk and maximize the benefit to research participants. Many states impose human subject protection laws that mirror or in some cases exceed federal requirements. HIPAA also regulates the use and disclosure of Protected Health Information in connection with research activities. Research conducted overseas is subject to a variety of national protections such as mandatory ethics committee review, as well as laws regulating the use, disclosure and cross-border transfer of personal data. The costs of compliance with these laws may be significant and compliance with regulatory requirements may result in delay. Noncompliance may disrupt our research and result in data that is unacceptable to regulatory authorities, data lock or other sanctions that may significantly disrupt our operations.

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Intellectual Property Risks Related to Our Business

Our collaborators may assert ownership or commercial rights to inventions we develop from our use of the biological materials which they provide to us, or otherwise arising from the collaboration.

We collaborate with various institutions, physicians, researchers and companies in scientific matters. We may not always have written agreements with certain of such collaborators, or the written agreements we have do not cover intellectual property rights. Also, we rely on numerous third parties to provide us with blood samples and biological materials that we use to develop tests. If we cannot successfully negotiate sufficient ownership and commercial rights to any inventions that result from our use of a third party collaborator’s materials, or if disputes arise with respect to the intellectual property developed with the use of a collaborator’s samples, or data developed in a collaborator’s study, we may be limited in our ability to capitalize on the market potential of these inventions or developments.

If we are unable to maintain intellectual property protection, our competitive position could be harmed.

Our ability to protect our proprietary discoveries and technologies affects our ability to compete and to achieve sustained profitability. Currently, we rely on a combination of U.S. and foreign patents and patent applications, copyrights, trademarks and trademark applications, confidentiality or non-disclosure agreements, material transfer agreements, licenses, consulting agreements, work-for-hire agreements and invention assignment agreements to protect our intellectual property rights. We also maintain certain company know-how, trade secrets and technological innovations designed to provide us with a competitive advantage in the market place as trade secrets. Currently, we own and license over 30 U.S. and foreign patents and patent applications. While we intend to pursue additional patent applications, it is possible that our pending patent applications and any future applications may not result in issued patents. Even if patents are issued to us, third parties may independently develop similar or competing technology that avoids our patents. Further, we cannot be certain that the steps we have taken will prevent the misappropriation of our trade secrets and other confidential information as well as the misuse of our patents and other intellectual property, particularly in foreign countries where we have not filed for patent protection.

From time to time the U.S. Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office, or USPTO, may change the standards of patentability and any such changes could have a negative impact on our business.

We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble damages.

From time to time we may face intellectual property infringement or misappropriation claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, were a third-party to succeed on an infringement claim against us, we may be required to pay substantial damages, including treble damages if such infringement were found to be willful. In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be pursuant to acceptable or commercially reasonable or practical terms or which may not be available at all.

It is also possible that an adverse finding of infringement against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate the test. Any such re-validation, in addition to being costly and time consuming, may be unsuccessful.

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Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s attention from our business and negatively affect our operating results or financial condition.

Risks Relating to Our Common Stock

There is a limited market for our common stock which may make it more difficult for shareholders to dispose of their shares.

 

Our common stock is quoted on the OTCQB under the symbol “VRTT”. However, this is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchange, and there has been minimal reported trading to date in our common stock. These factors may have an adverse impact on the trading and price of our common stock.

We qualify as an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We qualify as an emerging growth company, as defined in the JOBS Act. For as long as we continue to be qualified as an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in registration statements, periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile if such a market for our Common Stock exists.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We may elect to take advantage of the benefits of this extended transition period once we become a public company. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

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Holders of our Series A Preferred Stock have voting rights that adversely affect voting rights of common stockholders.

            Under our certificate of incorporation, bylaws and certificate of designation for Series A Preferred Stock, holders of our Series A Preferred Stock have certain rights, preferences and privileges that adversely affect the rights of the holders of our Common Stock, including but not limited to the following:

•

our certificate of incorporation can only be altered, amended or repealed by the affirmative vote of the holders of a majority of all of the then outstanding shares of Series A Preferred Stock, voting as a single class, provided that there are at least 700,000 shares of Series A Preferred Stock outstanding;

•

any or all of the directors may be only removed for cause or without cause by the vote of a majority of the shares of the Series A Preferred Stock; and

•

the amendment, repeal or adoption of new bylaws of the Company is subject to the approval of holders of Series A Preferred Stock.

            These rights shift the ability to control the Company to the holders of Series A Preferred Stock and could negatively affect the market for our common stock.

Our Series B Preferred Stock has rights and preferences that adversely affect the equity ownership of common stockholders.

 

Under the certificate of designation for Series B Preferred Stock, holders of our Series B Preferred Stock have certain rights to receive dividends, convert into common stock, and receive distributions upon liquidation that are dilutive to the equity ownership of common stockholders.  Furthermore, future adjustments to those preferential rights may arise in the future if the Company is unable to achieve certain goals, or if new equity is raised at a price lower than $2.50 per share of common stock.  The Company recently issued $4.2 million of Series B Preferred Stock, and has authorization to issue an additional $3.8 million (which can be increased at the discretion of the Board of Directors).

Our common stock is subject to the “penny stock” rules of the Securities and Exchange Commission, which may make it more difficult for stockholders to sell our common stock.

 

The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

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Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and may cause a decline in the market value of its stock.

Voting power of our shareholders is highly concentrated by insiders.

 

Our officers and directors control, either directly or indirectly, a substantial portion of our voting securities. Therefore, our management may significantly affect the outcome of all corporate actions and decisions for an indefinite period of time including election of directors, amendment of charter documents and approval of mergers and other significant corporate transactions.

We do not intend to pay dividends for the foreseeable future.

 

We have paid no dividends on our common stock to date and we do not anticipate paying any dividends to holders of our common stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of the business, we currently anticipate that any earnings will be retained to finance our future expansion and for the implementation of our business plan. Investors should take note of the fact that a lack of a dividend can further affect the market value of our common stock, and could significantly affect the value of any investment in the Company.

Our certificate of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

 

Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors has the authority to issue up to 20,000,000 shares of our preferred stock (of which 4,000,000 shares have been designated Series A Preferred Stock and are issued and outstanding; and 5,000,000 shares have been designated Series B Preferred Stock and approximately 1.7 million are issued and outstanding) without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.

Item 1B.  Unresolved Staff Comments.

Not required for a smaller reporting company.

 

Item 2. Properties.

We lease approximately 6,070 square feet of space in Lowell, Massachusetts for use as our corporate headquarters, including manufacturing and research laboratories. The annual rent according is $91,050 per year payable in equal monthly installments of $7,587, plus the Company’s share of common area maintenance charges and electricity. The amended lease expires in June 2018, subject to a five year extension at the election of the Company.

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Item 3. Legal Proceedings.

We are not party to, and our property is not the subject to, any material legal proceedings.

 

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

 

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

 

Market for Common Equity and Related Stockholder Matters

 

Our common stock has been quoted on the OTCQB under the symbol “VRTT” since May 4, 2015. There has been minimal reported trading to date in our common stock.

The following table sets forth, for the periods indicated, the range of high and low intraday bid information per share of our common stock for the period indicated.

 

 

 

High

 

 

Low

 

Quarter ended 12/31/15

 

$

1.70

 

 

$

0.95

 

 

The above prices are believed to reflect representative inter-dealer quotations, without retail markup, markdown or other fees or commissions, and may not represent actual transactions.

As of March 28, 2016, there are approximately 101 holders of record of our common stock.

 

Securities Authorized for Issuance under Equity Compensation Plans.

 

2014 Equity Incentive Plan

 

On March 26, 2014, our Board of Directors approved the adoption of the 2014 Equity Incentive Plan (the “2014 Plan”), which provides for the issuance of 3,000,000 shares of Common Stock (in the form of grants or options) to employees, consultants and directors. Unless prematurely terminated by the Board, the 2014 Plan terminates on March 26, 2024.

 

The 2014 Plan also provides for the exchange of an aggregate of 595,000 shares of Series A Preferred Stock (originally issued by Vizio Medical Devices LLC to seven people under the 2010 Equity Incentive Plan as Class B member units) for an aggregate of 595,000 shares of common stock and the return of those exchanged shares to Mr. Reich, who was the managing member (all as contemplated by the 2010 Equity Incentive Plan). This exchange occurred on October 8, 2014.

Set forth below is our equity compensation plan information as of December 31, 2015. 

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Equity Compensation Plan Information

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans
approved by security holders			0			$	0				0
Equity compensation plans not approved by security holders			0				0				1,536,000
Total			0			$	0				1,536,000

 

Stock Transfer Agent

 

Our stock transfer agent is Island Stock Transfer, located at 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions.

The dividend rate of the Series B preferred stock has been set at 9.5% annually, which accrues and is payable quarterly in additional shares of Series B preferred stock. The dividend rate will increase to 12% in the event that by March 31, 2018, the Company does not obtain CE Mark approval of its Therapeutic Oncopheresis System and generate at least $600,000 of gross profit in two fiscal quarters.  This potential increase in the dividend rate is conditioned on closing of the full $8 million of Series B financing by December 31, 2016.

 

Repurchases of Equity Securities

 

None.

 

Recent Sales of Unregistered Securities

 

During the three months ended December 31, 2015, the Company issued 249,500 shares of common stock for services.

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In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.

Item 6. Selected Financial Data.

Not required for a smaller reporting company.

 

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

Forward Looking Statements

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Annual Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of Viatar CTC Solutions Inc. and its wholly owned subsidiary, Viatar LLC.

 

This Annual Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

Overview

 

We are a biotechnology company focused on developing and marketing cancer molecular diagnostics and cancer therapy products, both of which are based on the principle of removing blood-borne circulating tumor cells (CTCs). We are seeking to commercialize two products which utilize our proprietary CTC removal technology:

·

The Viatar^TM Collection System for Molecular Analysis is designed to collect and purify a statistically significant quantity of CTCs from up to 50 mL of blood as the “front end” for DNA sequencing and other genetic analysis technologies used primarily for research.

·

The Viatar^TM Therapeutic Oncopheresis System is designed to remove CTCs from a patient’s blood as a new cancer therapy for metastatic disease.

  

We anticipate launching the Viatar^TM Collection System for Molecular Analysis during 2016 once we receive the following regulatory clearances: first, a CE Mark in Europe and Canada, second, a 510K designation in the United States. We are currently engaged in research collaborations with several CTC platform technology companies with the goal of marketing and selling the Viatar ^TM  Collection System for Molecular Analysis through private label and distribution arrangements.

 

We anticipate launching the Viatar^TM Therapeutic Oncopheresis System during 2016 with a CE Mark in Europe and Canada. Introduction in the United States will take several years, based on the anticipated PMA classification by the FDA. We anticipate marketing and selling the  Viatar ^TM  Therapeutic Oncopheresis System  on a direct basis through our own dedicated sales force in key large markets (such as the United States, Germany, France, Italy, UK and Japan), and through distributors in other markets.

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Key Factors Affecting our Results of Operations and Financial Condition

 

Our overall long-term growth plan depends on our ability to develop and commercialize our two oncology products. We are working with several CTC-based diagnostic companies to optimize our  Viatar ^TM  Collection System for Molecular Analysis  to their process flow, and we intend to enter into additional such collaborations in the coming year. These activities will help facilitate market adoption of that product, and we anticipate having to complete various studies with clinical samples to demonstrate its efficacy. We will also seek to publish the results of those studies in peer-reviewed scientific journals. Our ability to complete such clinical studies, as well as to perform clinical studies for the Viatar ^TM  Therapeutic Oncopheresis System  is dependent on our ability to foster strong collaborative relationships with cancer researchers, other CTC technology platform companies, and companies which make DNA sequencing equipment or perform such services; to conduct the appropriate clinical studies; and to obtain favorable clinical data.

 

For the years ended December 31, 2015 and 2014, we generated $65,910 and $9,000 from commercial sales, respectively. Assuming we are successful in completing development activities for the Viatar ^TM  Collection System for Molecular Analysis , we expect to generate revenues during 2016 from sales of that product. However, significant revenues and growth will depend on market adoption of that product. Similarly, assuming we are successful in completing development activities for the Viatar ^TM Therapeutic Oncopheresis System, we expect to generate revenues in 2017; however, significant revenues and growth will depend on clinical studies showing its efficacy in mitigating the spread and growth of metastatic tumors, and regulatory approval in the US.

 

Our operating expenses consist of general and administrative; research and development; clinical and regulatory; and business development. These expenses principally consist of personnel costs, outside services (such as cost of supporting clinical studies and regulatory consultants), laboratory equipment and consumables, rent and overhead, and legal and accounting fees.  We have also begun to incur significant capital costs for customized manufacturing and inspection equipment.   All of these expense and capital equipment categories will increase in the near-term, principally as a result of hiring additional personnel and contracting with outside engineering firms to complete the development of our two products; expanding the range and scope of clinical trials (both with cancer researchers as well as companies we collaborate with); hiring additional personnel to handle business development, sales and marketing activities; and hiring additional personnel or outside services to handle administrative functions.

 

We expect there to be an element of seasonality to our business, as research activities and patient treatment or monitoring with CTC-based tests is likely to decline during vacation and holiday seasons. We expect this trend of seasonality to continue for the foreseeable future.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The notes to our financial statements, which are included elsewhere in this report, contain a summary of our significant accounting policies. We consider the accounting policies discussed below as being critical to the understanding of our current and future results of our operations.

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Revenue Recognition

 

We recognize revenue in accordance with ASC 605, Revenue Recognition, and ASC 954-605, Health Care Entities, Revenue Recognition  which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. For contract partners, revenue is recorded based upon the contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to reliably estimate a payor’s individual payment patterns.

 

Accounts Receivable and Bad Debts

 

We will carry accounts receivable at original invoice amounts, less an estimate for doubtful receivables, based on a review of all outstanding amounts on a periodic basis. The estimate for doubtful receivables will be determined from an analysis of the accounts receivable on a quarterly basis, and be recorded as bad debt expense. Since we will only recognize revenue to the extent we expect to collect such amounts, bad debt expense related to receivables from product revenue will be recorded in general and administrative expense in the statements of operations. Accounts receivable will be written off when deemed uncollectible. Recoveries of accounts receivable previously written off will be recorded when received.

 

Stock-Based Compensation Expense

 

In December 2004, the FASB issued ASC 718, Compensation – Stock Compensation, or ASC 718. Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include options, restricted stock, restricted stock units, performance-based awards, share appreciation rights, and employee share purchase plans. As such, compensation cost is measured on the date of grant at fair value. The Company amortizes such compensation amounts, if any, over the respective vesting periods of the award. The Company uses the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, that requires the input of highly complex and subjective variables, including the expected life of the award and the expected stock price volatility over a period equal to or greater than the expected life of the award.

 

Equity instruments (“instruments”) issued to anyone other than employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC 505, Equity Based Payments to Non-Employees, or ASC 505, defines the measurement date and recognition period for such instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.

 

The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value estimated in accordance with ASC 718. The Company generally recognizes the compensation expense on a straight-line basis over the employee’s requisite service period.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. Topic 606 allows for either a “full retrospective” adoption or a “modified retrospective” adoption. The standard is effective for the Company beginning January 1, 2017. The Company is currently evaluating which method it will use and the revenue recognition impact this guidance will have once implemented.

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In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The guidance in ASU 2014-10 removes all incremental financial reporting requirements from GAAP for development-stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. In addition, the update adds an example disclosure in Risks and Uncertainties (Topic 275) to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities.

The accounting standards update also removes an exception provided to development stage entities in Consolidations (Topic 810) for determining whether an entity is a variable interest entity—which may change the consolidation analysis, consolidation decision, and disclosure requirements for a company that has an interest in a company in the development stage. ASU 2014-10, effective the first annual period beginning after December 15, 2014, will no longer require the presentation and disclosure requirements in Topic 915. The revised consolidation standards are effective one year later, in annual periods beginning after December 15, 2015. The Company adopted this ASU during the quarter ended September 30, 2014. Upon adoption of this ASU, the Company eliminated the inception-to-date information in the consolidated statements of operations, cash flows and shareholders’ deficit and no longer label the financial statements as those of a company in the developmental stage.

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-12, Compensation- Stock Compensation. The amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the effects of ASU 2014-12 on the consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern. The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial statements.

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

47

Years Ended December 31, 2015 and 2014

 

The following table sets forth certain information concerning our results of operations for the periods shown:

  

		Year Ended December 31,								Change
		2015				2014				Dollars				Percent
Revenue
Sales		$	65,910			$	9,000			$	$56,910				632%
Cost of Revenue
Cost of Sales			15,670				-				15,670				100%
Gross Profit			50,240				9,000				41,240				458%
Expenses
Research and Development
Research and Development			2,298,486				1,213,861				1,084,625				89%
Clinical & Regulatory			177,420				91,298				86,122				94%
Total R&D			2,475,906				1,305,159				1,170,747				90%
General and Administrative
General and Administrative			1,277,601				2,031,394				(753,793)				(37)%
Business Development			248,835				49,542				199,293				402%
Total G&A			1,526,436				2,080,936				(554,500)				(27)%
Total Expenses			4,002,436				3,386,095				578,997				17%
Other Income (Expenses)
Change in Derivative Liability			-				1,800				(1,800)				(100)%
Interest Expense			(114,183)				(91,785)				(22,398)				24%
Total Other Income (Expense)			(114,183)				(89,985)				(24,198)				27%
Loss Before Income Tax (Expense)			(4,066,286)				(3,467,080)				(599,206)				17%
Income tax (expense) benefit			-				(732,550)				732,550				(100)%
Net Loss		$	(4,066,286)			$	(4,199,630)			$	$133,344				(3)%

 

Revenue

 

Commercial sales of $65,910 and $9,000 for the year ended December 31, 2015 and 2014, respectively, arose in connection with evaluation testing of our filters and commercial sales. The increase is attributable to the integration of our filters into a diagnostic CTC company’s product line during the third and fourth quarters 2015. We do not expect to achieve significant sales until that and other potential customers undertake a full scale commercial rollout and successfully obtain widespread adoption by the research community.  

Gross Profit

Gross profit for the year ended December 31, 2015 was $50,240 or 76% of revenue.

Expenses

 

Research and Development Expenses

 

Research and development (“R&D”) expenses consist of two categories of expenses: (i) research and development; and (ii) clinical trial and regulatory expenses.

48

R&D Expenses

The R&D component of this category was $2,298,486 for the year ended December 31, 2015, an increase of $1,084,625 or 89%, compared with $1,213,861 for the year ended December 31, 2014. The largest component of the current period - $938,978 - was due to the non-cash expensing of restricted and unrestricted stock awards to employees issued pursuant to the 2014 Equity Incentive Plan compared to $476,610 for the year ended December 31, 2014. The balance for the year ended December 31, 2015 and 2014 was $1,359,509 and $157,232, respectively. The increase was due to higher staffing levels, use of third party engineering resources, and the purchase of supplies and equipment to support the oncology program.

Clinical Trial and Regulatory Expenses

Clinical trial and regulatory expenses were $177,420 for the year ended December 31, 2015, an increase of $86,122, or 94%, compared with $91,298 for the year ended December 31, 2014.  The increase was due to the first payment to a hospital that has agreed to conduct a pilot human clinical trial.  

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses consist of G&A and business development expenses.

G&A Expenses

G&A expenses were $1,277,601 for the year ended December 31, 2015, a decrease of $753,793 or 37%, compared with $2,031,394 for the year ended December 31, 2014. The decrease was due to the significant financial advisory and legal expenses incurred during the year ended December 31, 2014 in order to become a public filer.

We incur approximately $60,000 per quarter of legal, accounting and investor relations costs in connection with our status as an SEC-reporting company.

Business Development Expenses

 

Business development expenses were $248,835 for the year ended December 31, 2015, an increase of $199,293, or 402%, compared with $49,542 for the year ended December 31, 2014.  The increase was due to higher costs to obtain new capital, including certain investor relation activities and meetings.   

Interest Expense

 

Interest expense was $114,183 for the year ended December 31, 2015 compared to $91,785 for the year ended December 31, 2014. The 2015 period expense is comprised of $44,476 of accrued interest in the outstanding NYC R&D tax credit appeal, $43,873 for non-cash amortization of debt discount related to warrants issued with a demand note, and $25,834 of accrued interest on debt. The 2014 period expense was primarily comprised of $85,758 for non-cash amortization of debt discount related to warrants issued with a demand note and $6,027 of accrued interest on debt.

Net Loss

 

Net loss was $4,066,286 for the year ended December 31, 2015, an increase of $$133,344 or 3%, compared with $4,199,630 for the year ended December 31, 2014. The increase was primarily due to higher expenses as discussed above.

49

Three Months Ended December 31, 2015 and 2014

 

The following table sets forth certain information concerning our results of operations for the periods shown:

  

		Three Months Ended December 31,								Change
		(unaudited)
		2015				2014				Dollars				Percent
Revenue
Sales		$	27,970			$	-			$	$27,970				100%
Cost of Revenue
Cost of Sales			8,010				-				8,010				100%
Gross Profit			19,960				-				19,960				100%
Expenses
Research and Development
Research and Development			566,407				306,709				259,698				85%
Clinical & Regulatory			20,343				16,000				4,343				27%
Total R&D			586,750				322,709				264,041				82%
General and Administrative
General and Administrative			522,238				1,259,235				(736,997)				(59)%
Business Development			56,082				15,525				40,557				261%
Total G&A			578,320				1,274,760				(696,440)				(55)%
Total Expenses			1,165,070				1,597,469				(432,399)				(27)%
Other Income (Expenses)
Interest Expense			(41,051)				(74,122)				33,071				(45)%
Total Other Income (Expense)			(41,051)				(89,985)				(24,198)				27%
Loss Before Income Tax (Expense)			(1,186,162)				(1,671,591)				485,429				(29)%
Income tax (expense) benefit			-				(732,550)				732,550				(100)%
Net Loss		$	(1,186,162)			$	(2,404,141)			$	1,217,979				(51)%

 

Revenue

 

Commercial sales of $$27,970 and $0 for the three months ended December 31, 2015 and 2014, respectively, arose in connection with commercial sales. The increase is attributable to the integration of our filters into a diagnostic CTC company’s product line during the fourth quarter 2015. We do not expect to achieve significant sales until that and other potential customers undertake a full scale commercial rollout and successfully obtain widespread adoption by the research community.  

Gross Profit

Gross profit for the three months ended December 31, 2015 was $19,960 or 71% of revenue.

Expenses

 

Research and Development Expenses

 

Research and development (“R&D”) expenses consist of two categories of expenses: (i) research and development; and (ii) clinical trial and regulatory expenses.

50

R&D Expenses

The R&D component of this category was $566,407 for the three months ended December 31, 2015, an increase of $259,698 or 85%, compared with $306,709 for the three months ended December 31, 2014. One of the components of the three months ended December 31, 2015 - $48,457 - was due to the non-cash expensing of restricted and unrestricted stock awards to employees issued pursuant to the 2014 Equity Incentive Plan compared to $0 for the three months ended December 31, 2014. The balance for the three months ended December 31, 2015 and 2014 was $517,950 and $306,709 respectively. The increase was due to higher staffing levels, use of third party engineering resources, and the purchase of supplies and equipment to support the oncology program.

Clinical Trial and Regulatory Expenses

Clinical trial and regulatory expenses were $20,343 for the three months ended December 31, 2015, an increase of $4,343, or 27%, compared with $16,000 for the three months ended December 31, 2014.  

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses consist of G&A and business development expenses.

G&A Expenses

G&A expenses were $522,238 for the three months ended December 31, 2015, a decrease of $736,997 or 59%, compared with $1,259,235 for the three months ended December 31, 2014. The decrease was due to the significant financial advisory and legal expenses incurred during the year ended December 31, 2014 in order to become a public filer.

Business Development Expenses

 

Business development expenses were $56,082 for the three months ended December 31, 2015, an increase of $40,557, or 261%, compared with $15,525 for the three months ended December 31, 2014.  The increase was due to higher costs to obtain new capital, including certain investor relation activities and meetings.   

Interest Expense

 

Interest expense was $41,051 for the three months ended December 31, 2015 compared to $74,122 for the three months ended December 31, 2014. The current period expense is comprised of $14,389 of accrued interest in the outstanding NYC R&D tax credit appeal, $6,218 for non-cash amortization of debt discount related to warrants issued with a demand note and $20,444 of accrued interest on debt. The prior period expense was primarily comprised of $71,122 for non-cash amortization of debt discount related to warrants issued with a demand note and $3,000 of accrued interest on debt.

Net Loss

 

Net loss was $1,186,162 for the three months ended December 31, 2015, a decrease of $1,217,979 or 51%, compared with $2,404,141 for the three months ended December 31, 2014. The decrease was primarily due to lower expenses as discussed above.

51

 Liquidity and Capital Resources

 

We are actively working to improve our financial position and enable the growth of our business by raising new capital. During the year ended December 31, 2015 and 2014 we raised $1,009,125 and $830,000, respectively, through equity financing and $1,350,000 and $200,000, respectively, through debt financing. In addition, we received $611,939 and $0 from the promissory note for common stock subscription during the year ended December 31, 2015 and 2014, respectively. We repaid $100,000 and $0, respectively, on two outstanding demand notes during the year ended December 31, 2015 and 2014, respectively.

We have a limited operating history and our business is subject to all of the usual risks inherent in establishing and growing a new business enterprise. See “Risk Factors” at page 25.   As of December 31, 2015, we had an accumulated deficit of approximately $22.2 million. If we continue to incur operating losses and fail to become a profitable company, we may be unable to continue our operations. We expect to continue to operate at a net loss until we can obtain regulatory approval to commercialize our Therapeutic Oncopheresis System and secure widespread market acceptance and favorable reimbursement rates.  While we currently have sufficient cash on hand to fund operating and capital expenses for the next year, we anticipate that substantial additional capital will be needed in order to achieve profitability; probably on the order of $8-15 million.

In January 2015 we received a commitment from an existing shareholder to provide $1.5 million of financing by February 28, 2016. This commitment was satisfied through (a) the sale of an aggregate of 697,000 shares of common stock to accredited investors for proceeds of $1,009,125 (for an average price of $1.45 per share) net of offering costs of $134,750, and (b) the exchange of 4% Convertible Notes for stock of a non-publicly traded company.   

In October 2015, the Company borrowed $1,000,000 from a related party in exchange for a 4% convertible promissory note due November 2018. In October 2015, the Company issued a 4% convertible promissory note of $900,000 due December 2018 in exchange for 60,000 shares of stock in a private company valued at $15 per share, which was monetized in February 2016.

During the first quarter of 2016, the Company raised approximately $4.2 million of cash through the sale of approximately 1.7 million shares of Series B Preferred Stock. The investors are existing, accredited shareholders of the Company.  

The Company anticipates raising substantial additional equity capital in 2016, as well as funds from grants for research, development and clinical activities.

Cash Flows

 

Cash Used in Operating Activities

 

Net cash used in operating activities was $2,458,387 for the year ended December 31, 2015, compared to net cash used in operating activities of $1,115,418 for the year ended December 31, 2014. The change in cash used in operating activities was a result of the overall increase in expenses described above.  

 

In all periods, the primary use of cash in operating activities was to fund operations.

Cash Provided by Investing Activities

 

During the year ended December 31, 2015, the Company received proceeds of $240,000 from the sale of the investment in a non-publicly traded company. The increase in cash was offset by $175,583 utilized for the purchase of equipment. There was no cash used in investing activities in 2014. 

52

Cash Provided by Financing Activities

  

Net cash provided by financing activities was $2,871,064 for the year ended December 31, 2015, compared to net cash provided by financing activities of $1,080,000 for the year ended December 31, 2014. Our primary source of financing in all periods consisted of equity capital contributed by current and new investors, as well as debt financing from various lenders. While we currently have sufficient cash on hand to fund operating and capital expenses for the next year, we anticipate that substantial additional capital will be needed in order to achieve profitability; probably on the order of $8-15 million.

 

Contingencies

 

The Company is currently under audit by New York City tax authorities for the 2011, 2012, and 2013 tax years. The Company applied for New York City biotechnology tax credits and received certificates of eligibility from the NYC Department of Finance in the amounts of $147,997, $242,016, and $236,874 for tax years 2013, 2012, and 2011, respectively. These credits have been recognized as income tax benefits on the consolidated statements of operations in the year of application. As of December 31, 2015, the 2011, 2012, and 2013 tax refunds have been received for these amounts. The City of New York ruled that the Company does not qualify for the tax credits. As of December 31, 2015, the Company accrued $777,026 on the consolidated balance sheet which includes $150,138 of interest. The Company appealed the decision made by the City of New York. As of the date of this report, no decision has been made regarding the appeal.

 

Subsequent Events

During the first quarter of 2016 the Company sold all of its remaining stock of a non-publicly traded company for aggregate cash proceeds of $480,000.  Consequently, the Company's investment in a non-publicly traded company was reduced to $0.

During the first quarter of 2016, the Company raised approximately $4.2 million of cash through the sale of approximately 1.7 million shares of Series B Preferred Stock. The investors are existing, accredited shareholders of the Company.  The shares of Series B Preferred Stock:

·

·

have a stated value of $2.50 and a conversion price of $2.50, subject to certain adjustments;

·

are convertible into such number of shares of common stock as determined by dividing the number of shares of Series B Preferred Stock being converted, multiplied by the stated value, divided by the conversion price then in effect;

·

are entitled to one vote for each share of Series B Preferred Stock on any matter submitted to  holders of common stock;

·

are entitled to dividends at the annual rate of 9.5% (which will increase to 12% in the event that by March 31, 2018, the Company does not obtain CE Mark approval of its Therapeutic Oncopheresis System and generate at least $600,000 of gross profit in two fiscal quarters, subject to certain conditions), payable quarterly in shares of Series B Preferred Stock;

·

upon any liquidation, will be entitled to receive, prior to any payments in respect of the Company’s common stock, an amount equal to the stated value plus any accrued but unpaid dividends;

·

beginning in 2022, will automatically convert into common stock in the event that the closing price of the common stock is at least $4.00 for 20 consecutive trading days  with a minimum average trading volume of at least 25,000 shares for such period.

53

In conjunction with that financing the terms of the Company’s Series A Preferred Stock were amended to provide that it will not participate in dividends payable in shares of Series B Preferred Stock to the holders of the Series B Preferred Stock, and to provide that the liquidation amount payable to the holders of Series A Preferred Stock will be paid following payment of the liquidation amount due to holders of Series B Preferred Stock.

  

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

  

Not required for a smaller reporting company.

 

54

Item 8. Financial Statements and Supplementary Data.

  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2015 and 2014	F-2
Consolidated Statements of Operations for the years ended December 31, 2015 and 2014	F-3
Consolidated Statements of Members’ Deficit for the years ended December 31, 2015 and 2014	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014	F-5
Notes to Consolidated Financial Statements	F-6

55

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members of

Viatar CTC Solutions, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Viatar CTC Solutions, Inc. and Subsidiary as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended.  Viatar CTC Solutions, Inc. and Subsidiary’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Viatar CTC Solutions, Inc. and Subsidiary as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Rosenberg Rich Baker Berman & Company

Rosenberg Rich Baker Berman & Company

Somerset, New Jersey

March 28, 2016

F-1

Viatar CTC Solutions Inc. and Subsidiary

Consolidated Balance Sheets

				December 31, 2015		December 31, 2014
ASSETS
CURRENT ASSETS
	Cash			$ 508,445		$ 31,351
	Prepaid expenses			247,659		-
		Total current assets		756,104		31,351
	Property and equipment, net			172,793		-
	Investment in non-publicly traded company			480,000		-
			TOTAL ASSETS	$ 1,408,897		$ 31,351
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
	Accounts payable and accrued expenses			$ 217,977		$ 290,210
	Accrued income tax liability			777,026		732,550
	Demand note payable			-		50,000
	Convertible notes payable - net of long term			-		93,495
		Total current liabilities		995,003		1,166,255
	Convertible notes payable, net			2,126,218		-
			TOTAL LIABILITIES	3,121,221		1,166,255
	Commitments and contingencies
STOCKHOLDERS' DEFICIT
	Series A preferred stock, $.001 par value, 20,000,000 shares
		authorized, 4,000,000 shares issued and outstanding at
		December 31, 2015 and 2014, respectively		4,000		4,000
		Common stock, $.001 par value, 100,000,000 shares authorized,18,605,426 and 16,814,426 shares issued and outstanding at December 31, 2015 and 2014, respectively		18,606		16,815
	Common stock subscription and interest receivable			-		(605,475)
	Additional paid-in capital			20,492,974		17,611,374
	Accumulated deficit			(22,217,527)		(18,151,789)
			Total stockholders' deficit	(1,701,947)		(1,125,075)
	Noncontrolling interest			(10,377)		(9,829)
			TOTAL STOCKHOLDERS' DEFICIT	(1,712,324)		(1,134,904)
			TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$ 1,408,897		$ 31,351

See notes to consolidated financial statements.

F-2

Viatar CTC Solutions Inc. and Subsidiary

Consolidated Statements of Operations

			For the Year Ended December 31,
			2015		2014
REVENUE
	Sales		$ 65,910		$ 9,000
COST OF REVENUE
	Cost of sales		15,670		-
GROSS MARGIN			50,240		9,000
EXPENSES
	Research and development		2,475,907		1,305,159
	General and administrative		1,526,436		2,080,936
TOTAL EXPENSES			4,002,343		3,386,095
LOSS FROM OPERATIONS			(3,952,103)		(3,377,095)
OTHER INCOME (EXPENSE)
	Change in value of derivative liability		-		1,800
	Interest expense		(114,183)		(91,785)
TOTAL OTHER INCOME (EXPENSE)			(114,183)		(89,985)
LOSS BEFORE INCOME TAX (EXPENSE) BENEFIT			(4,066,286)		(3,467,080)
	Income tax (expense) benefit		-		(732,550)
NET LOSS			(4,066,286)		(4,199,630)
	Net loss attributable to noncontrolling
		interest in consolidated subsidiary	(548)		(311)
NET LOSS ATTRIBUTABLE TO
	STOCKHOLDERS		$ (4,065,738)		$ (4,199,319)

See notes to consolidated financial statements.

F-3

Viatar CTC Solutions Inc. and Subsidiary

Consolidated Statements of Stockholders’ Deficit

For the Years Ended December 31, 2015 and 2014