ITEM 1A. RISK FACTORS
You should carefully consider the following
material risk factors as well as all other information set forth or referred to in this report before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. We may not be successful in preventing the material adverse effects
that any of the following risks and uncertainties may cause. These potential risks and uncertainties may not be a complete list of the
risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently unaware of, or presently consider
immaterial, that may become material in the future and have a material adverse effect on us. You could lose all or a significant portion
of your investment due to any of these risks and uncertainties.
Summary of Risk Factors
Our business is subject
to numerous risks and uncertainties that you should consider before investing in our company, as fully described below. The principal
factors and uncertainties that make investing in our company risky include, among others:
General Operating and Business Risks
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● Potential liability claims may adversely affect our business.
Risk Factors Related to our Laboratory Services
Business
Risk Factors Related to Clinical and Commercialization
Activity
● We have limited experience in conducting clinical trials.
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Risks Related to Our Securities
General Operating and Business Risks
Our limited operating history makes it difficult
for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
We did not begin operations of our business through
AHS until May 2015. We have a limited operating history and limited revenue. As a consequence, it is difficult, if not impossible, to
forecast our future results based upon our historical data. Reliance on the historical results may not be representative of the results
we will achieve, particularly in our combined form. Because of the uncertainties related to our lack of historical operations, we may
be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our
stock price.
Our results of operations have not resulted
in profitability and we may not be able to achieve profitability going forward.
We incurred net losses amounting to $11,930,847 and $9,090,499 for
the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of approximately $63.1
million. If we incur additional significant losses, our stock price may decline, perhaps significantly. Our management is developing plans
to achieve profitability. Our business plan is speculative and unproven. There is no assurance that we will be successful in executing
our business plan or that even if we successfully implement our business plan, that we will be able to curtail our losses now or in the
future. Further, as we are a new enterprise, we expect that net losses will continue.
There is substantial doubt about our ability
to continue as a going concern, which will affect our ability to obtain future financing and may require us to curtail our operations.
Our financial statements as of December 31, 2022
were prepared under the assumption that we will continue as a going concern. The independent registered public accounting firm that audited
our 2022 financial statements, in their report, included an explanatory paragraph referring to our recurring losses since inception and
expressing management’s assessment and conclusion that there is substantial doubt in our ability to continue as a going concern.
Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue
as a going concern depends on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce
expenditures, and, ultimately, to generate revenue. We cannot assure you, however, that we will be able to achieve any of the foregoing.
See Note 2 to our Consolidated Financial Statements for further details.
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Our cash will only fund our operations for
a limited time and we will need to raise additional capital in order to support our development.
We are currently operating at a loss and expect
our operating costs will increase significantly as we continue to grow our operations. The independent registered public accounting firm
that audited our 2022 financial statements, in their report, included an explanatory paragraph referring to our recurring losses since
inception and expressing management’s assessment and conclusion that there is substantial doubt in our ability to continue as a
going concern. At December 31, 2022, we had cash of approximately $2.0 million. We will need to raise additional capital or generate
substantial revenue in order to support our development and commercialization efforts.
If our available cash balances are insufficient
to satisfy our liquidity requirements, including due to risks described herein, we may seek to raise additional capital through equity
offerings, debt financings, collaborations or licensing arrangements. We will need to raise additional capital, and we may also consider
raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities,
or for other reasons, including to:
● fund development and expansion of our operations;
● acquire, license or invest in technologies and additional laboratories;
● acquire or invest in complementary businesses or assets; and
● finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will
depend on many factors, including:
● our sales and marketing and research and development activities; and
● changes in regulatory oversight applicable to our products and services.
Other than our debt facility with our chairman,
we have no arrangements or credit facilities in place as a source of funds, and there can be no assurance that we will be able to raise
sufficient additional capital on acceptable terms, or at all, and if we are not successful in raising additional capital, we may not
be able to continue as a going concern. We may seek additional capital through a combination of private and public equity offerings,
debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or
restricting our ability to take specific actions, such as incurring additional debt, that could increase our expenses and require that
our assets secure such debt. Equity financing, if obtained, could result in dilution to our then existing stockholders and/or require
such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available
at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations and financial
condition may be materially adversely affected. We can provide no assurances that any additional sources of financing will be available
to us on favorable terms, if at all. Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse
effects on our operations.
If we raise additional capital by issuing
equity securities, our existing stockholders’ percentage ownership will be reduced and these stockholders may experience substantial
dilution.
If we raise additional funds by issuing debt
securities, these debt securities would have rights senior to those of our Common Stock and the terms of the debt securities issued could
impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations
and licensing arrangements, we may be required to relinquish some rights to our technologies or products, or to grant licenses on terms
that are not favorable to us.
We have significant outstanding debt obligations
and servicing these debt obligations will require a significant amount of capital, and our business may not be able to pay our substantial
debt.
As of December 31, 2022, we had $4.8 million
of outstanding indebtedness. In order to service this indebtedness and any additional indebtedness we may incur in the future, we will
need to generate cash from our operating activities. Our ability to generate cash is subject, in part, to our ability to successfully
execute our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control.
If we are unable to generate sufficient cash to repay our debt obligations when they become due and payable, either when they mature,
or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may
negatively impact our business operations and financial condition.
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If we breach any of the undertakings or default
on any of our obligations under our agreements with our lenders, our outstanding indebtedness could become immediately due and payable,
which would harm our business, financial condition and results of operations and could require us to reduce or cease operations. If our
indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay in full that indebtedness.
Our business is subject
to risks arising from epidemic diseases, such as the outbreak of the COVID-19 illness.
The Coronavirus Disease 2019, or
COVID-19, pandemic which has been declared by the World Health Organization to be a “public health emergency of international
concern,” spread across the globe and impacted worldwide economic activity. Although several vaccines have been developed,
a public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners
may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be
requested or mandated by governmental authorities. While it is not possible at this time to estimate the full impact that future
pandemics, including COVID-19, could have on our business, the continued spread of COVID-19 and the measures taken by the
governments of countries affected could disrupt the supply chain and adversely impact our business, financial condition or results
of operations. Future pandemics, including COVID-19, and mitigation measures may also have an adverse impact on global economic conditions which
could have an adverse effect on our business and financial condition. The extent to which these pandemics impact our results
will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge
concerning the severity of the virus and the actions to contain its impact.
We depend upon key personnel and need additional
personnel.
Our success depends
on the continuing services of Wenzhao Lu, our Chairman of the Board, and David Jin, Meng Li and Luisa Ingargiola, our executive officers.
The loss of Mr. Lu, Dr. Jin, Ms. Li or Ms. Ingargiola could have a material and adverse effect on our business operations. Additionally,
the success of our operations will largely depend upon our ability to successfully attract and maintain competent and qualified key management
personnel. As with any company with limited resources, there can be no guaranty that we will be able to attract such individuals or that
the presence of such individuals will necessarily translate into profitability for us. Our inability to attract and retain key personnel
may materially and adversely affect our business operations. The supply of qualified technical, professional, managerial and other personnel,
including lab medical directors and lab operations managers, is currently constrained; competition for qualified employees, even across
different industries, is intense, including as individuals leave the job market. We may lose, or fail to attract and retain, key management
personnel, or qualified skilled technical, professional or other employees. The same is true for patient-facing staff with specialized
training required to perform activities related to specimen collection. In the future, if competition for the services of these professionals
increases, we may not be able to continue to attract and retain individuals in its markets. Changes in key management, or the ability
to attract and retain qualified personnel, as a result of increased competition for talent, wage growth, or other market factors, could
lead to strategic and operational challenges and uncertainties, distractions of management from other key initiatives, and inefficiencies
and increased costs, any of which could adversely affect our business, financial condition, results of operations, and cash flows.
The Laboratory Services MSO Acquisition will
result in organizational changes that could create significant growth for our business. If we fail to effectively manage this growth
and adapt our business structure in a manner that preserves our reputation, then our business, financial condition and results of operations
could be harmed.
On February 9, 2023, we acquired 40% of all the
issued and outstanding equity interests of Laboratory Services MSO. The Laboratory Services MSO Acquisition has resulted in significant
growth in our operations. We have incurred and will continue to incur significant expenditures and the allocation of management time
to assimilate Laboratory Services MSO in a manner that preserves the key aspects of our business, but there can be no assurance that
we will be successful in our efforts. If we do not effectively integrate Laboratory Services MSO, the effectiveness of our business growth
could suffer, and our reputation could be harmed, each of which could adversely impact our business, financial condition and results
of operations.
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The success of our business will depend, in part,
on our ability to realize our anticipated benefits and opportunities from the acquisition. We can provide no assurance that the anticipated
benefits of the Laboratory Services MSO Acquisition will be fully realized in the time frame anticipated or at all. The failure to meet
the challenges involved in integrating the two businesses could cause an interruption of business activities, an increase in operating
costs or lower anticipated financial performance. Our failure to achieve the anticipated and the potential benefits underlying our reasons
for the Laboratory Services MSO Acquisition could have a material adverse impact on our business, financial condition and results of
operations.
We must effectively manage the growth of our
operations, or our company will suffer.
To manage our growth, we believe we must continue
to implement and improve our services and products. We may not have adequately evaluated the costs and risks associated with our planned
expansion, and our systems, procedures, and controls may not be adequate to support our operations. In addition, our management may not
be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a
profitable basis. The success of our future operating activities will also depend upon our ability to expand our support system to meet
the demands of our growing business. Any failure by our management to effectively anticipate, implement, and manage changes required
to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.
Our revenue and results of operations may
suffer if we are unable to attract new clients, continue to engage existing clients, or sell additional products and services.
We presently derive our revenue from providing
medical related consulting services to related parties and generating rental revenue from our income-producing real estate property in
New Jersey. Our growth therefore depends on our ability to attract new clients, maintain existing clients and properties and sell additional
products and services to existing clients. This depends on our ability to understand and anticipate market and pricing trends and our
clients’ needs and our ability to deliver consistent, reliable, high-quality services. Our failure to engage new clients, continue
to re-engage with our existing clients or cross-sell additional services could materially and adversely affect our operating results.
Our prospects will suffer if we are not able
to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
We only recently commenced business and we presently
generate medical related consulting services from related parties and generate rental revenue from our income-producing real estate property
in New Jersey. On the consulting side, Wenzhao Lu, our Chairman and significant shareholder, is the Chairman of each of the clients in
which we have provided consulting services. Our future success depends upon our ability to hire, train, motivate, manage, and retain
a significant number of highly skilled employees, particularly research analysts, technical experts, and sales and marketing staff. We
will experience competition for professional personnel in each of our business lines. Hiring, training, motivating, managing, and retaining
employees with the skills we need is time consuming and expensive. Any failure by us to address our staffing needs in an effective manner
could hinder our ability to continue to provide high-quality products and services and to grow our business.
Potential liability claims may adversely affect
our business.
Our services, which may include recommendations
and advice to organizations regarding complex business and operational processes and regulatory and compliance issues may give rise to
liability claims by our clients or by third parties who bring claims against our clients. Healthcare organizations often are the subject
of regulatory scrutiny and litigation, and we also may become the subject of such litigation based on our advice and services. Any such
litigation, whether or not resulting in a judgment against us, may adversely affect our reputation and could have a material adverse
effect on our financial condition and results of operations. We may not have adequate insurance coverage for claims against us.
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In accordance with our strategic development
policy, we may invest in companies for strategic reasons and may not realize a return on our investments.
From time to time, we may make investments in
companies. These investments may be for strategic objectives to support our key business initiatives but may also be standalone investments
or acquisitions. Such investments or acquisitions could include equity or debt instruments in private companies, many of which may not
be marketable at the time of our initial investment. These companies may range from early-stage companies that are often still defining
their strategic direction to more mature companies with established revenue streams and business models. The success of these companies
may depend on product development, market acceptance, operational efficiency, and other key business factors. The companies in which
we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings,
or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these private companies fails,
we could lose all or part of our investment in that company. If we determine that impairment indicators exist and that there are other-than-temporary
declines in the fair value of the investments, we may be required to write down the investments to their fair value and recognize the
related write-down as an investment loss.
We face intense competition which could cause us to lose market
share.
In the healthcare markets in which we operate,
we will compete with large healthcare providers who have more significant financial resources, established market positions, long-standing
relationships, and who have more significant name recognition, technical, marketing, sales, distribution, financial and other resources
than we do. The resources available to our competitors to develop new services and products and introduce them into the marketplace exceed
the resources currently available to us. This intense competitive environment may require us to make changes in our services, products,
pricing, licensing, distribution, or marketing to develop a market position.
If we fail to comply with our obligations
in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business
relationships with our licensors, we could lose intellectual property rights that are important to our business.
We are party to a research agreement with the
Massachusetts Institute of Technology (“MIT”) for development of chimeric antigen receptor (CAR) technology. MIT has granted
us options to non-exclusively or exclusively license MIT inventions arising under this research agreement. We may need to negotiate commercially
reasonable terms and conditions with MIT to advance our research and development activities or allow the commercialization of CAR technology
or any other product candidates we may identify and pursue.
Avalon GloboCare and Arbele Limited (“Arbele”)
are parties to the joint venture Avactis Biosciences, Inc. (“Avactis”) for development of AVA-011, a mRNA-based dual anti-CD19-CD22
CAR-T cell therapy candidate. Arbele has granted Avactis an exclusive license to its rights in this technology. We and Arbele may need
to obtain additional licenses from others to advance our research and development activities or allow the commercialization of mRNA-based
CAR technology or any other product candidates we may identify and pursue.
The Company formed a strategic partnership with
HydroPeptide, LLC, a leading epigenetics skin care company, to engage in co-development and commercialization of a series of clinical-grade,
exosome-based cosmeceutical and orthopedic products. As part of this agreement, the Company signed a three-way Material Transfer Agreement
between Avalon GloboCare, HydroPeptide and the University of Pittsburgh Medical Center.
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The Company and the University of Pittsburgh
of the Commonwealth System of Higher Education (the “University”) entered into a Corporate Research Agreement (the “University
Agreement”). Pursuant to the University Agreement, for a term of two years the University agreed to use its reasonable efforts
to perform academic research funded by the Company in connection with the development of point-of-care modular autonomous processing
system to generate clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR) T-cell therapy candidate (the “Project”)
subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator.
Our agreements with MIT, Hydropeptide, University
of Pittsburg and Arbele impose, and we expect that future agreements will impose, various development, diligence, commercialization,
or other obligations on AVAR and us. In spite of our efforts, these partners may conclude that we have materially breached its obligations
under such agreements and might therefore terminate the agreements, thereby removing or limiting our ability or our subsidiary AVAR’s
ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated,
or if the underlying patents fail to provide the intended exclusivity, competitors or other third parties would have the freedom to seek
regulatory approval of, and to market, products identical to ours and we may be required to cease our development and commercialization
of CAR or exosome technology or other product candidates that we may identify. Any of the foregoing could have a material adverse effect
on our competitive position, business, financial conditions, results of operations, and prospects.
Moreover, disputes may arise regarding intellectual
property subject to a licensing agreement, including:
● the priority of invention of patented technology.
In addition, the agreements under which we currently
license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible
to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to
be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other
obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition,
results of operations, and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability
to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize
the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations,
and prospects.
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We may face uncertainty and difficulty in
obtaining and enforcing our patents and other proprietary rights.
There can be no assurance that any patent applications
we file or license will be approved, or that challenges will not be instituted against the validity or enforceability of any patent licensed-in
or owned by us. Our pending and future patent applications may not result in patents being issued that protect our product candidates,
in whole or in part, or which effectively prevent others from commercializing competitive product candidates. Even if our patent applications
issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing
with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar
or alternative product candidates in a non-infringing manner. The cost of litigation to uphold the validity and prevent infringement
of a patent is substantial. Furthermore, there can be no assurance that others will not independently develop substantially equivalent
technologies not covered by patents to which we have rights or obtain access to our know-how. In addition, the laws of certain countries
may not adequately protect our intellectual property. Our competitors may possess or obtain patents on products or processes that are
necessary or useful to the development, use, or manufacture of our product candidates. There can also be no assurance that our proposed
technology will not infringe upon patents or proprietary rights owned by others, with the result that others may bring infringement claims
against us and require us to license such proprietary rights, which may not be available on commercially reasonable terms, if at all.
Any such litigation, if instituted, could have a material adverse effect, potentially including monetary penalties, diversion of management
resources, and injunction against continued manufacture, use, or sale of certain products or processes.
We rely upon non-patented proprietary know-how.
There can be no assurance that we can adequately protect our rights in such non-patented proprietary know-how, or that others will not
independently develop substantially equivalent proprietary information or techniques or gain access to our proprietary know-how. Any
of the foregoing events could have a material adverse effect on us. In addition, if any of our trade secrets, know-how or other proprietary
information were to be disclosed, or misappropriated, the value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would suffer.
In September 2011, the Leahy-Smith America Invents
Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These
include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under
the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor
to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent
by the U.S. Patent and Trademark Office, or USPTO, and may become involved in opposition, derivation, post-grant and inter partes
review, or interference proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or
litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.
The USPTO has developed new and untested regulations
and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated
with the Leahy-Smith Act, and in particular, the “first-to-file” provisions, only became effective in March 2013. The Leahy-Smith
Act has also introduced procedures that may make it easier for third parties to challenge issued patents, as well as to intervene in
the prosecution of patent applications. Finally, the Leahy-Smith Act contains new statutory provisions that still require the USPTO to
issue new regulations for their implementation, and it may take the courts years to interpret the provisions of the new statute. Accordingly,
it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation
could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our
issued patents.
We may not be able to protect our intellectual
property rights throughout the world.
Filing, prosecuting and defending patents on
our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in
some countries outside the United States may be less extensive than those in the United States. In addition, the laws of some foreign
countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently,
we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies
in jurisdictions where we do not obtain patent protection to develop their own products and may also export infringing products to territories
where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products
and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
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Many companies have encountered significant problems
in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly
certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly
those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of
competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions,
whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business,
could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could
provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies
awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the
world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Patent terms may be inadequate to protect
our competitive position on our product candidates for an adequate amount of time.
Patents have a limited lifespan. In the United
States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional
filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents
covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products,
including generics or biosimilars. Given the amount of time required for the development, testing and regulatory review of new product
candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result,
any patents we may obtain may not provide us with sufficient rights to exclude others from commercializing products similar or identical
to ours.
Obtaining and maintaining patent protection
depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent
agencies, and any patent protection we may obtain in the future could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity
fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental
patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various
non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions
during the patent application process. There are situations in which non-compliance can result in abandonment or lapse of the patent
or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors
might be able to enter the market and this circumstance would have a material adverse effect on our business.
It is difficult and costly to protect our
proprietary rights, and we may not be able to ensure their protection. If we fail to protect or enforce our intellectual property rights
adequately or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our commercial viability will depend in part
on obtaining and maintaining patent protection and trade secret protection of our product candidates, and the methods used to manufacture
them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making,
using, selling, offering to sell, or importing our products is dependent upon the extent to which we obtain rights under valid and enforceable
patents or trade secrets that cover these activities.
The patent positions of pharmaceutical and biopharmaceutical
companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.
No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The
biopharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations
of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict
the breadth of claims that may be allowed or enforced in the patents we own. Further, if any of our patents are deemed invalid and unenforceable,
it could impact our ability to commercialize or license our technology.
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The degree of future protection for our proprietary
rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain
or keep our competitive advantage. For example:
● the patents of others may have an adverse effect on our business.
We also may rely on trade secrets to protect
our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult
to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific
collaborators, and other advisors may unintentionally or willfully disclose our information to competitors. In addition, courts outside
the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent
knowledge, methods, and know-how.
We may be subject to claims challenging the
inventorship of patents and other intellectual property.
We or our licensors may be subject to claims
that former employees, collaborators or other third parties have an interest as an inventor or co-inventor in intellectual property we
own or license. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants
or others who are involved in developing our product candidates. We may be subject to claims by third parties asserting that our licensors,
employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership
of our owned or in-licensed patents, trade secrets or other intellectual property. If we or our licensors fail in defending any such
claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or
right to use, intellectual property that is important to our product candidates. Even if we are successful in defending against such
claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could
have a material adverse effect on our business, financial condition, results of operations and prospects.
If any of our trade secrets, know-how or other
proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired
and our business and competitive position would suffer.
Our viability also depends upon the skills, knowledge
and experience of our scientific and technical personnel, and our consultants and advisors. To help protect our proprietary know-how
and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality
agreements. To this end, we require all of our employees, consultants, advisors and contractors to enter into agreements which prohibit
unauthorized disclosure and use of confidential information and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our business. These agreements are often limited in duration and may not provide
adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure
or the lawful development by others of such information. There is no assurance that such agreements will be honored by such parties or
enforced in whole or part by the courts. We cannot be certain that others will not gain access to these trade secrets or that our patents
will provide adequate protection. Others may independently develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets. In addition, enforcing a claim that a third party illegally obtained and is using any of
our trade secrets is expensive and time consuming, and the outcome is unpredictable. If any of our trade secrets, know-how or other proprietary
information is improperly disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired
and our business and competitive position would suffer.
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We may incur substantial costs as a result
of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights
to, or use of, our technology.
If we choose to go to court to stop a third party
from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that such patents
are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources,
even if we were successful in discontinuing the infringement of our patents. In addition, there is a risk that the court will decide
that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the
risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other
party’s activities do not infringe our rights to these patents. In addition, the U.S. Supreme Court has in the past invalidated
tests used by the USPTO in granting patents over the past 20 years. As a consequence, issued patents may be found to contain invalid
claims according to the newly revised standards. Some of our own patents may be subject to challenge and subsequent invalidation in a
variety of post-grant proceedings, particularly inter partes review, before the USPTO or during litigation under the revised criteria,
which make it more difficult to defend the validity of claims in already issued patents.
Furthermore, a third party may claim that we
or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights and may go to
court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits
are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk
that a court could decide that we or our commercialization partners are infringing the third party’s patents and order us or our
partners to stop the activities covered by the patents. In addition, there is a risk that a court could order us or our partners to pay
the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation
of patents, and it is not always clear to industry participants, including us, which patents cover various types of products, manufacturing
processes or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always
uniform. If we are sued for patent infringement, we would need to demonstrate that our products, manufacturing processes or methods of
use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able
to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome
the presumption of validity enjoyed by issued patents.
As some patent applications in the United States
may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions
are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind
actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents
or our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future
file, patent applications covering technology similar to ours. Any such patent applications may have priority over our patent applications
or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed
a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by
the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible
that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention
prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
Some of our competitors may be able to sustain
the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any
uncertainties resulting from the initiation and continuation of any litigation or inter partes review proceedings could have a
material adverse effect on our ability to raise the funds necessary to continue our operations.
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Some jurisdictions in which we operate have enacted
legislation which allows members of the public to access information under statutes similar to the U.S. Freedom of Information Act. Even
though we believe our information would be excluded from the scope of such statutes, there are no assurances that we can protect our
confidential information from being disclosed under the provisions of such laws. If any confidential or proprietary information is released
to the public, such disclosures may negatively impact our ability to protect our intellectual property rights.
Breaches or compromises of our information
security systems or our information technology systems or infrastructure could result in exposure of private information, disruption
of our business and damage to our reputation, which could harm our business, results of operation and financial condition.
We utilize information security and information
technology systems and websites that allow for the secure storage and transmission of proprietary or private information regarding our
clients, patients, employees, vendors and others, including individually identifiable health information. A security breach of our network,
hosted service providers, or vendor systems, may expose us to a risk of loss or misuse of this information, litigation and potential
liability. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks, including on
companies within the healthcare industry. Although we believe that we take appropriate measures to safeguard sensitive information within
our possession, we may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks
targeted at us, our clients, our patients, or others who have entrusted us with information. Actual or anticipated attacks may cause
us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party
experts and consultants. We invest in industry standard security technology to protect personal information. Advances in computer capabilities,
new technological discoveries, or other developments may result in the technology used by us to protect personal information or other
data being breached or compromised. To our knowledge, we have not experienced any material breach of our cybersecurity systems. If our
or our third-party service provider systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems
with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned could
occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment, acts
of terrorism, circumvention of security systems, or other cyber-attacks, we could experience delays or decreases in revenue, and reduced
efficiency of our operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers, or loss,
misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation, regulatory
actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause us to incur significant
losses and remediation costs.
We may be exposed to liabilities under the
Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese anti-corruption law
could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice
Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political
parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations
and agreements with third parties where corruption may occur. It is our policy to implement safeguards to prevent these practices by
our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants,
sales agents or distributors of our company may engage in conduct for which we might be held responsible.
Violations of the FCPA or other anti-corruption
laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our
business, operating results and financial condition. In addition, the United States government may seek to hold our company liable for
successor liability FCPA violations committed by companies in which we invest or that we acquire.
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Risk Factors Related to our Laboratory Services
MSO Business
Continued changes
in healthcare reimbursement models and products (e.g., health insurance exchanges), changes in government payment and reimbursement systems,
or changes in payer mix, including an increase in third-party benefits management and value-based payment models, could have a material
adverse effect on our revenues, profitability and cash flow.
Diagnostic testing services are billed to managed
care organizations (MCOs), Medicare, Medicaid, physicians and physician groups, hospitals, patients and employer groups. Most testing
services are billed to a party other than the physician or other authorized person who ordered the test. Increases in the percentage
of services billed to government and MCOs could have an adverse effect on our revenues. Although we currently do not provide any “in
network” laboratory services, our plan is to begin providing such services in the near future.
These organizations have different contracting
philosophies, which are influenced by the design of their products. Some MCOs contract with a limited number of clinical laboratories
and engage in direct negotiation of rates. Other MCOs adopt broader networks with generally uniform fee structures for participating
clinical laboratories. In some cases, those fee structures are specific to independent clinical laboratories, while the fees paid to
hospital-based and physician-office laboratories may be different, and are typically higher. MCOs may also offer Managed Medicare or
Managed Medicaid plans. In addition, an increasing number of MCOs are implementing, directly or through third parties, various types
of laboratory benefit management programs that may include laboratory networks, utilization management tools (such as prior authorization
and/or prior notification), and claims edits, which may impact coverage or reimbursement for commercial laboratory tests. Some of these
programs address commercial laboratory testing broadly, while others are focused on certain types of testing such as molecular, genetic
and toxicology testing. An increase in the use of such programs could lead to increased denial of claims, extended appeals, and reduced
revenue.
Our ability to attract and retain MCOs is critical
given the impact of healthcare reform, related products and expanded coverage (e.g. health insurance exchanges and Medicaid expansion)
and evolving value-based care and risk-based reimbursement delivery models (e.g., accountable care organizations (ACOs) and Independent
Physician Associations (IPAs)).
A portion of the managed care fee-for-service
revenues is collectible from patients in the form of deductibles, coinsurance and copayments. As patient cost-sharing has been increasing,
our collections may be adversely impacted.
In addition, Medicare and Medicaid and private
insurers have increased their efforts to control the cost, utilization and delivery of healthcare services, including commercial laboratory
services. Measures to regulate healthcare delivery in general, and clinical laboratories in particular, have resulted in reduced prices,
added costs and decreased test utilization for the commercial laboratory industry by increasing complexity and adding new regulatory
and administrative requirements. Pursuant to legislation passed in late 2003, the percentage of Medicare beneficiaries enrolled in Managed
Medicare plans has increased. The percentage of Medicaid beneficiaries enrolled in Managed Medicaid plans has also increased; however,
changes to, or repeal of, the Patient Protection and Affordable Care Act (ACA) may continue to affect coverage, reimbursement, and utilization
of laboratory services, as well as administrative requirements, in ways that are currently unpredictable. Further healthcare reform could
adversely affect laboratory reimbursement from Medicare, Medicaid or commercial carriers.
We expect the efforts to impose reduced reimbursement,
more stringent payment policies, and utilization and cost controls by government and other payers to continue. If our laboratory services
business cannot offset additional reductions in the payments it receives for its services by reducing costs, increasing test volume,
and/or introducing new services and procedures, it could have a material adverse effect on our revenues, profitability and cash flows.
In 2014, Congress passed the Protecting Access to Medicare Act (PAMA), requiring Medicare to change the way payment rates are calculated
for tests paid under the Clinical Laboratory Fee Schedule (CLFS), and to base the payment on the weighted median of rates paid by private
payers. On June 23, 2016, CMS issued a final rule to implement PAMA that required applicable laboratories, including our laboratory services
business, to begin reporting their test-specific private payer payment amounts to CMS during the first quarter of 2017. CMS exercised
enforcement discretion to permit reporting for an additional 60 days, through May 30, 2017. CMS used that private market data to calculate
weighted median prices for each test (based on applicable current procedural technology (CPT) codes) to represent the new CLFS rates
beginning in 2018, subject to certain phase-in limits. For 2018-2020, a test price could not be reduced by more than 10% per year. As
a result of provisions included within the CARES Act, PAMA rate reductions for 2021 were suspended. As a result of the Protecting Medicare
and American Farmers from Sequester Cuts Act that became law in December 2021, the data reporting requirements and Medicare reimbursement
cuts that would have occurred under PAMA in 2022 were delayed by one additional year. As a result of the Consolidated Appropriations
Act, 2023, which became law in December 2022, the data reporting requirements and Medicare reimbursement cuts that would have occurred
under PAMA in 2023 were delayed by one additional year.
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For 2024-2026, a test price cannot be reduced
by more than 15.0% per year. The process of data reporting and repricing will be repeated every three years for Clinical Diagnostic Laboratory
Tests (CDLTs) beginning in 2024. CFLS rates for 2027 and subsequent periods will not be subject to phase-in limits. The phase-in of rates
for CDLTs established in 2018 will resume in 2024. New CLFS rates will be established in 2025 based on data from 2019 to be reported
in 2024. New CLFS rates will be established in 2028 based on data from 2026 to be reported in 2027 CLFS rates for Advanced Diagnostic
Laboratory Tests (ADLTs) will be updated annually.
CMS published its initial proposed CLFS rates
under PAMA for 2018-2020 on September 22, 2017. Following a public comment period, CMS made adjustments and published final CLFS rates
for 2018-2020 on November 17, 2017, with additional adjustments published on December 1, 2017. 2021, 2022 and 2023 PAMA rates were frozen
as described above.
Healthcare reform legislation also contains numerous
regulations that will require us, as an employer, to implement significant process and record-keeping changes to be in compliance. These
changes increase the cost of providing healthcare coverage to employees and their families. Given the limited release of regulations
to guide compliance, as well as potential changes to the ACA, the exact impact to employers, including us, is uncertain.
Government payers,
such as Medicare and Medicaid, have taken steps to reduce the utilization and reimbursement of healthcare services, including clinical
testing services.
Although we currently do not provide any laboratory
services that are billed through Medicare or Medicaid, we plan to do so in the near future. At that time, we will face efforts by government
payers to reduce utilization of and reimbursement for diagnostic information services. One example of this is increased use of prior
authorization requirements. We expect efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization
of clinical test services will continue.
Pursuant to PAMA,
reimbursement rates for many clinical laboratory tests provided under Medicare were reduced from 2018 - 2020. PAMA calls for further
revision of the Medicare CLFS for years after 2020, based on future surveys of market rates; reimbursement rate reduction from 2024-26
is capped by PAMA at 15% annually. PAMA’s next data collection and reporting period have been delayed, most recently by federal legislation
adopted in December 2022, which further delayed the reimbursement rate reductions and reporting requirements until January 1, 2024.
In addition, CMS has adopted policies limiting
or excluding coverage for clinical tests that we perform. We also expect in the future to provide physician services that are reimbursed
by Medicare under a physician fee schedule, which is subject to adjustment on an annual basis. Medicaid reimbursement varies by state
and is subject to administrative and billing requirements and budget pressures.
In addition, over the last several years, the
federal government has expanded its contracts with private health insurance plans for Medicare beneficiaries, called “Medicare
Advantage” programs, and has encouraged such beneficiaries to switch from the traditional programs to the private programs. There
has been growth of health insurance plans offering Medicare Advantage programs, and of beneficiary enrollment in these programs. States
have mandated that Medicaid beneficiaries enroll in private managed care arrangements. In addition, state budget pressures have encouraged
states to consider several courses of action that may impact our business, such as delaying payments, reducing reimbursement, restricting
coverage eligibility, denying claims and service coverage restrictions. Further, CMS has set goals for value-based reimbursement to be
achieved by 2030.
Reimbursement for Medicare services also is subject
to annual reduction under the Budget Control Act of 2011, and the Statutory Pay-As-You-Go Act of 2010.
From time to time, the
federal government has considered whether competitive bidding could be used to provide clinical testing services for Medicare beneficiaries
while maintaining quality and access to care. Congress periodically considers cost-saving initiatives. These initiatives have included
coinsurance for clinical testing services, co-payments for clinical testing and further laboratory physician fee schedule reductions.
Other steps taken
to reduce utilization and reimbursement include requirements to obtain diagnosis codes to obtain payment, increased documentation requirements,
limiting the allowable number of tests or ordering frequency, expanded prior authorization programs and otherwise increasing payment
denials.
Steps to reduce utilization
and reimbursement also discourage innovation and access to innovative solutions that we may offer.
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Health plans and
other third parties have taken steps to reduce the utilization and reimbursement of health services, including clinical testing services.
We face efforts by non-governmental
third-party payers, including health plans, to reduce utilization of and reimbursement for clinical testing services. Examples include
increased use of prior authorization requirements and increased denial of coverage for services. There is increased market activity regarding
alternative payment models, including bundled payment models. We expect continuing efforts by third-party payers, including in their
rules, practices and policies, to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical
testing services. ACOs and Independent Delivery Networks (IDNs), including hospitals and hospital health systems, also may undertake
efforts to reduce utilization of, or reimbursement for, diagnostic information services.