LCDX Caliber Imaging and Diagnostics Inc (CE)

You should consider carefully the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other public filings in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks related to Our Financial Position and Capital Requirements

We have a history of losses, and we anticipate that we will incur continued losses for the foreseeable future.

We reported net losses of approximately $5.5 million and $9.8 million in 2013 and 2012, respectively. As of December 31, 2013, we had an accumulated deficit of approximately $52.0 million. We have devoted substantially all of our resources to research and development and sales of our products. Our success will depend upon, among other things, our ability to successfully market and sell our products and to generate revenues. Unanticipated problems, expenses and delays are frequently encountered in developing and commercializing new technology. These include, but are not limited to, competition, the need to gain clinical acceptance of our technology, the need for sales and marketing expertise, regulatory concerns, and setbacks in the continued development of new technology. We expect to continue to incur operating losses for the foreseeable future and require additional capital to fund ongoing operations. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity. If we are not able to fund our cash needs, we will not be able to continue as a going concern, and it is likely that all of our investors would lose their investment. If we are unable to obtain the necessary capital or financing to fund our cash needs it will adversely affect our ability to fund operations and continue as a going concern. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our overall business results of operations and financial condition,

Our limited cash resources and working capital deficit may result in our inability to continue operations unless we obtain additional financing.

As of December 31, 2013, we had cash and cash equivalents of $0.8 million and a working capital deficit of $5.1 million. In 2013, our cash used in operating activities totaled $4.8 million. As a result of our limited cash resources and working capital deficit, we are delinquent in paying a number of our creditors. Unless we obtain additional financing in the coming months, we will need to substantially curtail operations and may be unable to continue our business.

Our indebtedness and financing arrangements could negatively impact our business.

As of December 31, 2013, we had approximately $12.0 million of outstanding debt.  We cannot be sure that our future working capital or cash flows, combined with any funds resulting from our current fund raising efforts, will be sufficient to meet our debt obligations and commitments. Any failure by us to repay such debt in accordance with its terms or to renegotiate and extend such terms would have a negative impact on our business and financial condition, and may result in legal claims by our creditors.  In addition, the existence of our outstanding debt many hinder or prevent us from raising new equity or debt financing.  Our ability to make scheduled payments on our debt as they become due will depend on our future performance and our ability to implement our business strategy successfully. Failure to pay our interest expense or make our principal payments would result in a default. A default, if not waived, could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. If this occurs, we may be forced to sell or liquidate assets, obtain additional equity capital or refinance or restructure all or a portion of our outstanding debt on terms that may be less favorable to us. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to repay our debt and the lenders may be able to foreclose on our assets or force us into bankruptcy proceedings or involuntary receivership.

We cannot assure you that we will be able to achieve or accomplish the projections of our future plans and prospects included in this report.

This report includes certain projections of our plans and prospects for the future. Our future actions and results may differ materially from these projections due to risks, uncertainties and other factors, many of which are beyond our control, including but not limited to:

Based on the above factors and other risks and uncertainties, our future plans and prospects may differ materially from our projections.

The report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a going concern.

Our auditors have indicated in their reports on our financial statements for the fiscal years ended December 31, 2013 and 2012 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. A “going concern” opinion could impair our ability to finance our operations through the sale of debt or equity securities. Our ability to continue as a going concern will depend on our ability to obtain additional financing when necessary, which is not certain. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.

Any additional capital raising will likely cause dilution to existing stockholders and, if capital raising is a secured raise, it may restrict our operations or adversely affect our ability to operate our business.

The sale of equity or issuance of debt to raise capital could result in dilution to our stockholders. The incurrence of indebtedness , may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending capital, or declaring dividends, or which impose financial covenants on us that impede our ability to manage our operations.

Risks Related to the Development and Commercialization of Our Products

We have limited marketing experience, sales force or distribution capabilities. If we are unable to recruit key personnel to perform these functions, we may not be able to successfully commercialize our products.

Our ability to produce revenues ultimately depends on our ability to sell our products. We currently have limited experience in marketing or selling our products, and a limited marketing and sales staff and distribution capabilities. Developing a marketing and sales force is time-consuming and will involve the investment of significant amounts of financial and management resources, and could delay the launch of new products or expansion of existing product sales. In addition, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. If we fail to establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties, our ability to generate revenues will suffer.

Furthermore, even if we enter into marketing and distributing arrangements with third parties, we may have limited or no control over the sales, marketing and distribution activities of these third parties, and these third parties may not be successful or effective in selling and marketing our products. If we fail to create successful and effective marketing and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these distributors experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results of operations could be harmed.

Our commercial success in clinical markets depends upon attaining significant market acceptance of our products by physicians, patients and healthcare payers.

The medical device industry is highly competitive and subject to rapid technological change. Our success in clinical markets depends, in part, upon physicians continuing to perform a significant number of diagnostic procedures and our ability to achieve and maintain a competitive position in the development of technologies and products in the skin cancer diagnosis field. If physicians, patients, or other healthcare providers opt to use our competitors’ products, or healthcare payers do not accept our products, our commercial opportunity in clinical markets will be reduced and our potential revenues will suffer.

Biopsy of the lesion, followed by pathologic examination of the tissue specimen, is today’s widely accepted standard of care with a long history of use. Two alternative diagnostic tools, clinical photography and dermoscopy, are currently gaining acceptance in the U.S. medical community. In addition, technological advances may result in improvements in these alternative diagnostic tools or new technologies may emerge that produce superior diagnostic results as compared to VivaScope and our telepathology server.

If we are unable to obtain adequate reimbursement from healthcare payers, or acceptable prices, for our products, our revenues and prospects for profitability in the clinical market will suffer.

Our future revenues and ability to become profitable will depend heavily upon the availability of adequate and timely reimbursement for the use of our products and services from governmental and other third-party payers. Reimbursement by a third-party payer may depend upon a number of factors, including the third-party payer’s determination that use of a product is: (i) a covered benefit under its health plan, (ii) safe, effective and medically necessary, (iii) appropriate for the specific patient, (iv) cost effective, and (v) neither experimental nor investigational. Obtaining reimbursement approval for our products and services from each government or other third-party payer will be a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data to each payer. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payer determines that a product is eligible for reimbursement, the payer may impose coverage limitations that preclude payment for some product uses that are approved by the FDA or similar authorities. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. If we are not able to obtain coverage and profitable reimbursement promptly from government-funded and private third-party payers for our products, our ability to generate revenues and become profitable will be compromised.

The termination of our distribution relationships with any of our key distributors, or a decline in revenue from such distributors, could have a material adverse effect on our business, financial condition, and results of operations.

Our sales to date have been to a limited number of distributors and customers. For the year ended December 31, 2013, sales to two distributors were in the amounts of approximately $1.4 million and $0.5 million representing 42% and 15%, respectively, of our total revenues. Our distribution agreements with these key distributors may be terminated, or our distributors may fail to perform their obligations under such agreements. If either of these events occurs, our marketing and distribution efforts may be impaired and our revenues may be adversely impacted. We may experience greater or lesser customer concentration in the future. However, it is likely that our revenue and profitability will continue to be dependent on a very limited number of large customers and distributors. In certain countries our regulatory approval is in the name of the distributor. In the event the relationship with such distributor terminated, we would need to go through the process of reobtaining the regulatory approval in another name which would impact our ability to sell product until such approval was obtained. The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key distributors could have a material adverse effect on our revenue in any given period and may result in significant annual and quarterly revenue variations. Although we may be able to sell directly to customers if our relationships with any or all of our key distributors terminate, the development of our sales and distribution capabilities could involve significant expense and delay.

We operate in highly competitive markets, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

Currently our largest competitive threat in clinical markets is a surgical biopsy, which is the standard of care. Although we possess patented technology for our VivaScope products and our VivaNet telepathology system, we face competition, both nationally and internationally, from companies marketing technologies which offer an alternative to confocal microscopy and traditional biopsy. Many of these companies have established name recognition, reputation, and market presence, and may have greater financial, technical, sales, marketing and other resources than we have, enabling them to better withstand the impact of risks associated with a highly competitive industry .

Companies that have developed devices using confocal microscopy include those which have applications in ophthalmology, such as Nidek, and in gastroenterology, such as Mauna Kea Technologies, which has a confocal endomicroscopy device. Although we do not currently view these companies as competitors, these companies may compete with us in their respective application areas, which could possibly become broader and expand into our applications. Our confocal imaging devices compete with other noninvasive screening technologies which are sold by companies such as FotoFinder Systems, Inc., Mela Sciences, Inc., Michelson Diagnostics and Verisante. Though we do not believe that we compete with any specific large companies currently, major medical imaging companies such as General Electric Co., Siemens and Philips Healthcare, each of which manufacture and market precision medical diagnostic products, could decide to develop or acquire a product or products to compete with our VivaScope confocal imagers.

In the medical and therapeutic product research and development market companies with confocal microscopy products that we compete with include Nikon Corporation, Olympus Corporation, Carl Zeiss AG and Leica Microsystems Inc. These companies have established name recognition, reputation, and market presence, and greater financial, technical, sales, marketing and other resources than we have.  

New product development in the medical device industry is both costly and labor intensive with very low success rates for successful commercialization; if we cannot successfully develop or obtain future products, our ability to grow may be impaired.

Our long-term success is dependent, in large part, on the design, development and commercialization of new products and services in the medical technology industry. The product development process is time-consuming, unpredictable and costly. There can be no assurance that we will be able to develop or acquire new products, successfully complete clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that potential products will achieve market acceptance. In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.

If our products are approved for reimbursement, we anticipate experiencing significant pressures on pricing.

Our customers can include hospitals and physicians that typically bill various third-party payers, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs, for the healthcare diagnostic services provided to their patients. The ability of customers to obtain appropriate reimbursement for their products and services from private and governmental third-party payers is critical to the success of medical technology companies. The availability of reimbursement affects which products or services customers purchase and the prices they may be willing to pay. Reimbursement varies from country to country and can significantly impact the acceptance of new products and services. In the U.S. and in some foreign markets pricing and profitability of medical devices may be subject to government control. In the U.S. many private payers look to the Centers for Medicare & Medicaid Services, or CMS, which administer the Medicare program, in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payers. Legislative or administrative reforms to reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of diagnostic tools, technology assessments and managed-care arrangements, could have a material adverse effect on our business, financial condition or results of operations.

Even if reimbursement programs cover a device for certain uses, that does not mean that the level of reimbursement will be sufficient for commercial success. We expect to experience pricing pressures in connection with the commercialization of our products and our future products due to efforts by private and government-funded payers to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increase in public funding for healthcare services. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payers are expected to continue. Payers frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to commercialize our products and therefore, on our liquidity and our business, financial condition, and results of operations.

We operate in a heavily regulated sector, and our ability to remain viable will depend on future legislative action and favorable government decisions at various points by various agencies.

Our products are regulated in the markets we operate as well as the associated manufacturing, labeling and record keeping procedures. Regulatory clearance or approval to market a diagnostic product may contain limitations on the indicated uses of the product. Marketing clearance or approval can also be withdrawn by regulators due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval. In addition, regulators have the authority to change or modify their regulations at any time, and also has the authority to change the medical classification of our products, thereby increasing the associated regulations to which we must adhere.

The regulations affecting healthcare change frequently, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and our products. In addition, regulations and guidance are often revised or reinterpreted in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

Applicable laws and regulations are extremely complex and, in some cases, still evolving. Though we incur significant fees related to regulatory compliance, if our operations are found to be in violation of any of the laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. Any action 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 time and attention from the operation of our business.

If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems, our products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Regulatory approval of our products may be subject to limitations on the indicated uses for which the products may be marketed or contain requirements for costly post marketing testing and surveillance to monitor the safety or effectiveness of the products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

Our business is subject to inspection by the FDA and international authorities, and we could face penalties if we are found to be non-compliant with the regulations of the FDA or international authorities.

The FDA and various other authorities will inspect our facilities from time to time to determine whether we are in compliance with regulations relating to medical device manufacturing, including regulations concerning design, manufacturing, testing, quality control, product labeling, distribution, promotion, and record keeping practices. Our facility was most recently inspected by the FDA in August 2009. A determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures or, in extreme cases, criminal sanctions or a shutdown of our manufacturing facility. Even if regulatory approvals to market a product are obtained from the FDA, such approvals may contain limitations on the indicated uses of the product. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of products. FDA regulations depend heavily on administrative interpretation, and future interpretations made by the FDA or other regulatory bodies with possible retroactive effect may adversely affect us.

If the FDA or international authorities determine that our promotional materials or activities constitute promotion of our products for an unapproved use or other claim in violation of applicable law relating to the promotion of our products, it could demand that we cease the use of or modify our promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or other materials to constitute promotion of telepathology or VivaScope for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Our competitors may also assert claims either directly or indirectly with the FDA concerning any alleged illegal or improper marketing promotional activity.

Healthcare policy changes, including legislation to reform the U.S. healthcare system, may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Political, economic and regulatory influences are subjecting the healthcare industry to potential fundamental changes that could substantially affect our results of operations. In response to perceived increases in health care costs in recent years, there have been and continue to be proposals and enactments by the Obama administration, members of U.S. Congress, state governments, regulators and third-party payers to control these costs and, more generally, to reform the U.S. healthcare system. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective treatments. Certain of these proposals and enactments or regulations promulgated to enforce them may limit the prices we are able to charge for our products or the amount of reimbursement that may be available if such products are approved for reimbursement. The adoption of some or all of these enactments and proposals could have a material adverse effect on us. We cannot predict the final form these might take or their effects on our business.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. As a U.S. headquartered company with sales in the U.S., this healthcare reform legislation will materially impact us. Certain provisions of the legislation will not be effective for a number of years, there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact of the legislation will be. The legislation imposes on medical device manufacturers such as a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning in 2013. Both downward pressure on reimbursement and the excise tax could have a material adverse effect on our business, financial condition and the results of operations. Other provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is developed and delivered, and may adversely affect our business and results of operations. Further, we cannot predict what healthcare programs and regulations ultimately will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements for our products or reduce medical procedure volumes could adversely affect our business and results of operations.

We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significant penalties for noncompliance.

There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include: the Anti-Kickback Law which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients or the purchase, order or recommendation of goods or services for which payment will be made by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the Anti-Inducement Law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; HIPAA, which creates federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations on entities with respect to the privacy, security and transmission of individually identifiable health information; the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and the Civil Monetary Penalties Law, which authorizes the Department of Health and Human Services, (“HHS”), to impose civil penalties administratively for fraudulent or abusive acts. We are also subject to state laws that are analogous to the above federal laws, such as state anti-kickback and false claims laws (some of which may apply to healthcare items or services reimbursed by any third-party payer, including commercial insurers), as well as certain state laws that require pharmaceutical and medical device companies to comply with industry voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.

Sanctions for violating these laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. Our ongoing efforts to comply with these laws may be costly, and a violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. The risk of our being found in violation of these laws is increased by the fact that many of them have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation. An investigation into the use of telepathology, telepathology workstations and VivaScope by physicians may dissuade physicians from either purchasing or using telepathology, telepathology workstations and VivaScope and could have a material adverse effect on our ability to commercialize our products.

The application of the privacy provisions of HIPAA is unclear, and we will become subject to other laws and regulations regarding the privacy and security of medical information.

HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (insurers, clearinghouses, and most healthcare providers) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is unclear whether we would be deemed to be a covered entity or a business associate under the HIPAA regulations. In either case, we will be required to physically safeguard the integrity and security of the patient information that we, or our physician customers, receive, store, create or transmit. If we fail to safeguard patient information, then we or our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market our products. We also may be liable under state laws governing the privacy of health information. As and when we expand our commercialization efforts in the foreign markets that we have targeted, we will also become subject to a variety of international laws, regulations and policies designed to protect the privacy of health information. The costs associated with our ongoing compliance could be substantial, which could negatively impact our profitability.

Clinical trials associated with future applications of our technology may involve lengthy and expensive processes with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.

In the future, as we explore additional applications of our technology, clinical trials may be required for regulatory approval. We are not currently conducting any clinical trials related to any regulatory approval and we have no current plans to conduct any such clinical trials. However, should we decide to conduct such clinical trials, we cannot predict whether we will encounter problems with any future clinical trials, which would cause us or regulatory authorities to delay or suspend those clinical trials, or delay the analysis of data from those clinical trials. We estimate that clinical trials involving any of the various potential applications of VivaScope and telepathology which we may choose to pursue could continue for several years and that such trials may also take significantly longer to complete and may cost more money that we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of our products, including but not limited to: delays in obtaining regulatory approvals to commence a clinical trial; slower than anticipated patient recruitment and enrollment; negative or inconclusive results from clinical trials; unforeseen safety issues; an inability to monitor patients adequately during or after treatment; and problems with investigator or patient compliance with the trial protocols.

A number of companies in the medical device industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials. Despite the successful results reported in early clinical trials regarding our products, we do not know whether any clinical trials we or our clinical partners may conduct will produce favorable results. The failure of clinical trials to produce favorable results could have a material adverse effect on our business, financial condition and results of operations.

Alternative applications of our technology may not be successful, which will limit our ability to grow and generate revenue.

Although we believe the early exploratory and pilot studies for other clinical applications of our technology beyond the early detection and diagnosis of skin cancer are encouraging, there can be no assurance any of these research and development activities, engineering efforts, or clinical studies will be successful or that any FDA clearances will be achieved for any of these other clinical applications. If alternative applications of our technology are not successful, our ability to grow the Company and generate revenue will be adversely impacted.

We face the risk of product liability claims and may not be able to obtain or maintain adequate insurance to protect against these claims.

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if any of our products cause, or merely appears to have caused, an injury or if a patient alleges that any of our products failed to provide appropriate diagnostic information on a lesion where melanoma, another skin cancer, or another form of disease, was subsequently found to be present. Claims may be made by patients, healthcare providers or others involved with telepathology, telepathology workstations or VivaScope. Although we carry product liability insurance that covers our VivaScope products, our anticipated current and anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to operate VivaScope. If these medical personnel are not properly trained or are negligent, we may be subjected to liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance of VivaScope in the market.

Insurance and surety companies have reassessed many aspects of their businesses and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverage, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to the Operation of Our Business

We rely on intellectual property and proprietary rights and may not be able to protect these rights.

We rely heavily on proprietary technology that we protect primarily through patents, licensing arrangements, trade secrets, copyrights, trademarks, proprietary know-how and non-disclosure agreements. We have 58 issued patents and 20 pending patent applications worldwide. There can be no assurance that any pending or future patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-disclosure agreements will provide meaningful protection of our proprietary information. Further, we cannot assure you that others will not independently develop similar technologies or duplicate any technology developed by us or that our technology will not infringe upon patents or other rights owned by others. In addition, in the future, we may be required to assert infringement claims against third parties, and there can be no assurance that one or more parties will not assert infringement claims against us. Any resulting litigation or proceeding could result in significant expense to us and divert the efforts of our management personnel as well as lead to unfavorable publicity that harms our reputation and causes the market price of our common stock to drop, whether or not such litigation or proceeding is determined in our favor. In addition, to the extent that any of our intellectual property and proprietary rights were ever deemed to violate the proprietary rights of others in any litigation or proceeding or as a result of any claim, we may be prevented from using them, which could cause a termination of our ability to sell our products. Litigation could also result in a judgment or monetary damages being levied against us.

We may be adversely affected by breaches of online security.

To the extent that our activities involve the storage and transmission of confidential information, security breaches could damage our reputation and expose us to a risk of loss, or to litigation and possible liability. A substantial portion of our revenue in future years will rely upon the transmission and storage of medical data through a virtual private network, or VPN, across the Internet. Our business may be materially adversely affected if our security measures do not prevent security breaches. In addition, such information may be subject to HIPAA privacy and security regulations, the potential violation of which may trigger concerns by healthcare providers, which may adversely impact our business, financial condition and results of operations.

All of our manufacturing operations are conducted at a single location. Any disruption at our facility could increase our expenses.

All of our manufacturing operations are conducted at a single location. We take precautions to safeguard our facility, including insurance, health and safety protocols, contracted off-site engineering services, and off-site storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.

Our manufacturing efforts currently rely on various suppliers that supply components and subassemblies required for the final assembly and test of our devices. Some of these suppliers are sole-source suppliers. Contract manufacturers of some of our components, such as completed circuit boards, may also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, long lead times and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including: suppliers may make errors in manufacturing components that could negatively affect the effectiveness or safety of our products, or cause delays in shipment of our products; we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers; our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner; and our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.

Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

Our success will depend on our ability to attract and retain our personnel.

Our success is particularly dependent upon the continued service of our executive officers and other key employees. We have currently executed employment agreements with our CEO, CFO, CTO and VP of Operations. The agreements range in term from three to five years and each are renewable for additional one-year terms unless either we or the executive send written notice to the other party of its intention not to renew at least ninety (90) days prior to expiration of the then-current term. Each of these executives has agreed, pursuant to his or her respective employment agreement, not to compete with us, nor solicit our customers or employees, for a period of one (1) year following the termination of such executive’s employment. All of our employees, including our executive officers, have executed our standard form of Employee Invention, Copyright, Proprietary Information and Conflicts of Interest Agreement. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business and results of operations. Our future success will depend in part upon our ability to attract and retain highly qualified personnel. We may not be successful in hiring, retaining or developing sufficient qualified individuals.

Our employees may engage in misconduct or improper activities, including noncompliance with regulatory standards and prohibitions on insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with applicable manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our manufacturing, research and development and clinical processes do not generally involve the handling of potentially harmful biological materials or hazardous materials, but they may occasionally do so. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our business, financial condition and results of operations. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We may be subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to accurately report our financial condition, results of operations or prevent fraud.

We regularly review and update our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures, and have concluded that our internal control over financial reporting was not fully effective. We maintain controls and procedures to mitigate risks, such as processing system failures and errors. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Events could occur which are not prevented or detected by our internal controls. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could cause a failure to meet our reporting obligations under applicable federal securities laws, which could have a material adverse effect on our business, results of operations and financial condition.

If our products contain defects or otherwise fail to perform as expected, we could be liable for damages and incur unanticipated warranty, recall and other related expenses, our reputation could be damaged, we could lose market share and, as a result, our financial condition or results of operations could suffer.

Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment and/or use. If any of our products contain a defect or do not operate properly, we may have to devote significant time and resources to find and correct the issue. Such efforts could divert the attention of our management team and other relevant personnel from other important tasks. A product recall or a significant number of product returns could be expensive; damage our reputation and relationships with our customers and distributors; result in the loss of business to competitors; and result in litigation against us. Because our products are relatively new and we do not yet have the benefit of long-term experience observing product performance in the field, our estimates of a product lifespan and incidence of claims may be inaccurate. Should actual product failure rates, claims levels, material usage, or other issues differ from the original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate.

We are an “emerging growth company,” or “EGC”, and any decision on our part to comply only with certain reduced disclosure requirements applicable to “emerging growth companies” could make our common stock less attractive to investors.

We are an “EGC” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, from which we are currently exempt as a smaller reporting company, and stockholder approval of any golden parachute payments not previously approved in connection with a transaction resulting in a change of control.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We expect to take advantage these exemptions. If we do take advantage of any of these exemptions, investors may find our financial statements and other disclosures not comparable to companies that comply with public company effective dates, and will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and the stock price may be more volatile.

Poor or uncertain global economic conditions have had and could continue to have an adverse effect on our operating results.

The global economic environment began to deteriorate significantly in 2008, with declining values in real estate, increased unemployment and volatility in the global financial markets resulting in reduced credit lending by banks, solvency concerns of major financial institutions and sovereign debt issues. Economic and market conditions have continued to be volatile and uncertain in many markets around the world. In Europe where the sale of our products constituted 41% of our total sales in fiscal 2013, sovereign debt issues, government austerity programs, and bank credit issues continue to affect the capital markets of numerous European countries. These circumstances have had, and are expected to continue to have, a negative impact on our business. If the global economy continues to be weak or deteriorate further, there will likely be a negative impact on our revenues, operating margins and earnings.

Risks Relating to Our Securities

Because our securities are quoted on the OTCQB marketplace, our liquidity and the price of our securities are limited and our investors may be subject to significant restrictions on the resale of our securities due to state “Blue Sky” laws.

Our common stock and warrants are traded on the OTCQB marketplace quotation system, which is a FINRA-sponsored entity and operated inter-dealer automated quotation system for equity securities not included in a national exchange. Quotation of our securities on the OTCQB marketplace limits the liquidity and price of our securities more than if our securities were quoted or listed on the NYSE Amex or the Nasdaq Capital Market, which are national securities exchanges. Lack of liquidity will limit the price at which you may be able to sell our securities or your ability to sell our securities at all.

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. Since our securities are listed on the OTCQB marketplace, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our securities. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our securities to be limited, as you may be unable to resell your securities without the significant expense of state registration or qualification.

The exercise of our warrants may also be subject to “blue sky” laws. As a result, depending on the state of residence of a holder of the warrants, a holder may not be able to exercise its warrants unless we comply with any state securities law requirements necessary to permit such exercise or an exemption applies. Although we plan to use our reasonable efforts to assure that holders will be able to exercise their warrants under applicable state securities laws if no exemption exists, there is no assurance that we will be able to do so. As a result, the ability to exercise the warrants may be limited. The value of the warrants may be significantly reduced if holders are not able to exercise their warrants under applicable state securities laws.

Because our shares are subject to the penny stock rules, it may be more difficult to sell our shares.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The OTC Markets does not meet such requirements and for so long as the price of our common stock is less than $5.00, our securities will be deemed penny stocks. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our securities, and therefore security holders may have difficulty selling their shares.

Our stock price may remain volatile and purchasers of our common stock could incur substantial losses.

As a result of the volatility which our stock has incurred since our initial public offering, a decline in the market price of our common stock could cause stockholders to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.

The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: the announcement of new products or product enhancements by us or our competitors; developments or disputes concerning patents or other intellectual property rights; changes in the structure of third-party reimbursement in the U.S.; the departure of key personnel; results of our research and development efforts and our clinical trials; regulatory developments in the U.S. and foreign countries; developments concerning our clinical collaborators, suppliers or marketing partners; changes in financial estimates or recommendations by securities analysts; lack of trading volume in the stock, failure of any new products, if approved, to achieve commercial success; product liability claims and litigation against us; the strength and variations in our financial results or those of companies that are perceived to be similar to us; general economic, industry and market conditions; and future sales of our common stock.

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

Based upon beneficial ownership as of December 31, 2013, our directors, executive officers, holders of more than 5% of our common stock, and their affiliates, in the aggregate, beneficially owned a significant percentage of our outstanding common stock. To the extent that our affiliates may purchase additional shares, that percentage will be even higher. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under New York law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. Some of these persons or entities may have interests that differ from those of the stockholders. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our Board of Directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of our Company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

Our charter documents and New York law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

Provisions of our certificate of incorporation and bylaws and applicable provisions of New York law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our Board of Directors. These provisions:

In addition, Section 912 of the New York Business Corporation Law generally provides that a New York corporation may not engage in a business combination with an interested stockholder for a period of five years following the interested stockholder’s becoming such. An interested stockholder is generally a stockholder owning at least 20% of a corporation’s outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive stockholders of the opportunity to sell shares to potential buyers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

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

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Future sales of our common stock may cause our stock price to decline.

If our existing stockholders sell, or indicate intent to sell, substantial amounts of our common stock in the public market the trading price of our common stock could decline significantly. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.