Item 1A. Risk Factors
Risks Related to our Business
There is substantial doubt about our ability to continue as
a going concern.
We are a development stage company with no commercial products.
Our primary product candidate is in the process of being developed, and will require significant additional clinical development
and investment before it could potentially be commercialized. As a result, we have not generated any revenue from operations since
inception, and we have incurred substantial net losses to date. Moreover, our cash position is vastly inadequate to support our
business plans and substantial additional funding will be needed in order to pursue those plans, which include research and development
of our primary product candidate, seeking regulatory approval for that product candidate, and pursuing its commercialization in
the U.S., Europe and other markets. Those circumstances raise substantial doubt about our ability to continue as a going concern.
In particular and as discussed in greater detail below under the risk factor entitled “
We will need substantial additional
funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development
programs or commercialization efforts and could cause our business to fail
,” as of January 31, 2017, we believe that
our current cash on hand will meet our anticipated cash requirements into the fourth quarter of Fiscal 2017.
We have incurred significant losses since inception. We expect
to continue to incur losses for the foreseeable future, and we may never generate revenue or achieve or maintain profitability.
As noted above under the risk factor entitled “
There
is substantial doubt about our ability to continue as a going concern
,
” w
e are a development stage company
with no commercial products. Consequently, we have incurred losses in each year since our inception and we expect that losses will
continue to be incurred in the foreseeable future in the operation of our business. To date, we have financed our operations entirely
through equity and debt investments by founders, other investors and third parties, and we expect to continue to rely on these
sources of funding, to the extent available in the foreseeable future. Losses from operations have resulted principally from costs
incurred in research and development programs and from general and administrative expenses, including significant costs associated
with establishing and maintaining intellectual property rights, significant legal and accounting costs incurred in connection with
both the closing of the Merger and complying with public company reporting and control obligations, and personnel expenses. We
have devoted much of our operations to date to the research and development of our core technology, including selecting our initial
product composition, conducting initial safety and other related tests, generating scale-up, reproducibility and manufacturing
and formulation methods, and developing and protecting the intellectual property rights underlying our technology platform.
We expect to continue to incur significant expenses and we anticipate
that those expenses and losses may increase in the foreseeable future as we seek to:
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develop our principal product candidate, AC5, and the underlying technology, including advancing applications and conducting biocompatibility and other preclinical studies;
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raise capital needed to fund our operations;
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build and enhance investor relations and corporate communications capabilities;
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conduct additional clinical trials relating to AC5 and any other product candidate we seek to develop;
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attempt to gain regulatory approvals for product candidates;
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build relationships with contract manufacturing partners, and invest in product and process development through such partners;
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maintain, expand and protect our intellectual property portfolio;
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advance additional product candidates and technologies through our research and development pipeline;
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seek to commercialize selected product candidates which may require regulatory approval; and
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hire additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.
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To become and remain profitable, we must succeed in developing and
eventually commercializing product candidates with significant market potential. This will require us to be successful in a number
of challenging activities, including successfully completing preclinical testing and clinical trials of product candidates, obtaining
regulatory approval for our product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory
approval. We are only in the preliminary stages of many of those activities. We may never succeed in those activities and may never
generate operating revenues or achieve profitability. Even if we do generate operating revenues sufficient to achieve profitability,
we may not be able to sustain or increase profitability. Our failure to generate operating revenues or become and remain profitable
would impair our ability to raise capital, expand our business or continue our operations, all of which would depress the price
of our Common Stock. A further decline or lack of increase in the prices of our Common Stock could cause our stockholders to lose
all or a part of their investment in the Company.
We will need substantial additional funding and may be unable
to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization
efforts and could cause our business to fail.
Based on our current operating expenses and working capital requirements,
as of January 31, 2017, we believe that our current cash on hand will meet our anticipated cash requirements into the fourth quarter
of Fiscal 2017. In addition to the funds raised from our previous equity and convertible debt financings and borrowings under the
Life Sciences Accelerator Funding Agreement (the “
MLSC Loan Agreement
”) that we entered into with MLSC, we will
need to obtain additional cash to continue operations and fund our planned future operations, including the continuation of our
ongoing research and development efforts, the licensing or acquisition of new assets, and researching and developing any potential
patents, the related compounds and any further intellectual property that we may acquire. In addition, our plans may change and/or
we may use our capital resources more rapidly than we currently anticipate. We presently expect that our expenses will increase
in connection with our ongoing activities to support our business operations inclusive of regulatory applications and approval
of AC5 in the U.S. and Europe and therefore we will require additional funding. Our future capital requirements will depend on
many factors, including:
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the scope, progress and results of our research, preclinical, and clinical development activities;
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the scope, progress and results of our research and development collaborations;
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the extent of potential direct or indirect grant funding for our research and development activities;
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the scope, progress, results, costs, timing and outcomes of any regulatory process and clinical trials conducted for any of our product candidates;
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the timing of entering into, and the terms of, any collaboration agreements with third parties relating to any of our product candidates;
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the timing of and the costs involved in obtaining regulatory approvals for our product candidates;
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the costs of operating, expanding and enhancing our operations to support our clinical activities and, if our product candidates are approved, commercialization activities;
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the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
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the costs associated with maintaining and expanding our product pipeline;
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the costs associated with expanding our geographic focus;
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operating revenues, if any, received from sales of our product candidates, if any are approved
by the U.S. Food and Drug Administration (“
FDA
”) or other applicable regulatory agencies;
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the cost associated with being a public company, including obligations to regulatory agencies, and increased investor relations and corporate communications expenses; and
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the costs of additional general and administrative personnel, including accounting and finance, legal and human resources employees.
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We intend to obtain additional financing for our business through
public or private securities offerings, the incurrence of additional indebtedness, or some combination of those sources. We have
obtained research and development support through collaborative arrangements, such as the Project Agreement that we entered into
with the National University of Ireland Galway (“
NUIG
”) on May 28, 2015, and we may continue to seek funding
through additional collaborative arrangements with strategic partners if we determine them to be necessary or appropriate, although
these arrangements could require us to relinquish rights to our technology or product candidates and could result in our receipt
of only a portion of any revenues associated with the partnered product. We cannot provide any assurance that additional financing
from these sources will be available on favorable terms, if at all. In addition, we are bound by certain contractual terms and
obligations that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited
to, provisions in the MLSC Loan Agreement (i) restricting our ability to incur certain types of additional indebtedness, and (ii)
that would cause all amounts under the MLSC Loan Agreement to become immediately due and payable if we receive cumulative net proceeds
of $5,000,000 or more in one or more financing transactions at any time after October 3, 2016. These restrictions and provisions,
which are discussed in greater detail below under the risk factor entitled “
Our current and any future debt facilities
or instruments may require us to use our limited capital to repay amounts owed and may impose limitations on our operations, which
could negatively affect our business plans
,” could make it more challenging for us to raise capital through the incurrence
of additional debt or through future equity issuances. Further, if we do raise capital through the sale of equity, or securities
convertible into equity, the ownership of our then existing stockholders would be diluted, which dilution could be significant
depending on the price at which we may be able to sell our securities. Also, if we raise additional capital through the incurrence
of indebtedness, we may become subject to additional covenants restricting our business activities, and the holders of debt instruments
may have rights and privileges senior to those of our equity investors. Finally, servicing the interest and principal repayment
obligations under our debt facilities could divert funds that would otherwise be available to support research and development,
clinical or commercialization activities.
If we are unable to obtain adequate financing on a timely basis
or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one or more of our product development
activities, which could cause our business to fail.
The terms of the 2016 Private Placement Financing could impose
additional challenges on our ability to raise funding in the future.
The subscription agreements that we entered into between May 24,
2016 and May 26, 2016 (the “
2016 Subscription Agreements
”) in connection with our private placement financing
that closed on May 26, 2016 (the “
2016 Private Placement Financing
”) impose certain restrictions on our ability
to issue equity or debt securities, including the following: (i) until the six-month anniversary of the first date on which all
the Registrable Securities (as defined in the registration rights agreement that we entered into with the investors in the 2016
Private Placement Financing)(the “
2016 Registrable Securities
”) are covered by one or more effective registration
statements, which occurred on July 13, 2016 (the “
2016 Registration Statement Effective Date
”), the 2016 Investors
shall have certain notice and participation rights with respect to offers and sales of securities that we may pursue (these rights
expired on January 13, 2017); and (ii) until the earlier of the nine-month anniversary of the 2016 Registration Statement Effective
Date and the date on which the 2016 Investors have sold all such 2016 Registrable Securities, we may not effect or enter into an
agreement for a VRT, where a “
VRT
” is a transaction in which we (1) issue convertible securities at (A) a conversion,
exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares
of our Common Stock at any time after the initial issuance of such convertible securities; or (B) with a conversion, exercise or
exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or
upon the occurrence of specified or contingent events directly or indirectly related to our business or the market for the common
stock, other than pursuant to a customary “weighted average” anti-dilution provision; or (2) enter into any agreement
(including, without limitation, an “equity line of credit” or an “at-the-market offering”) whereby we or
any subsidiary may sell securities at a future determined price, other than standard and customary “preemptive” or
“participation” rights. These provisions could make our securities less attractive to investors and could limit our
ability to obtain adequate financing on a timely basis or on acceptable terms in the future, which could have significant harmful
effects on our financial condition and business and could include substantial limitations on our ability to continue to conduct
operations.
Our current and any future debt facilities or instruments
may require us to use our limited capital to repay amounts owed and may impose limitations on our operations, which could negatively
affect our business plans.
On September 30, 2013, we entered into the MLSC Loan Agreement with
MLSC pursuant to which MLSC has provided us an unsecured subordinated loan in principal amount of $1,000,000 (such loan, the “
MLSC
Loan
”). Under the original terms of the MLSC Loan Agreement, the MLSC Loan bore interest at a rate of 10% per annum,
and became fully due and payable on the earlier of (i) September 30, 2018; (ii) the occurrence of an event of default under the
MLSC Loan Agreement; or (iii) the completion of a sale of substantially all of our assets, a change-of-control transaction or one
or more financing transactions in which we receive from third parties other than our then existing shareholders net proceeds of
$5,000,000 or more in a 12-month period. On September 28, 2016, we entered into an amendment (the “
Amendment
”).
Under the terms of the Amendment, (i) interest on the MLSC Loan decreased from 10% per annum to 7% per annum beginning October
3, 2016; and (ii) the MLSC Loan becomes due and payable on the earlier of (a) October 3, 2017 (the “
Maturity Date
”);
(b) the completion of a sale of substantially all of our assets, or a change-of-control transaction; or (c) one or more financing
transactions in which we receive cumulative net proceeds of $5,000,000 or more in one or more financing transactions at any time
after October 3, 2016, and the occurrence of an event of default under the MLSC Loan Agreement. In addition, under the terms of
the Amendment, beginning October 3, 2016, the Company began repaying the principal and accrued interest under the MLSC Loan by
making the first of 13 monthly payments of $106,022, with the last payment scheduled to occur on the Maturity Date. Accordingly,
we will need substantial amounts of cash in order to repay the principal and interest owed under MLSC Loan, as it becomes due,
which we may not have or be able to obtain. Any failure to make payments as required under the MLSC Loan Agreement would constitute
an event of default, and could result in, among other things, MLSC’s acceleration of all amounts due thereunder.
Further, the MLSC Loan Agreement restricts our use of the proceeds
of the MLSC Loan to funding working capital requirements and/or the purchase of capital assets in the life sciences field, and
we are expressly prohibited from using any such proceeds for any severance payment, investment in certain securities or payment
for goods or services to a related party of the Company. Additionally, the MLSC Loan Agreement provides that, for so long as any
of the MLSC Loan remains outstanding, our headquarters and at least a majority of our employees must be located in Massachusetts
and we must not take certain actions without obtaining MLSC’s prior consent, including without limitation paying dividends
on our capital stock, redeeming any of our outstanding securities, and completing a sale of substantially all of our assets or
a change-of-control transaction. Further, our failure to remain a “certified life sciences company” under the Massachusetts
General Law would constitute an event of default under the MLSC Loan Agreement. Our ability to pursue our business plans during
the term of the MLSC Loan may be severely limited as a result of those restrictions, which could cause our operations and financial
condition to suffer.
In addition, the MLSC Loan Agreement restricts our ability, without
the prior written consent of MLSC, to incur certain types and amounts of additional indebtedness, including indebtedness senior
or, in certain circumstances, equal to the MLSC Loan and any indebtedness to any of our stockholders or employees that is subject
to a security interest and not expressly subordinated to the MLSC Loan. Our ability to finance our operations could be limited
if, while the MLSC Loan is outstanding, the only source of capital available to us is prohibited by the restrictions set forth
in the MLSC Loan Agreement, in which case we may be forced to curtail or eliminate some or all of our operations.
Our short operating history may hinder our ability to successfully
meet our objectives.
We are a development stage company subject to the risks, uncertainties
and difficulties frequently encountered by early-stage companies in evolving markets. Our operations to date have been primarily
limited to organizing and staffing, developing and securing our technology and undertaking funding preclinical studies of our lead
product candidate, and funding one clinical trial. We have not demonstrated our ability to successfully complete large-scale, pivotal
clinical trials, obtain regulatory approvals, manufacture a commercial scale product or arrange for a third party to do so on our
behalf, or conduct sales and marketing activities necessary for successful product commercialization.
Because of our limited operating history, we have limited insight
into trends that may emerge and affect our business, and errors may be made in developing an approach to address those trends and
the other challenges faced by development stage companies. Failure to adequately respond to such trends and challenges could cause
our business, results of operations and financial condition to suffer or fail. Further, our limited operating history may make
it difficult for our stockholders to make any predictions about our likelihood of future success or viability.
If we are not able to attract and retain qualified management
and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a significant degree on the skills,
experience and efforts of the principal members of our scientific and management personnel. These members include Terrence Norchi,
MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other key personnel could harm our business
and might significantly delay or prevent the achievement of research, development or business objectives. Further, our operation
as a public company will require that we attract additional personnel to support the establishment of appropriate financial reporting
and internal controls systems. Competition for personnel is intense. We may not be able to attract, retain and/or successfully
integrate qualified scientific, financial and other management personnel, which could materially harm our business.
If we fail to properly manage any growth we may experience,
our business could be adversely affected.
We anticipate increasing the scale of our operations as we seek
to develop our product candidates, including hiring and training additional personnel and establishing appropriate systems for
a company with larger operations. The management of any growth we may experience will depend, among other things, upon our ability
to develop and improve our operational, financial and management controls, reporting systems and procedures. If we are unable to
manage any growth effectively, our operations and financial condition could be adversely affected.
If we fail to maintain appropriate internal controls in the
future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.
Our efforts to comply with Section 404 of the Sarbanes-Oxley Act
of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting requires
the commitment of significant financial and managerial resources. Internal control over financial reporting has inherent limitations,
including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions,
and fraud. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information,
and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC
or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions,
including the inability of registered broker dealers to make a market in our stock, or investigation by regulatory authorities.
Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory
requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our stock
and our business.
We rely significantly on information technology and any failure,
inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to
operate our business effectively.
We maintain sensitive data pertaining to our Company on our computer
networks, including information about our research and development activities, our intellectual property and other proprietary
business information. Our internal computer systems and those of third parties with which we contract may be vulnerable to damage
from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures, despite the implementation of security measures. System failures, accidents or security breaches could cause interruptions
to our operations, including material disruption of our research and development activities, result in significant data losses
or theft of our intellectual property or proprietary business information, and could require substantial expenditures to remedy.
To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications or inappropriate
disclosure of confidential or proprietary information, we could incur liability and our research and development programs could
be delayed, any of which would harm our business and operations.
Risks Related to the Development and Commercialization
of our Product Candidates
Our business plan is dependent on the success of our initial
product candidate, AC5.
Our business is currently focused almost entirely on the development
and commercialization of one product candidate, AC5. Our reliance on one primary product candidate means that, if we are not able
to obtain regulatory approvals and market acceptance of that product, our chances for success will be significantly reduced. We
are also less likely to withstand competitive pressures if any of our competitors develops and obtains regulatory approval or certification
for a similar product faster than we can or that is otherwise more attractive to the market than AC5. Our current dependence on
one product candidate increases the risk that our business will fail if our development efforts for that product candidate experience
delays or other obstacles or are otherwise not successful.
The Chemistry, Manufacturing and Control (“CMC”)
process may be challenging.
Because of the complexity of our lead product candidate, the CMC
process, including product scale-up activities, may be difficult to complete successfully within the parameters required by the
FDA or its foreign counterparts. Peptide formulation optimization is particularly challenging, and any delays could negatively
impact our ability to conduct clinical trials and our subsequent commercialization timeline. Furthermore, we have, and the third
parties with whom we may establish relationships may also have, limited experience with attempting to commercialize a self-assembling
peptide as a medical device, which increases the risks associated with completing the CMC process successfully, on time, or within
the projected budget. Failure to complete the CMC process successfully would impact our ability to start a clinical trial and could
severely limit the long-term viability of our business.
Our principal product candidate is inherently risky because
it is based on novel technologies.
We are subject to the risks of failure inherent in the development
of products based on new technologies. The novel nature of AC5 creates significant challenges with respect to product development
and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro and in vivo testing, government
regulation and approval, third-party reimbursement and market acceptance. Our failure to overcome any one of those challenges could
harm our operations, ability to complete a clinical trial, and overall chances for success.
The manufacturing, production, and sterilization methods that
we intend to be utilized are detailed and complex and are a difficult process to manage.
We intend to utilize third party manufacturers to manufacture and
sterilize our products. We believe that our proposed manufacturing methods make our choice of manufacturer and sterilizer critical,
as they must possess sufficient expertise in synthetic organic chemistry and device manufacturing. If such manufacturers are unable
to properly manufacture to product specifications or sterilize our products adequately, that could severely limit our ability to
market our products.
Compliance with governmental regulations regarding the treatment
of animals used in research could increase our operating costs, which would adversely affect the commercialization of our technology.
The Animal Welfare Act (“
AWA
”) is the federal
law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations
that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals,
most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping conditions. Third parties
with whom we contract are subject to registration, inspections and reporting requirements under the AWA. Furthermore, some states
have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals.
Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If our contractors or we fail to comply
with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity,
and our operations could be adversely affected.
If the FDA or similar foreign agencies or intermediaries impose
requirements or an alternative product classification more onerous than we anticipate, our business could be adversely affected.
The development plan for our lead product candidate is based on
our anticipation of pursuing the medical device regulatory pathway, and in February 2015 we received confirmation from The British
Standards Institution (“
BSI
”), a Notified Body (which is a private commercial entity designated by the national
government of an European Union (“
EU
”) member state as being competent to make independent judgments about whether
a medical device complies with applicable regulatory requirements) in the EU, that AC5 fulfills the definition of a medical device
within the EU and will be classified as such in consideration for CE mark designation. However, the FDA and other applicable foreign
agencies, including European Competent Authorities, will have authority to finally determine the regulatory path for our product
candidates in their jurisdictions. If the FDA or similar foreign agencies or intermediaries deem our product to be a member of
a category other than a medical device, such as a drug or biologic, or impose additional requirements on our pre-clinical and clinical
development than we presently anticipate, financing needs would increase, the timeline for product approval would lengthen, the
program complexity and resource requirements world increase, and the probability of successfully commercializing a product would
decrease. Any or all of those circumstances would materially adversely affect our business.
If we are not able to secure and maintain relationships with
third parties that are capable of conducting clinical trials on our product candidates and support our regulatory submissions,
our product development efforts, and subsequent regulatory approvals could be adversely impacted.
Our management has limited experience in conducting preclinical
development activities and clinical trials. As a result, we have relied and will need to continue to rely on third party research
institutions, organizations and clinical investigators to conduct our preclinical and clinical trials and support our regulatory
submissions. If we are unable to reach agreement with qualified research institutions, organizations and clinical investigators
on acceptable terms, or if any resulting agreement is terminated prior to the completion of our clinical trials, then our product
development efforts could be materially delayed or otherwise harmed. Further, our reliance on third parties to conduct our clinical
trials and support our regulatory submissions will provide us with less control over the timing and cost of those trials, the ability
to recruit suitable subjects to participate in the trials, and the timing, cost, and probability of success for the regulatory
submissions. Moreover, the FDA and other regulatory authorities require that we comply with standards, commonly referred to as
good clinical practices (“
GCP
”), for conducting, recording and reporting the results of our preclinical development
activities and our clinical trials, to assure that data and reported results are credible and accurate and that the rights, safety
and confidentiality of trial participants are protected. Additionally, both we and any third party contractor performing preclinical
and clinical studies are subject to regulations governing the treatment of human and animal subjects in performing those studies.
Our reliance on third parties that we do not control does not relieve us of those responsibilities and requirements. If those third
parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development
activities or clinical trials in accordance with regulatory requirements or stated protocols, we may not be able to obtain, or
may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our
efforts to, successfully commercialize our product candidates. Any of those circumstances would materially harm our business and
prospects.
Any clinical trials that are planned or are conducted on our
product candidates may not start or may fail.
Clinical trials are lengthy, complex and extremely expensive processes
with uncertain expenditures and results and frequent failures. While the Company has completed its first clinical trial in Western
Europe, clinical trials that are planned or which have or shall commence for any of our product candidates could be delayed or
fail for a number of reasons, including if:
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the FDA or other regulatory authorities, or other relevant decision making bodies do not grant permission to proceed or place a trial on clinical hold due to safety concerns or other reasons;
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sufficient suitable subjects do not enroll, enroll more slowly than anticipated or remain in our trials;
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we fail to produce necessary amounts of product candidate;
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subjects experience an unacceptable rate of efficacy of the product candidate;
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subjects experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product candidate;
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any portion of the trial or related studies produces negative or inconclusive results or other adverse events;
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reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;
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third-party clinical investigators lose their licenses or permits necessary to perform our clinical trials, do not perform their clinical trials on the anticipated schedule or consistent with the clinical trial protocol, GCP or regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;
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inspections of clinical trial sites by the FDA or an institutional review board (“
IRB
”) or other applicable regulatory authorities find violations that require us to undertake corrective action, suspend or terminate one or more testing sites, or prohibit us from using some or all of the resulting data in support of our marketing applications with the FDA or other applicable agencies;
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manufacturing facilities of our third party manufacturers are ordered by the FDA or other government or regulatory authorities to temporarily or permanently shut down due to violations of current good manufacturing practices (“
cGMP
”) or other applicable requirements;
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third-party contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements;
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the FDA or other regulatory authorities impose requirements on the design, structure or other features of the clinical trials for our product candidates that we and/or our third party contractors are unable to satisfy;
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one or more IRB refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial;
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the FDA or other regulatory authorities seek the advice of an advisory committee of physician and patient representatives that may view the risks of our product candidates as outweighing the benefits;
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the FDA or other regulatory authorities require us to expand the size and scope of the clinical trials, which we may not be able to do; or
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the FDA or other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that attain regulatory approval.
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Any delay or failure of one or more of our clinical trials may occur
at any stage of testing. Any such delay could cause our development costs to materially increase, and any such failure could significantly
impair our business plans, which would materially harm our financial condition and operations.
We cannot market and sell any product candidate in the U.S.
or in any other country or region if we fail to obtain the necessary regulatory approvals, clearances or certifications from applicable
government agencies.
We cannot sell our product candidates in any country until regulatory
agencies grant marketing approval, clearance or other required certification. The process of obtaining such approval is lengthy,
expensive and uncertain. If we are able to obtain such approvals for our lead product candidate or any other product candidate
we may pursue, which we may never be able to do, it would likely be a process that takes many years to achieve.
To obtain marketing approvals in the U.S. for our product candidates,
we believe that we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to
demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. As described
above, many factors could cause those trials to be delayed or to fail.
We believe that the pathway to marketing approval in the U.S. for
our lead product candidate for internal use will likely require the process of FDA Premarket Approval (“
PMA
“)
for the product, which is based on novel technologies and likely will be classified as a Class III medical device. This approval
pathway can be lengthy and expensive, and is estimated to take from one to three years or longer from the time the PMA application
is submitted to the FDA until approval is obtained, if approval can be obtained at all.
Similarly, to obtain approval to market our product candidates outside
of the U.S., we will need to submit clinical data concerning our product candidates to and receive marketing approval or other
required certifications from governmental or other agencies in those countries, which in certain countries includes approval of
the price we intend to charge for a product. For instance, in order to obtain the certification needed to market our lead product
candidate in the EU, we believe that we will need to obtain a CE mark for the product, which entails scrutiny by applicable regulatory
agencies and bears some similarity to the PMA process, including completion of one or more successful clinical trials.
We may encounter delays or rejections if changes occur in regulatory
agency policies, if difficulties arise within regulatory or related agencies such as, for instance, any delays in their review
time, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns
during the period in which we develop a product candidate or during the period required for review of any application for marketing
approval or certification.
Any difficulties we encounter during the approval or certification
process for any of our product candidates would have a substantial adverse impact on our operations and financial condition and
could cause our business to fail.
We cannot guarantee that we will be able to effectively market
our product candidates.
A significant part of our success depends on the various marketing
strategies we plan to implement. Our business model has historically focused solely on product development, and we have never attempted
to commercialize any product. There can be no assurance as to the success of any such marketing strategy that we develop or that
we will be able to build a successful sales and marketing organization. If we cannot effectively market those products we seek
to commercialize directly, such products’ prospects will be harmed.
Any product for which we obtain required regulatory approvals
could be subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval requirements.
Any product for which we are able to obtain marketing approval or
other required certifications, and for which we are able to obtain approval of the manufacturing processes, post-approval clinical
data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review
by the FDA and comparable foreign regulatory authorities, including through periodic inspections. These requirements include, without
limitation, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements
relating to quality control, quality assurance and corresponding maintenance of records and documents. Maintaining compliance with
any such regulations that may be applicable to us or our product candidates in the future would require significant time, attention
and expense. Even if marketing approval of a product is granted, the approval may be subject to limitations on the indicated uses
for which the product may be marketed or other conditions of approval, or may contain requirements for costly and time consuming
post-marketing approval testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of
previously unknown problems with any approved product candidate or related manufacturing processes, or failure to comply with regulatory
requirements, may result in consequences to us such as:
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restrictions on the marketing or distribution of a product, including refusals to permit the import or export of the product;
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the requirement to include warning labels on the products;
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withdrawal or recall of the products from the market;
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refusal by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that we may submit;
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suspension of any ongoing clinical trials;
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fines, restitution or disgorgement of profits or revenue;
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suspension or withdrawal of marketing approvals or certifications; or
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civil or criminal penalties.
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If any of our product candidates achieves required regulatory marketing
approvals or certifications in the future, the subsequent occurrence of any such post-approval consequences would materially adversely
affect our business and operations.
Current or future legislation may make it more difficult and
costly for us to obtain marketing approval or other certifications of our product candidates.
In 2007, the Food and Drug Administration Amendments Act of 2007
(the “
FDAAA
”) was adopted. This legislation grants significant powers to the FDA, many of which are aimed at
assuring the safety of medical products after approval. For example, the FDAAA grants the FDA authority to impose post-approval
clinical study requirements, require safety-related changes to product labeling and require the adoption of complex risk management
plans. Pursuant to the FDAAA, the FDA may require that a new product be used only by physicians with specialized training, only
in specified health care settings, or only in conjunction with special patient testing and monitoring. The legislation also includes
requirements for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for
conducting clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that
violate these laws are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA, or any
other new legislation, regulations or policies that grant the FDA or other regulatory agencies additional authority that further
complicates the process for obtaining marketing approval and/or further restricts or regulates post-marketing approval activities,
could make it more difficult and more costly for us to obtain and maintain approval of any of our product candidates.
Public perception of ethical and social issues may limit or
discourage the type of research we conduct.
Our clinical trials will involve human subjects, and third parties
with whom we contract also conduct research involving animal subjects. Governmental authorities could, for public health or other
purposes, limit the use of human or animal research or prohibit the practice of our technology. Further, ethical and other concerns
about our or our third party contractors’ methods, particularly the use of human subjects in clinical trials or the use of
animal testing, could delay our research and preclinical and clinical trials, which would adversely affect our business and financial
condition.
Use of third parties to manufacture our product candidates
may increase the risk that preclinical development, clinical development and potential commercialization of our product candidates
could be delayed, prevented or impaired.
We have limited personnel with experience in medical device development
and manufacturing, do not own or operate manufacturing facilities, and generally lack the resources and the capabilities to manufacture
any of our product candidates on a clinical or commercial scale. We currently intend to outsource all or most of the clinical and
commercial manufacturing and packaging of our product candidates to third parties. However, we have not established long-term agreements
with any third party manufacturers for the supply of any of our product candidates. There are a limited number of manufacturers
that operate under cGMP regulations and that are capable of and willing to manufacture our lead product candidate utilizing the
manufacturing methods that are required to produce that product candidate, and our product candidates will compete with other product
candidates for access to qualified manufacturing facilities. If we have difficulty locating third party manufacturers to develop
our product candidates for preclinical and clinical work, then our product development programs will experience delays and otherwise
suffer. We may also be unable to enter into agreements for the commercial supply of products with third party manufacturers in
the future, or may be unable to do so when needed or on acceptable terms. Any such events could materially harm our business.
Reliance on third party manufacturers entails risks to our business,
including without limitation:
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the failure of the third party to maintain regulatory compliance, quality assurance, and general expertise in advanced manufacturing techniques and processes that may be necessary for the manufacture of our product candidates;
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limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
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failure of the third party manufacturers to meet the demand for the product candidate, either from future customers or for preclinical or clinical trial needs;
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the possible breach of the manufacturing agreement by the third party; and
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the possible termination or non-renewal of the agreement by the third party at a time that is costly or inconvenient for us.
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The failure of any of our contract manufacturers to maintain high
manufacturing standards could result in harm to clinical trial participants or patients using the products. Such failure could
also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing or delivery,
cost overruns or other problems that could seriously harm our business or profitability. Further, our contract manufacturers will
be required to adhere to FDA and other applicable regulations relating to manufacturing practices. Those regulations cover all
aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates and any products that
we may commercialize in the future. The failure of our third party manufacturers to comply with applicable regulations could result
in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing
approval or other required certifications of our product candidates, delays, suspension or withdrawal of approvals, license revocation,
seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business, financial condition and operations.
Materials necessary to manufacture our product candidates
may not be available on time, on commercially reasonable terms, or at all, which may delay or otherwise hinder the development
and commercialization of those product candidates.
We will rely on the manufacturers of our product candidates to purchase
from third party suppliers the materials necessary to produce the compounds for preclinical and clinical studies, and may continue
to rely on those suppliers for commercial distribution if we obtain marketing approval or other required certifications for any
of our product candidates. The materials to produce our products may not be available when needed or on commercially reasonable
terms, and the prices for such materials may be susceptible to fluctuations. We do not have any control over the process or timing
of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements relating to the commercial
production of any of these materials. If these materials cannot be obtained for our preclinical and clinical studies, product testing
and potential regulatory approval of our product candidates would be delayed, which would significantly impact our ability to develop
our product candidates and materially adversely affect our ability to meet our objectives and obtain operations success.
We may not be successful in maintaining or establishing collaborations,
which could adversely affect our ability to develop and, if required regulatory approvals are obtained, commercialize our product
candidates.
As demonstrated by the Project Agreement that we entered into with
NUIG on May 28, 2015, we are interested in collaborating with physicians, patient advocacy groups, foundations, government agencies,
and/or other third parties to assist with the development of our product candidates. If required regulatory approvals are obtained
for any of our product candidates, then we may consider entering into additional collaboration arrangements with medical technology,
pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing partners for the development,
sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to expand our current relationship
with NUIG and/or seek additional collaborators in the future but are unable to reach agreements with NUIG and/or such other collaborators,
as applicable, then we may fail to meet our business objectives for the affected product or program. Moreover, collaboration arrangements
are complex and time consuming to negotiate, document and implement, and we may not be successful in our efforts, if any, to establish
and implement additional collaborations or other alternative arrangements. The terms of any collaboration or other arrangements
that we establish may not be favorable to us, and the success of any such collaboration will depend heavily on the efforts and
activities of our collaborators. Any failure to engage successful collaborators could cause delays in our product development and/or
commercialization efforts, which could harm our financial condition and operational results.
We compete with other pharmaceutical and medical device companies,
including companies that may develop products that make our product candidates less attractive or obsolete.
The medical device, pharmaceutical and biotechnology industries
are highly competitive. If our product candidates become available for commercial sale, we will compete in that competitive marketplace.
There are several products on the market or in development that could be competitors with our lead product candidate. Further,
most of our competitors have greater resources or capabilities and greater experience in the development, approval and commercialization
of medical devices or other products than we do. We may not be able to compete successfully against them. We also compete for funding
with other companies in our industry that are focused on discovering and developing novel improvements in surgical bleeding prevention.
We anticipate that competition in our industry will increase. In
addition, the healthcare industry is characterized by rapid technological change, resulting in new product introductions and other
technological advancements. Our competitors may develop and market products that render our lead product candidate or any future
product candidate we may seek to develop non-competitive or otherwise obsolete. Any such circumstances could cause our operations
to suffer.
If we fail to generate market acceptance of our product candidates
and establish programs to educate and train surgeons as to the distinctive characteristics of our product candidates, we will not
be able to generate revenues on our product candidates.
Acceptance in the marketplace of our lead product candidate depends
in part on our and our third party contractors’ ability to establish programs for the training of surgeons in the proper
usage of that product candidate, which will require significant expenditure of resources. Convincing surgeons to dedicate the time
and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful in those
efforts. If surgeons are not properly trained, they may ineffectively use our product candidates. Such misuse could result in unsatisfactory
patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product candidates are superior
to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for those product candidates
among certain select groups of the population and develop programs to effectively train them to use those products. If we fail
to do so, we will not be able to generate revenue from product sales and our business, financial condition and results of operations
will be adversely affected.
We face uncertainty related to pricing, reimbursement and
healthcare reform, which could reduce our potential revenues.
If our product candidates are approved for commercialization, any
sales will depend in part on the availability of direct or indirect coverage and reimbursement from third-party payers such as
government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other
healthcare related organizations. If our product candidates obtain marketing approval, pricing and reimbursement may be uncertain.
Both the federal and state governments in the U.S. and foreign governments continue to propose and pass new legislation affecting
coverage and reimbursement policies, which are designed to contain or reduce the cost of healthcare. Further, federal, state and
foreign healthcare proposals and reforms could limit the prices that can be charged for the product candidates that we may develop,
which may limit our commercial opportunity. Adoption of our product candidates by the medical community may be limited if doctors
and hospitals do not receive adequate partial or full reimbursement for use of our products or procedures in which our products
are used, if any are commercialized. In some foreign jurisdictions, marketing approval or allowance could be dependent upon pre-marketing
price negotiations. As a result, any denial of private or government payer coverage or inadequate reimbursement for procedures
performed using our products, before or upon commercialization, could harm our business and reduce our prospects for generating
revenue.
In addition, the U.S. Congress recently adopted legislation regarding
health insurance. As a result of this new legislation, substantial changes could be made to the current system for paying for healthcare
in the U.S., including modifications to the existing system of private payers and government programs, such as Medicare, Medicaid
and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or some combination
of those, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact reimbursement for medical
devices such as our product candidates. If reimbursement for our approved product candidates, if any, is substantially less than
we expect, or rebate obligations associated with them are substantially increased, our business could be materially and adversely
impacted.
The use of our product candidates in human subjects may expose
us to product liability claims, and we may not be able to obtain adequate insurance or otherwise defend against any such claims.
We face an inherent risk of product liability claims and currently
have clinical trial liability coverage. We will need to obtain additional product liability insurance coverage if and when we begin
commercialization of any of our product candidates. If claims against us exceed any applicable insurance coverage we may obtain,
then our business could be adversely impacted. Regardless of whether we would be ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of our financial and managerial resources, which could significantly
harm our business.
Risks Related to our Intellectual Property
If we are unable to obtain and maintain protection for our
intellectual property rights, the value of our technology and products will be adversely affected
Our success will depend in large part on our ability to obtain and
maintain protection in the U.S. and other countries for the intellectual property rights covering or incorporated into our technology
and products. The ability to obtain patents covering technology in the field of medical devices generally is highly uncertain and
involves complex legal, technical, scientific and factual questions. We may not be able to obtain and maintain patent protection
relating to our technology or products. Even if issued, patents issued or licensed to us may be challenged, narrowed, invalidated,
held to be unenforceable or circumvented, or determined not to cover our product candidates or our competitors’ products,
which could limit our ability to stop competitors from marketing identical or similar products. One of our licensed MIT European
patents was recently opposed, however this patent was maintained in amended form following an administrative hearing. One of our
licensed MIT Japanese patents was recently challenged in a Japanese court. No decision has been issued. Further, we cannot be certain
that we were the first to make the inventions claimed in the patents we own or license, or that protection of the inventions set
forth in those patents was the first to be filed in the U.S. Third parties that have filed patents or patent applications covering
similar technologies or processes may challenge our claim of sole right to use the intellectual property covered by the patents
we own or exclusively license. Moreover, changes in applicable intellectual property laws or interpretations thereof in the U.S.
and other countries may diminish the value of our intellectual property rights or narrow the scope of our patent protection. Any
failure to obtain or maintain adequate protection for our intellectual property would materially harm our business, product development
programs and prospects.
In addition, our proprietary information, trade secrets and know-how
are important components of our intellectual property rights. We seek to protect our proprietary information, trade secrets, know-how
and confidential information, in part, with confidentiality agreements with our employees, corporate partners, outside scientific
collaborators, sponsored researchers, consultants and other advisors. We also have invention or patent assignment agreements with
our employees and certain consultants and advisors. If our employees or consultants breach those agreements, we may not have adequate
remedies for any of those breaches. In addition, our proprietary information, trade secrets and know-how may otherwise become known
to or be independently developed by others. Enforcing a claim that a party illegally obtained and/or for which a party is using
our proprietary information, trade secrets and/or know-how is difficult, expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the U.S. may be less willing to protect trade secrets. Costly and time consuming litigation could be
necessary to seek to enforce and determine the scope of our intellectual property rights, and failure to obtain or maintain protection
thereof could adversely affect our competitive business position and results of operations.
We do not have exclusive rights to certain intellectual property
as our patent portfolio includes certain patents that are jointly owned with our collaborators and others that have been in-licensed
on a non-exclusive basis.
As of November 15, 2016, we either own or license from others a
number of U.S. patents, U.S. patent applications and international (PCT) patent applications with certain of our collaborators.
The rights of our collaborators to these patents, patent applications and other compounds under the collaborations may in the future
restrict our ability to further develop or generate revenues from those compounds except through the collaborations.
Our patent portfolio includes a total of 23 patents and pending
applications in a total of nine jurisdictions assigned to Arch Biosurgery, Inc. This portfolio covers self-assembling peptides
and methods of use thereof, and includes eight patents that have been either allowed, issued or granted.
We have also entered into a license agreement with Massachusetts
Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under
one portfolio of patents and non-exclusive rights under another portfolio of patents. The portfolio exclusively licensed
from MIT includes a total of 22 patents and pending applications in a total of nine jurisdictions, including sixteen patents that
have been either allowed, issued or granted
.
The portfolio non-exclusively licensed from MIT includes a number
of PCT applications which have now entered the national and regional phases outside of the US, including eight patents that have
been either allowed, issued or granted in four jurisdictions that expire between 2016 and 2027 (absent patent term extension),
and one pending patent application in one jurisdiction.
If we lose certain intellectual property rights owned by third
parties and licensed to us, our business could be materially harmed.
We have entered into certain in-license agreements with MIT and
with certain other third parties, and may seek to enter into additional in-license agreements relating to other intellectual property
rights in the future. To the extent we and our product candidates rely heavily on any such in-licensed intellectual property, we
are subject to our and the counterparty’s compliance with the terms of such agreements in order to maintain those rights.
Presently, we, our lead product candidate and our business plans are dependent on the patent and other intellectual property rights
that are licensed to us under our license agreement with MIT. Although that agreement has a durational term through the life of
the licensed patents, it also imposes certain diligence, capital raising, and other obligations on us, our breach of which could
permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance fees under that agreement,
and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement. Any failure by us to satisfy
our obligations under our license agreement with MIT or any other dispute or other issue relating to that agreement could cause
us to lose some or all of our rights to use certain intellectual property that is material to our business and our lead product
candidate, which would materially harm our product development efforts and could cause our business to fail.
If we infringe or are alleged to infringe the intellectual
property rights of third parties, our business and financial condition could suffer.
Our research, development and commercialization activities, as well
as any product candidates or products resulting from those activities, may infringe or be accused of infringing a patent or other
intellectual property under which we do not hold a license or other rights. Third parties may own or control those patents or other
rights in the U.S. or abroad, and could bring claims against us that would cause us to incur substantial time, expense, and diversion
of management attention. If a patent or other intellectual property infringement suit were brought against us, we could be forced
to stop or delay research, development, manufacturing or sales, if any, of the applicable product or product candidate that is
the subject of the suit. In order to avoid or settle potential claims with respect to any of the patent or other intellectual property
rights of third parties, we may choose or be required to seek a license from a third party and be required to pay license fees
or royalties or both. Any such license may not be available on acceptable terms, or at all. Even if we or our future collaborators
were able to obtain a license, the rights granted to us or them could be non-exclusive, which could result in our competitors gaining
access to the same intellectual property rights and materially negatively affecting the commercialization potential of our planned
products. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspects
of our business operations, if, as a result of actual or threatened infringement claims, we are unable to enter into licenses on
acceptable terms or at all or otherwise settle such claims. Further, if any such claims were successful against us, we could be
forced to pay substantial damages. Any of those results could significantly harm our business, prospects and operations.
Risks Related to Ownership of our Common Stock
There is not now, and there may not ever be, an active market
for our Common Stock, which trades in the over-the-counter market in low volumes and at volatile prices.
There currently is a limited market for our Common Stock. Although
our Common Stock is quoted on the OTCQB, an over-the-counter quotation system, trading of our Common Stock is extremely limited
and sporadic and generally at very low volumes. Further, the price at which our Common Stock may trade is volatile and we expect
that it will continue to fluctuate significantly in response to various factors, many of which are beyond our control. The stock
market in general, and securities of small-cap companies driven by novel technologies in particular, has experienced extreme price
and volume fluctuations in recent years. Continued market fluctuations could result in further volatility in the price at which
our Common Stock may trade, which could cause its value to decline. To the extent we seek to raise capital in the future through
the issuance of equity, those efforts could be limited or hindered by low and/or volatile market prices for our Common Stock.
We do not now meet the initial listing standards of the Nasdaq Stock
Market or any other national securities exchange. We presently anticipate that our Common Stock will continue to be quoted on the
OTCQB or another over-the-counter quotation system. In those venues, our stockholders may find it difficult to obtain accurate
quotations as to the market value of their shares of our Common Stock, and may find few buyers to purchase their stock and few
market makers to support its price.
A more active market for our Common Stock may never develop. As
a result, investors must bear the economic risk of holding their shares of our Common Stock for an indefinite period of time.
Our Common Stock is a “penny stock.”
The SEC has adopted regulations that generally define “penny
stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market
price of our Common Stock is, and is expected to continue to be in the near term, less than $5.00 per share and is therefore a
“penny stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable
to purchase the securities. Those rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect
the ability of our stockholders to sell their shares of our Common Stock. In addition, if our Common Stock continues to be quoted
on the OTCQB as we expect, then our stockholders may find it difficult to obtain accurate quotations for our stock, and may find
few buyers to purchase our stock and few market makers to support its price.
If we issue additional shares in the future, including issuances
of shares upon exercise of the Series E Warrants, the Series D Warrants, and the Series A Warrants, our existing stockholders will
be diluted.
Our articles of incorporation authorize the issuance of up to 300,000,000
shares of Common Stock. In connection with the 2016 Private Placement Financing that closed on May 26, 2016, we issued an aggregate
of 9,418,334 shares of our Common Stock, which equaled approximately 8% of the 118,592,070 shares of our Common Stock that were
issued and outstanding immediately prior to the commencement of the 2016 Private Placement Financing. Upon the closing of the 2016
Private Placement Financing, we also issued Series E Warrants to acquire up to an additional 7,063,748 shares of our Common Stock
at an initial exercise price of $0.4380 per share. As of January 31, 2017, up to 5,983,323
shares may be acquired upon the exercise of the Series E Warrants.
Similarly, in connection with our private placement financing that
concluded on July 2, 2015 (the “
2015 Private Placement Financing
”), we issued an aggregate of 14,390,754 shares
of our Common Stock, which equaled approximately 18% of the 78,766,487 shares of our Common Stock that were issued and outstanding
immediately prior to the commencement of the 2015 Private Placement Financing. Upon the closing of the 2015 Private Placement Financing,
we also issued Series D Warrants to acquire up to an additional 14,390,754 shares of our Common Stock at an initial exercise price
of $0.25 per share. As of January 31, 2017, up to 10,451,663 shares may be acquired upon
the exercise of the Series D Warrants.
Upon the closing of our private placement financing on February
4, 2014 (the “
2014 Private Placement Financing
”), we issued an aggregate of 11,400,000 shares of our Common
Stock, which equaled approximately 16% of our currently issued and outstanding Common Stock on the date the 2014 Private Placement
Financing closed. Upon the closing of the 2014 Private Placement Financing, we also issued three series of Warrants to acquire
up to an additional 34,200,000 shares of our Common Stock at initial exercise prices ranging from $0.30 per share (the Series A
Warrants), $0.35 per share (the Series B Warrants), and $0.40 per share (the Series C Warrants). On December 1, 2014, the Company
entered into that certain Amendment to Series A Warrants, Series B Warrants and Series C Warrants to Purchase Common Stock, dated
as of December 1, 2014, with Cranshire pursuant to which, among other things, the exercise prices of the Series B Warrants and
Series C Warrants were lowered to $0.20 per share. Following the December 1, 2014 amendment, (i) 4,000,000 shares underlying the
Series B Warrants were exercised, and the remaining 7,400,000 expired unexercised on January 3, 2015 when the term of the Series
B Warrants expired; and (ii) all 11,400,000 shares underlying the Series C Warrants were exercised prior to the expiration of the
Series C Warrants at 5:00 p.m., New York time, on July 2, 2016. As a result of the conversion price of our Convertible Notes, the
closing of the Notes Offering and the subsequent issuance of the Convertible Notes triggered the Anti-Dilution Provisions of the
Series A Warrants, which in turn reduced the exercise price of the Series A Warrants to $0.20 per share and increased the aggregate
number of shares issuable under the Series A Warrants by 5,700,000 shares (or fifty-percent (50%)) from 11,400,000 shares to 17,100,000
shares. As of January 31, 2017, up to 25,000 shares may be acquired upon the exercise of
the Series A Warrants.
Additionally, as of January 31, 2017, 5,447,529 shares of Common Stock
were reserved for future issuance under the 2013 Plan, of which 12,479,210 shares
are subject to outstanding option awards granted under the 2013 Plan at exercise prices ranging from $0.17 to $0.72 per share and
with a weighted average exercise price of $0.33 per share, and the numbers issuable under the 2013 Plan will increase by up to
3 million shares on the first business day of each following fiscal year as set forth in the 2013 Plan. Finally, in addition to
the Series E Warrants granted in connection with the 2016 Private Placement Financing, the Series D Warrants granted in connection
with the 2015 Private Placement Financing, and the Series A Warrants granted in connection with the 2014 Private Placement Financing,
there are currently outstanding warrants to acquire up to 145,985 shares of our Common Stock. Any future grants of options, warrants
or other securities exercisable or convertible into our Common Stock, or the exercise or conversion of such shares, and any sales
of such shares in the market, could have an adverse effect on the market price of our Common Stock.
In addition to capital raising activities, other possible business
and financial uses for our authorized Common Stock include, without limitation, future stock splits, acquiring other companies,
businesses or products in exchange for shares of Common Stock, issuing shares of our Common Stock to partners in connection with
strategic alliances, attracting and retaining employees by the issuance of additional securities under our various equity compensation
plans, compensating consultants by issuing shares or options to purchase shares of our Common Stock, or other transactions and
corporate purposes that our Board of Directors deems are in the Company’s best interest. By way of example, on August 6,
2015, we issued an aggregate of 600,000 shares of restricted stock in connection with our entrance into separate consulting agreements
with two investor relations firms, Excelsior Global Advisors LLC and Acorn Management Partners, LLC, in each case in consideration
of the services to be provided under and in accordance with the terms of each consulting agreement. Additionally, shares of Common
Stock could be used for anti-takeover purposes or to delay or prevent changes in control or management of the Company. We cannot
provide assurances that any issuances of Common Stock will be consummated on favorable terms or at all, that they will enhance
stockholder value, or that they will not adversely affect our business or the trading price of our Common Stock. The issuance of
any such shares will reduce the book value per share and may contribute to a reduction in the market price of the outstanding shares
of our Common Stock. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power
of all current shareholders. Further, such issuance may result in a change of control of our corporation.
Future sales of our Common Stock or rights to purchase Common
Stock, or the perception that such sales could occur, could cause our stock price to fall.
As noted above under the risk factor entitled, “
We will
need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate
our product development programs or commercialization efforts and could cause our business to fail
,” as of January 31, 2017,
we believe that our current cash on hand will meet our anticipated cash requirements into the fourth quarter of Fiscal
2017. To raise capital, we may sell Common Stock, convertible securities or other equity securities in one or more transactions
at prices and in a manner we determine from time to time. Any such sales of our Common Stock by us or resale of our Common Stock
by our existing stockholders could cause the market price of our Common Stock to decline.
FINRA sales practice requirements may limit a stockholder’s
ability to buy and sell our stock.
In addition to the “penny stock” rules described above,
FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated its
belief that there is a high probability that speculative low priced securities will not be suitable for at least some customers.
These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our Common
Stock, which may limit the ability of our stockholders to buy and sell our Common Stock and could have an adverse effect on the
market for our shares.
There may be additional risks because we completed a reverse
merger transaction in June 2013.
Additional risks may exist because we completed a “reverse
merger” transaction in June 2013. Securities analysts of major brokerage firms may not provide coverage of the Company because
there may be little incentive to brokerage firms to recommend the purchase of our Common Stock. There may also be increased scrutiny
by the SEC and other government agencies and holders of our securities due to the nature of the transaction, as there has been
increased focus on transactions such as the Merger in recent years. Further, since the Company existed as a “shell company”
under applicable rules of the SEC up until the closing of the Merger on June 26, 2013, there will be certain restrictions and limitations
on the Company going forward relating to any potential future issuances of additional securities to raise funding and compliance
with applicable SEC rules and regulations.
The Company may have material liabilities that were not discovered
before the closing of the Merger.
The Company may have material liabilities that were not discovered
before the consummation of the Merger. We could experience losses as a result of any such unasserted liabilities that are eventually
found to be incurred, which could materially harm our business and financial condition. Although the Merger Agreement contained
customary representations and warranties from the Company concerning its assets, liabilities, financial condition and affairs,
there may be limited or no recourse against the Company’s prior owners or principals in the event those prove to be untrue.
As a result, the stockholders of the Company bear risks relating to any such unknown or unasserted liabilities.
Certain of our directors and officers own a significant percentage
of our capital stock and are able to exercise significant influence over the Company.
Certain of our directors and executive officers own a significant
percentage of our outstanding capital stock. As of January 31, 2017, Dr. Terrence W. Norchi, our President, Chief Executive Officer
and a director, Dr. Avtar Dhillon, the Chairman of our Board of Directors, and James R. Sulat, a director, beneficially own (as
determined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) approximately 17.9%
of our shares of Common Stock. Accordingly, these members of our Board of Directors and management team have substantial voting
power to approve matters requiring stockholder approval, including without limitation the election of directors, and have significant
influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in control
of our Company, even if such a change in control would be beneficial to our stockholders.
The elimination of monetary liability against our directors
and officers under Nevada law and the existence of indemnification rights held by our directors, officers and employees may result
in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation eliminate the personal liability of
our directors and officers to our Company and our stockholders for damages for breach of fiduciary duty as a director or officer
to the extent permissible under Nevada law. Further, our amended and restated bylaws provide that we are obligated to indemnify
any of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain conditions, advance the
expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those
indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage
awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage
us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such
actions, if successful, might otherwise benefit us or our stockholders.
We are subject to the reporting requirements of federal securities
laws, compliance with which involves significant time, expense and expertise.
We are a public reporting company in the U.S., and, accordingly,
are subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including the
obligations imposed by the Sarbanes-Oxley Act. The costs associated with preparing and filing annual, quarterly and current reports,
proxy statements and other information with the SEC in the ordinary course, as well as preparing and filing audited financial statements,
has caused, and could continue to cause, our operational expenses to remain at higher levels or continue to increase.
Our present management team has limited experience in managing public
companies. It will be time consuming, difficult and costly for our management team to acquire additional expertise and experience
in operating a public company, and to develop and implement the additional internal controls and reporting procedures required
by Sarbanes-Oxley and other applicable securities laws.
Shares of our Common Stock that have not been registered under
federal securities laws are subject to resale restrictions imposed by Rule 144. In addition, any shares of our Common Stock that
are held by affiliates, including any that are registered, will be subject to the resale restrictions of Rule 144.
Rule 144 imposes requirements on us and our stockholders that must
be met in order to effect a sale thereunder. As a result, it will be more difficult for us to raise funding to support our operations
through the sale of debt or equity securities unless we agree to register such securities under the Securities Act, which could
cause us to expend significant additional time and cash resources and which we presently have no intention to pursue. Further,
it may be more difficult for us to compensate our employees and consultants with our securities instead of cash. We were a shell
company prior to the closing of the Merger, and such status could also limit our use of our securities to pay for any acquisitions
we may seek to pursue in the future (although none are currently planned), and could cause the value of our securities to decline.
In addition, any shares held by affiliates, including shares received in any registered offering, will be subject to certain additional
requirements in order to effect a sale of such shares under Rule 144.
We do not intend to pay cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid any dividends on our shares and do
not anticipate paying any such dividends in the foreseeable future. Any future payment of cash dividends would depend on our financial
condition, contractual restrictions, solvency tests imposed by applicable corporate laws, results of operations, anticipated cash
requirements and other factors and will be at the discretion of our Board of Directors. In addition, under the terms of the MLSC
Loan Agreement, we must obtain MLSC’s prior consent before declaring or paying any dividends during the term of the MLSC
Loan Agreement. As a result, our stockholders should not expect that we will ever pay cash or other dividends on our outstanding
capital stock.
We are at risk of securities class action litigation that
could result in substantial costs and divert management’s attention and resources.
In the past, securities class action litigation has been brought
against companies following periods of volatility of its securities in the marketplace, particularly following a company’s
initial public offering. Due to the volatility of our stock price, we could be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert management’s attention and resources.
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements that involve risks,
uncertainties and assumptions. In some cases, you can identify forward-looking statements by terminology such as “if,”
“shall,” “may,” “might,” “will likely result,” “should,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,”
“goal,” “objective,” “predict,” “potential” or “continue,” or the negative
of these terms or other comparable terminology. All statements made in this report on Form 10-Q other than statements of historical
fact are statements that could be deemed forward-looking statements, including without limitation statements about our business
plan, our plan of operations and our need to obtain future financing. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks in the section entitled “
Risk Factors
” and
the risks set out below, any of which may cause our or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements. These risks include, by way of example and not in limitation, risks related to:
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Our ability to continue as a going concern;
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Our ability to obtain financing necessary to operate our business;
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Our limited operating history;
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The results of our research and development activities, including uncertainties relating to the preclinical and clinical testing of our product candidates;
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The early stage of our primary product candidate presently under development;
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Our ability to develop, obtain required approvals for and commercialize our product candidates;
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Our ability to recruit and retain qualified personnel;
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Our ability to manage any future growth we may experience;
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Our ability to obtain and maintain protection of our intellectual property;
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Our dependence on third party manufacturers, suppliers, research organizations, academic institutions, testing laboratories and other potential collaborators;
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The size and growth of the potential markets for any of our approved product candidates, and the rate and degree of market acceptance of any of our approved product candidates;
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Our ability to successfully complete potential acquisitions and collaborative arrangements;
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Competition in our industry;
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General economic and business conditions; and
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Other factors discussed under the section entitled “
Risk Factors
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New risks emerge in our rapidly-changing industry from time to time.
As a result, it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business.
If any such risks or uncertainties materialize or such assumptions prove incorrect, our results could differ materially from those
expressed or implied by such forward-looking statements and assumptions. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. These forward-looking
statements speak only as of the date of this report on Form 10-Q. Except as required by applicable law, we do not intend to update
any of these forward-looking statements.