Item 1A. Risk Factors
You should consider carefully the following
information about the risks described below, together with the other information contained in this Quarterly Report and in our
other public filings in evaluating our business. The risk factors set forth below that are marked with an asterisk (*) did not
appear as separate risk factors in, or contain changes to the similarly titled risk factors included in, Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2016. If any of the following risks actually occur, our business, financial
condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances,
the market price of our common stock would likely decline.
Risks Related to Our Financial Condition
and Need for Additional Capital
We will need to raise additional
capital to support our operations, which may not be available on acceptable terms, or at all.*
We will need to raise additional capital
to support our operations and product development activities. In the near term, we expect to continue to fund our operations,
if at all, primarily through equity and debt financings in the future. We may also seek funds through arrangements with collaborators
or others that may require us to relinquish rights to the product candidates that we might otherwise seek to develop or commercialize
independently. If additional capital is not available to us when needed or on acceptable terms, we may not be able to continue
to operate our business pursuant to our business plan or we may have to discontinue our operations entirely. While we believe
that our existing resources will be sufficient to fund our planned operations until the end of the second quarter of 2018, we
cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletion of our
capital resources more rapidly than we currently anticipate.
Developing drugs and conducting clinical
trials is expensive. Our future funding requirements will depend on many factors, including:
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the costs and timing of our
research and development activities;
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the progress and cost of our clinical trials
and other research and development activities;
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manufacturing costs associated with our personalized
phage therapies strategy and other research and development activities;
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the terms and timing of any collaborative, licensing,
acquisition or other arrangements that we may establish;
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whether and when we receive the expected $1.8
million Australian tax rebate, or other future tax rebates, if any;
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the costs and timing of seeking regulatory approvals;
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the costs of filing, prosecuting, defending
and enforcing any patent applications, claims, patents and other intellectual property rights; and
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the costs of lawsuits involving us or our product
candidates.
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We may seek to raise capital through a
variety of sources, including:
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the public equity market;
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private equity financings;
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collaborative arrangements;
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licensing arrangements; and/or
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public or private debt.
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Raising additional capital through
the sale of securities could cause significant dilution to our stockholders. Any additional fundraising efforts may divert
our management from their day to day activities, which may adversely affect our ability to develop and commercialize our
product candidates. Our ability to raise additional funds will depend, in part, on the success of our product development
activities, including our personalized phage therapies strategy and any clinical trials we initiate, regulatory events, our
ability to identify and enter into in-licensing or other strategic arrangements, and other events or conditions that may
affect our value or prospects, as well as factors related to financial, economic and market conditions, many of which are
beyond our control. There can be no assurances that sufficient funds will be available to us when required or on acceptable
terms, if at all.
If we are unable to secure additional
funds when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure,
curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition
of our company by a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements
that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy
or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition
and results of operations. Moreover, if we are unable to obtain additional funds on a timely basis, there will be substantial
doubt about our ability to continue as a going concern and increased risk of insolvency and up to a total loss of investment by
our stockholders.
We have incurred losses since our
inception and anticipate that we will continue to incur significant losses for the foreseeable future, and our future profitability
is uncertain.*
We have incurred losses in each year since
our inception in 1992. As of March 31, 2017, our accumulated deficit was $384.6 million, $69.1 million of which has been accumulated
since January of 2011, when we began our focus on bacteriophage development, and we expect to incur losses for the foreseeable
future. We have devoted, and will continue to devote for the foreseeable future, substantially all of our resources to research
and development of our product candidates. For the three months ended March 31, 2017 and 2016, we had losses from operations of
$3.4 million and $4.5 million, respectively. Additional information regarding our results of operations may be found in our consolidated
financial statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included Item 2 in this report.
Clinical trials and activities associated
with discovery research are costly. We do not expect to generate any revenue from the commercial sales of our product candidates
in the near term, and we expect to continue to have significant losses for the foreseeable future.
To attain ongoing profitability, we will
need to develop products that receive regulatory approval, and market and sell such products effectively, or rely on other parties
to do so. We cannot predict when we will achieve ongoing profitability, if at all. We have never generated revenue from product
sales and there is no guarantee that we will be able to do so in the future. If we fail to become profitable, or if we are unable
to fund our continuing losses, our business, financial condition and results of operations may be materially adversely impacted
and our stock price could decline.
We have never generated any revenue
from product sales and may never be profitable.
Our ability to generate meaningful revenue
and achieve profitability depends on our ability, and the ability of any third party with which we may partner, to successfully
complete the development of, and obtain the regulatory approvals necessary to, commercialize our product candidates. We do not
anticipate generating revenues from product sales for the foreseeable future, if ever. If any of our product candidates fail in
clinical trials or if any of our product candidates do not gain regulatory approval, or if any of our product candidates, if approved,
fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not
be able to sustain profitability in subsequent periods. Our ability to generate future revenues from product sales depends heavily
on our success in:
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completing research and preclinical
and clinical development of our product candidates;
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seeking and obtaining regulatory and marketing
approvals for product candidates for which we complete clinical trials;
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developing a sustainable, scalable, reproducible,
and transferable manufacturing process for our product candidates;
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launching and commercializing product candidates
for which we obtain regulatory and marketing approval, either by establishing a sales force, marketing and distribution infrastructure,
or by collaborating with a partner;
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obtaining market acceptance of any approved
products;
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addressing any competing technological and market
developments;
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implementing additional internal systems and
infrastructure, as needed;
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identifying and validating new product candidates;
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negotiating favorable terms in any collaboration,
licensing or other arrangements into which we may enter;
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maintaining, protecting and expanding our portfolio
of intellectual property rights, including patents, trade secrets and know-how; and
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attracting, hiring and retaining qualified personnel.
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Even if one or more of the product candidates
that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any
approved product. Our expenses could increase beyond expectations if we are required by the U.S. Food and Drug Administration,
or FDA, the European Medicines Agency, or EMA, or other foreign regulatory authorities to perform clinical trials and other studies
in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products,
we may not become profitable and may need to obtain additional funding to continue operations.
Taxing authorities could reallocate
our taxable income among our subsidiaries, which could increase our overall tax liability.
We are organized in the United States,
and we currently have subsidiaries in the United Kingdom, Australia and Slovenia. If we succeed in growing our business, we expect
to conduct increased operations through our subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements
between us and our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations
of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arm’s
length and that appropriate documentation is maintained to support the transfer prices. While we believe that we operate in compliance
with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable
tax authorities.
If tax authorities in any of these countries
were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could require us to
adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a
higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation,
both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher
tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our consolidated tax
liability, which could adversely affect our financial condition, results of operations and cash flows.
Our ability to use our net operating
tax loss carryforwards and certain other tax attributes may be limited.*
Our ability to utilize our net
operating loss carryforwards, or NOLs, and certain other tax attributes may be limited under Sections 382 and 383 of the
Internal Revenue Code of 1986, as amended, or the Code. These limitations apply if an “ownership change,” as
defined by Section 382 of the Code, occurs. If we have experienced an “ownership change” at any time since our
formation, we may already be subject to limitations on our ability to utilize our existing net operating losses and other tax
attributes to offset taxable income. In addition, future changes in our stock ownership (including in connection with future
private or public offerings, as well as changes that may be outside of our control), may trigger an “ownership
change” and, consequently, limitations under Sections 382 and 383 of the Code. As a result, if we earn net taxable
income, our ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset U.S.
federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which
could accelerate or permanently increase state taxes owed. We have not completed a study to assess whether an
“ownership change” has occurred or whether there have been multiple “ownership changes” since our
formation, due to the complexity and cost associated with such a study, and the fact that we believe there will likely be
additional ownership changes in the future. However, we believe there may have been one or more “ownership
changes” since our formation, including in connection with our November 2016 and May 2017 public offerings.
If we fail to maintain proper and
effective internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could
be impaired and our public reporting may be unreliable.
We are required to maintain internal control
over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of our consolidated financial statements in accordance with generally accepted accounting principles. In connection with the correction
of an immaterial error in the third quarter of 2016, and the restatement of our consolidated financial statements for the second
quarter of 2015, we determined that we had a material weakness as of December 31, 2016, namely that our internal control over financial
reporting, including control over the evaluation and review of complex and non-routine transactions, was not effective. A material
weakness means a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be
prevented or detected on a timely basis.
We do not expect that our internal control
over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of
a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in
the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies
or material weaknesses in our internal control over financial reporting will not be identified in the future.
We are taking steps to remediate the material
weakness in our internal control over financial reporting, including the addition of and training of qualified personnel to identify
and evaluate complex and non-routine transactions and the development of specific procedures, processes and internal controls related
to complex and non-routine transactions. However, we cannot assure you that these efforts will remediate our material weakness
in a timely manner, or at all, or that we will be able to maintain effective controls and procedures even if we remediate our material
weakness. If we are unable to successfully remediate our material weakness, implement and maintain effective controls and procedures,
or identify any future material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may
be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and we may experience
a loss of public confidence, which could have an adverse effect on our business, financial condition and the market price of our
common stock and other securities.
We incur significant costs as a result
of operating as a public company, and our management is required to devote substantial time to compliance initiatives.
As a public company, we incur significant
legal, accounting and other expenses. We are subject to the reporting requirements of the Exchange Act, which require, among other
things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In
addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and the NYSE MKT to implement provisions of
the Sarbanes-Oxley Act, imposes significant requirements on public companies, including requiring establishment and maintenance
of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance
and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations
in these areas such as “say on pay” and proxy access. Recent legislation permits emerging growth companies to implement
many of these requirements over a longer period and up to five years following their initial public offering. We intend to take
advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than
expected and thereby incur unexpected expenses.
We expect the rules and regulations applicable
to public companies to result in us continuing to incur substantial legal and financial compliance costs. These costs will decrease
our net income or increase our net loss, and may require us to reduce costs in other areas of our business.
Risks Related to Our Business
Results from preclinical studies
and Phase 1 or 2 clinical trials of our product candidates or from compassionate-use treatments may not be predictive of the results
of later stage clinical trials.*
Preclinical studies, including studies
of our product candidates in animal disease models, may not accurately predict the result of human clinical trials of those product
candidates. In particular, promising animal studies suggesting the efficacy of prototype phage products in the treatment of bacterial
infections, such as
P. aeruginosa
and
S. aureus,
may not predict the ability of these products to
treat similar infections in humans. Despite promising data in our completed Phase 1 clinical trials, our phage technology may be
found not to be efficacious in treating bacterial infections alone or in combination with other agents, when studied in later-stage
clinical trials.
In addition, we have used and plan to
continue to use our bacteriophage technology in the area of personalized medicine under compassionate-use guidelines, which
permit the use of phage therapy outside of clinical trials, beginning in Australia and then expanding to the United States
and potentially other countries. Despite prior compassionate use successes, no assurance can be given that we will have
similar compassionate-use treatment successes in the future. Compassionate use is a term that is used to refer to the use of
an investigational drug or therapy outside of a clinical trial to treat a patient with a serious or immediately
life-threatening disease or condition who has no comparable or satisfactory alternative treatment options. Regulators often
allow compassionate use on a case-by-case basis for an individual patient or for defined groups of patients with similar
treatment needs. In some countries, such as Australia, the treating physician can administer treatment under
compassionate-use guidelines without pre-approval from the applicable regulatory authority.
To satisfy FDA or foreign regulatory approval
standards for the commercial sale of our product candidates, we must demonstrate in adequate and controlled clinical trials that
our product candidates are safe and effective. Success in early clinical trials, including Phase 1 and Phase 2 trials, or in our
compassionate-use program does not ensure that later clinical trials will be successful. Our initial results from early stage clinical
trials or our compassionate-use program also may not be confirmed by later analysis or subsequent larger clinical trials. A number
of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining
promising results in earlier clinical trials and most product candidates that commence clinical trials are never approved for commercial
sale.
Our personalized phage therapies
strategy may not be successful, which in turn could adversely affect our business.*
Our personalized phage therapies strategy
involves providing phage therapy under compassionate-use guidelines to patients outside of clinical trials with antibiotic-resistant
infections who have few or no other therapeutic options. We believe this strategic approach will not only provide potential benefit
to patients to whom we are able to provide personalized phage therapies under the compassionate-use guidelines, but also provide
the clinical data from these compassionate-use cases that we expect to support the potential validation of the clinical utility
of phage therapy and inform our future discussions with the FDA in 2018 or later on defining a potential path to market approval.
However, this program is subject to numerous risks and uncertainties, including the following:
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We
have not established a cost reimbursement structure or otherwise entered into an arrangement that would at least offset our manufacturing
costs for our phage therapies that may be administered to patients under compassionate-use guidelines. Increasing demand for our
phage therapies in compassionate-use cases could result in significant costs to us.
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Responding
to compassionate-use requests could divert attention of our personnel and use manufacturing resources that could otherwise be
deployed in other development program activities.
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Compassionate-use
treatment data may not establish proof-of-concept, and the FDA or other regulatory authorities may not accept compassionate-use
data as sufficient clinical validation in support of our regulatory approval efforts, which could materially delay and increase
the costs of our product development and commercialization activities.
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Patient
access to phage therapy will be provided on an individual basis where physicians will make an application or post-treatment notification
to the applicable regulatory authorities on a patient-by-patient basis. This can impose a significant administrative burden on
participating physicians, who may be resistant to navigating a process with which they are unfamiliar.
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We are seeking to develop antibacterial
agents using bacteriophage technology, a novel approach, which makes it difficult to predict the time and cost of development.
No bacteriophage products have been approved in the United States or elsewhere.
We are developing our product candidates
with bacteriophage technology. We have not, nor to our knowledge has any other company, received regulatory approval from the FDA
or equivalent foreign agencies for a pharmaceutical drug based on this approach. While
in vitro
studies have characterized
the behavior of bacteriophages in cell cultures and there exists a body of literature regarding the use of phage therapy in humans,
the safety and efficacy of phage therapy in humans has not been extensively studied in well-controlled modern clinical trials.
Most of the prior research on phage-based therapy was conducted in the former Soviet Union prior to and immediately after World
War II and lacked appropriate control group design or lacked control groups at all. Furthermore, the standard of care has changed
substantially during the ensuing decades since those studies were performed, diminishing the relevance of prior claims of improved
cure rates. We cannot be certain that our approach will lead to the development of approvable or marketable drugs.
Developing phage-based therapies on a commercial
scale will also require developing new manufacturing processes and techniques. We and our third-party collaborators may experience
delays in developing manufacturing capabilities for our product candidates, and may not be able to do so at the scale required
to efficiently conduct the clinical trials required to obtain regulatory approval of our product candidates, or to manufacture
commercial quantities of our products, if approved.
In addition, the FDA or other regulatory
agencies may lack experience in evaluating the safety and efficacy of drugs based on these approaches, which could lengthen the
regulatory review process, increase our development costs and delay or prevent commercialization of our product candidates.
Delays in our clinical trials could
result in us not achieving anticipated developmental milestones when expected, increased costs and delay our ability to obtain
regulatory approval for and commercialize our product candidates.
Delays in our ability to commence or enroll
patients for our clinical trials could result in us not meeting anticipated clinical milestones and could materially impact our
product development costs and delay regulatory approval of our product candidates. Planned clinical trials may not be commenced
or completed on schedule, or at all. Clinical trials can be delayed for a variety of reasons, including:
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delays
in the development of manufacturing capabilities for our product candidates to enable their consistent production at clinical
trial scale;
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failures
in our internal manufacturing operations that result in our inability to consistently and timely produce bacteriophages in sufficient
quantities to support our clinical trials;
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the
availability of financial resources to commence and complete our planned clinical trials;
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delays
in reaching a consensus with clinical investigators on study design;
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delays
in reaching a consensus with regulatory agencies on trial design or in obtaining regulatory approval to commence a trial;
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delays
in obtaining clinical materials;
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slower
than expected patient recruitment for participation in clinical trials;
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failure
by clinical trial sites, other third parties, or us to adhere to clinical trial agreements;
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delays
in reaching agreement on acceptable clinical trial agreement terms with prospective sites or obtaining institutional review board
approval; and
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adverse
safety events experienced during our clinical trials.
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If we do not successfully commence or complete
our clinical trials on schedule, the price of our common stock may decline.
Completion of clinical trials depends,
among other things, on our ability to enroll a sufficient number of patients, which is a function of many factors, including:
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the
therapeutic endpoints chosen for evaluation;
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the
eligibility criteria defined in the protocol;
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the
perceived benefit of the product candidate under study;
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the
size of the patient population required for analysis of the clinical trial’s therapeutic endpoints;
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our
ability to recruit clinical trial investigators and sites with the appropriate competencies and experience;
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our
ability to obtain and maintain patient consents; and
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competition
for patients from clinical trials for other treatments.
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We may experience difficulties in enrolling
patients in our clinical trials, which could increase the costs or affect the timing or outcome of these clinical trials. This
is particularly true with respect to diseases with relatively small patient populations.
We have not completed formulation
development of any of our product candidates
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The development of our bacteriophage product
candidates requires that we isolate, select and combine a number of bacteriophages that target the desired bacteria for that product
candidate. The selection of bacteriophages for any of our product candidates is based on a variety of factors, including without
limitation the ability of the selected phages, in combination, to successfully kill the targeted bacteria, the degree of cross-reactivity
of the individual phages with the same part of the bacterial targets, the ability of the combined phages to satisfy regulatory
requirements, our ability to manufacture sufficient quantities of the phages, intellectual property rights of third parties, and
other factors. While we have selected an initial formulation of AB-SA01 for the treatment of
S. aureus
infections, there
can be no assurance that this will be the final formulation of AB-SA01 for commercialization. In addition, we have initiated final
phage selection for AB-PA01, our
P. aeruginosa
product. AB-CD01, which is our
C. difficile
product, is at an earlier
stage. If we are unable to complete formulation development of our product candidates in the time frame that we have anticipated,
then our product development timelines, and the regulatory approval of our product candidates, could be delayed.
Our product candidates must undergo
rigorous clinical testing, such clinical testing may fail to demonstrate safety and efficacy and any of our product candidates
could cause undesirable side effects, which would substantially delay or prevent regulatory approval or commercialization.
Before we can obtain regulatory approval
for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction
of the FDA or other regulatory agencies. Clinical trials of new drug candidates sufficient to obtain regulatory marketing approval
are expensive and take years to complete.
We cannot be certain of successfully completing
clinical testing within the time frame we have planned, or at all. We may experience numerous unforeseen events during, or as a
result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our
product candidates, including the following:
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our
clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional
clinical and/or preclinical testing or to abandon programs;
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the
results obtained in earlier stage clinical testing may not be indicative of results in future clinical trials;
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clinical
trial results may not meet the level of statistical significance required by the FDA or other regulatory agencies;
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we,
or regulators, may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health
risks; and
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our
product candidates may have unintended or undesirable effects on patients that may delay or preclude regulatory approval of our
product candidates or limit their commercial use, if approved.
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We must continue to develop manufacturing
processes for our product candidates and any delay in or our inability to do so would result in delays in our clinical trials.
We are developing novel manufacturing processes
for our product candidates at our facility in Ljubljana, Slovenia. The manufacturing processes for our product candidates, and
the scale up of such processes for clinical trials, is novel, and there can be no assurance that we will be able to complete this
work in a timely manner, if at all. Any delay in the development or scale up of these manufacturing processes could delay the start
of clinical trials and harm our business. Our facility in Slovenia must also undergo ongoing inspections by JAZMP, the Slovenian
agency that regulates and supervises pharmaceutical products in Slovenia, for compliance with their and the EMA’s, current
good manufacturing practice regulations, or cGMP regulations, before the respective product candidates can be approved for use
in clinical trials or commercialization. In the event these facilities do not receive a satisfactory cGMP inspection for the manufacture
of our product candidates, we may need to fund additional modifications to our manufacturing process, conduct additional validation
studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as a delay of
up to several years in obtaining approval for such product candidate.
Our manufacturing facility will be subject
to ongoing periodic inspection by the European regulatory authorities, including JAZMP, and the FDA for compliance with European
and FDA cGMP regulations. Compliance with these regulations and standards is complex and costly, and there can be no assurance
that we will be able to comply. Any failure to comply with applicable regulations could result in sanctions being imposed (including
fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of our product candidates,
delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating
restrictions and criminal prosecution.
We may conduct clinical trials for
our products or product candidates outside the United States and the FDA may not accept data from such trials.
We completed an investigator-sponsored
clinical trial of AB-SA01 at the University of Adelaide in Australia for CRS in December 2016. Although the FDA may accept data
from clinical trials conducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions.
For example, the study must be well designed and conducted and performed by qualified investigators in accordance with ethical
principles. The study population must also adequately represent the U.S. population, and the data must be applicable to the U.S.
population and U.S. medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any
clinical studies conducted outside of the United States must be representative of the population for whom we intend to label the
product in the United States. In addition, such studies would be subject to the applicable local laws and FDA acceptance of the
data would be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. There
can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept any
such data, it would likely result in the need for additional trials, which would be costly and time consuming and delay aspects
of our business plan. During a telephonic meeting in February 2017, we received positive feedback from the FDA regarding our previously
submitted proposal to proceed with a Phase 2 clinical trial of AB-SA01 for CRS. However, there can be no assurances that the FDA
would ultimately support any decision by us to pursue a Phase 2 clinical trial based on data we currently have available.
We may need to license additional
intellectual property rights.*
The development and commercialization of
phage-based antibacterial agents may require us to obtain rights to intellectual property from third parties. For example, pursuant
to our Collaborative Research and Development Agreement with the United States Army Medical Research and Materiel Command and the
Walter Reed Army Institute of Research, we are currently focusing on developing bacteriophage therapeutics to treat
S. aureus
infections. To the extent the intellectual property is generated from the United States Army Medical Research and Materiel Command
or Walter Reed Army Institute of Research that is used in a commercial product, we may be obligated to make payments such as royalties,
licensing fees and milestone payments. We may also determine that it is necessary or advisable to license other intellectual property
from third parties. There can be no assurance that such intellectual property rights would be available on commercially reasonable
terms, if at all.
In April 2017, the University of Leicester
provided us with notice that it intends to terminate the license agreement as a result of its determination that we have not continued
to make substantial commercial progress in relation to the technology licensed to us under the agreement. Under the license agreement,
we have the right to enter in good faith discussion with the University of Leicester to identify feasible next steps to remedy
the perceived lack of commercial progress prior to a termination of the license agreement on such basis. Although we intend to
engage in such discussions with the University of Leicester, there can be no assurance that the parties will be able to identify
or agree upon feasible next steps to remedy the purported lack of commercial progress, or that we will otherwise be able to resolve
the matter in a manner that results in our retaining the rights licensed to us on the original terms of the agreement, on other
favorable terms, or at all. The licensed rights relate to bacteriophage therapeutic products for the treatment of
C. difficile
,
which is a program we are not actively developing at present, but may choose to develop in the future pending the rights to do
so.
We are subject to significant regulatory
approval requirements, which could delay, prevent or limit our ability to market our product candidates.
Our research and development activities,
preclinical studies, clinical trials and the anticipated manufacturing and marketing of our product candidates are subject to extensive
regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in Europe and elsewhere.
There can be no assurance that our manufacturing facilities will satisfy the requirements of the FDA or comparable foreign authorities.
We require the approval of the relevant regulatory authorities before we may commence commercial sales of our product candidates
in a given market. The regulatory approval process is expensive and time-consuming, and the timing of receipt of regulatory approval
is difficult to predict. Our product candidates could require a significantly longer time to gain regulatory approval than expected,
or may never gain approval. We cannot be certain that, even after expending substantial time and financial resources, we will obtain
regulatory approval for any of our product candidates. A delay or denial of regulatory approval could delay or prevent our ability
to generate product revenues and to achieve profitability.
Changes in regulatory approval policies
during the development period of any of our product candidates, changes in, or the enactment of, additional regulations or statutes,
or changes in regulatory review practices for a submitted product application may cause a delay in obtaining approval or result
in the rejection of an application for regulatory approval.
Regulatory approval, if obtained, may be
made subject to limitations on the indicated uses for which we may market a product. These limitations could adversely affect our
potential product revenues. Regulatory approval may also require costly post-marketing follow-up studies. In addition, the labeling,
packaging, adverse event reporting, storage, advertising, promotion and record-keeping related to the product will be subject to
extensive ongoing regulatory requirements. Furthermore, for any marketed product, its manufacturer and its manufacturing facilities
will be subject to continual review and periodic inspections by the FDA or other regulatory authorities. Failure to comply with
applicable regulatory requirements may, among other things, result in fines, suspensions of regulatory approvals, product recalls,
product seizures, operating restrictions and criminal prosecution.
A variety of risks associated with
our international operations could materially adversely affect our business.
In addition to our U.S. operations, we
have operations and subsidiaries in the United Kingdom, Australia and Slovenia. We face risks associated with our international
operations, including possible unfavorable regulatory, pricing and reimbursement, political, tax and labor conditions, which could
harm our business. We are subject to numerous risks associated with international business activities, including:
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compliance
with differing or unexpected regulatory requirements for the development, manufacture and, if approved, commercialization of our
product candidates;
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difficulties
in staffing and managing foreign operations;
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foreign
government taxes, regulations and permit requirements;
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U.S.
and foreign government tariffs, trade restrictions, price and exchange controls and other regulatory requirements;
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anti-corruption
laws, including the Foreign Corrupt Practices Act, or the FCPA;
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economic
weakness, including inflation, natural disasters, war, events of terrorism or political instability in particular foreign countries;
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fluctuations
in currency exchange rates, which could result in increased operating expenses and reduced revenues, and other obligations related
to doing business in another country;
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compliance
with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;
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workforce
uncertainty in countries where labor unrest is more common than in the United States;
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production
shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
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changes
in diplomatic and trade relationships; and
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challenges
in enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect
intellectual property rights to the same extent as the United States.
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These and other risks associated with our
international operations may materially adversely affect our business, financial condition and results of operations.
We do not have a sales force and
do not currently have plans to develop one.
The commercial success of any of our product
candidates will depend upon the strength of sales and marketing efforts for them. We do not have a sales force and have no experience
in sales, marketing or distribution. To successfully commercialize our product candidates, we will need to develop such a capability
ourselves or seek assistance from a third party with a large distribution system and a large direct sales force. We may be unable
to put such a plan in place. In addition, if we arrange for others to market and sell our products, our revenues will depend upon
the efforts of those parties. Such arrangements may not succeed. Even if one or more of our product candidates is approved for
marketing, if we fail to establish adequate sales, marketing and distribution capabilities, independently or with others, our business
will be materially harmed.
Our success depends in part on attracting,
retaining and motivating our personnel.*
Our success depends on our continued ability
to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions, clinicians and scientists. As of May 10, 2017, we had 32 full
time employees. Our success will depend on our ability to retain and motivate personnel and hire additional qualified personnel
when required. Competition for qualified personnel in the biotechnology field is intense. We face competition for personnel from
other biotechnology and pharmaceutical companies, universities, public and private research institutions and other organizations.
We also face competition from other more well-funded and well-established businesses and we may also be viewed as a riskier choice
from a job stability perspective due to our relative newer status than longer existing biotech and pharmaceutical companies. We
may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If we are
unsuccessful in our retention, motivation and recruitment efforts, we may be unable to execute our business strategy.
We must manage a geographically dispersed
organization.
While we are a small company, we currently
have operations in the United States, Australia and Slovenia. In the future, we may also locate facilities in other locations based
on proximity to personnel with the expertise needed to research, develop and manufacture phage-based therapeutics, costs of operations
or other factors. Managing our organization across multiple locations and multiple time zones may reduce our efficiency, increase
our expenses and increase the risk of operational difficulties in the execution of our plans.
Risks Related to Our Reliance on Third
Parties
We rely on third parties for aspects
of product development.
We rely on third parties such as the U.S.
Army for certain aspects of product development. We have worked with the U.S. Army for research and development of product candidates
to treat
S. aureus
infections. Because we rely on third parties to conduct these activities, we have less control over the
success of these programs than we would if we were conducting them on our own. Factors beyond our control that could impact the
success of these programs include the amount of resources devoted to the programs by the applicable third party, the staffing of
those projects by third-party personnel, and the amount of time such personnel devote to our programs compared to other programs.
Failure of our third-party collaborators to successfully complete the projects that we are working on with them could result in
delays in product development and the need to expend additional resources, increasing our expenses beyond current expectations.
We will rely on third parties to
conduct our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development
and commercialization of our product candidates.
We expect to use third parties, such as
clinical research organizations or the U.S. Army, to assist in conducting our clinical trials. However, we may face delays outside
of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change
service providers. This risk is heightened for clinical trials conducted outside of the United States, where it may be more difficult
to ensure that clinical trials are conducted in compliance with FDA requirements. Any third party that we hire to conduct clinical
trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we experience
significant delays in the progress of our clinical trials and in our plans to submit Biologics License Applications, the commercial
prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented.
Risks Related to Our Intellectual Property
We are dependent on patents and proprietary
technology. If we fail to adequately protect this intellectual property or if we otherwise do not have exclusivity for the marketing
of our products, our ability to commercialize products could suffer.
Our commercial success will depend in part
on our ability to obtain and maintain patent protection sufficient to prevent others from marketing our product candidates, as
well as to defend and enforce these patents against infringement and to operate without infringing the proprietary rights of others.
Protection of our product candidates from unauthorized use by third parties will depend on having valid and enforceable patents
cover our product candidates or their manufacture or use, or having effective trade secret protection. If our patent applications
do not result in issued patents, or if our patents are found to be invalid, we will lose the ability to exclude others from making,
using or selling the inventions claimed therein. We have a limited number of patents and pending patent applications.
The patent positions of biotechnology companies
can be uncertain and involve complex legal and factual questions. This is due to inconsistent application of policy and changes
in policy relating to examination and enforcement of biotechnology patents to date on a global scale. The laws of some countries
may not protect intellectual property rights to the same extent as the laws of countries having well-established patent systems,
and those countries may lack adequate rules and procedures for defending our intellectual property rights. Also, changes in either
patent laws or in interpretations of patent laws may diminish the value of our intellectual property. We are not able to guarantee
that all of our patent applications will result in the issuance of patents and we cannot predict the breadth of claims that may
be allowed in our patent applications or in the patent applications we may license from others.
Central provisions of The Leahy-Smith
America Invents Act, or the America Invents Act went into effect on September 16, 2012 and on March 16, 2013. The America
Invents Act includes a number of significant changes to U.S. patent law. These changes include provisions that affect the way
patent applications are being filed, prosecuted and litigated. For example, the America Invents Act enacted proceedings
involving post-issuance patent review procedures, such as inter partes review, or IPR, and post-grant review, that allow
third parties to challenge the validity of an issued patent in front of the United States Patent and Trademark Office
(“U.S. PTO”) Patent Trial and Appeal Board. Each proceeding has different eligibility criteria and different
patentability challenges that can be raised. IPRs permit any person (except a party who has been litigating the patent for
more than a year) to challenge the validity of the patent on the grounds that it was anticipated or made obvious by prior
art. Patents covering pharmaceutical products have been subject to attack in IPRs from generic drug companies and from hedge
funds. If it is within nine months of the issuance of the challenged patent, a third party can petition the U.S. PTO
for post-grant review, which can be based on any invalidity grounds and is not limited to prior art patents or
printed publications.
In post-issuance proceedings, U.S.
PTO rules and regulations generally tend to favor patent challengers over patent owners. For example, unlike in
district court litigation, claims challenged in post-issuance proceedings are given their broadest reasonable meaning, which
increases the chance a claim might be invalidated by prior art or lack support in the patent specification. As another
example, unlike in district court litigation, there is no presumption of validity for an issued patent, and thus, a
challenger’s burden to prove invalidity is by a preponderance of the evidence, as opposed to the heightened clear and
convincing evidence standard. As a result of these rules and others, statistics released by the U.S. PTO show a high
percentage of claims being invalidated in post-issuance proceedings. Moreover, with few exceptions, there is no standing
requirement to petition the U.S. PTO for inter partes review or post-grant review. In other words, companies that
have not been charged with infringement or that lack commercial interest in the patented subject matter can still petition
the United States PTO for review of an issued patent. Thus, even where we have issued patents, our rights under those patents
may be challenged and ultimately not provide us with sufficient protection against competitive products or processes.
The degree of future protection for our
proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or
permit us to gain or keep our competitive advantage. For example:
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we
might not be the first to file patent applications for our inventions;
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others
may independently develop similar or alternative product candidates to any of our product candidates that fall outside the scope
of our patents;
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our
pending patent applications may not result in issued patents;
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our
issued patents may not provide a basis for commercially viable products or may not provide us with any competitive advantages
or may be challenged by third parties;
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others
may design around our patent claims to produce competitive products that fall outside the scope of our patents;
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we
may not develop additional patentable proprietary technologies related to our product candidates; and
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we
are dependent upon the diligence of our appointed agents in national jurisdictions, acting for and on our behalf, which control
the prosecution of pending domestic and foreign patent applications and maintain granted domestic and foreign patents.
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An issued patent does not guarantee us
the right to practice the patented technology or commercialize the patented product. Third parties may have blocking patents that
could be used to prevent us from commercializing our patented products and practicing our patented technology. Our issued patents
and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to prevent
competitors from marketing the same or related product candidates or could limit the length of the term of patent protection of
our product candidates. Moreover, because of the extensive time required for development, testing and regulatory review of a potential
product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain
in force for only a short period following commercialization, thereby reducing any advantage of the patent. Patent term extensions
may not be available for these patents.
We rely on trade secrets and other
forms of non-patent intellectual property protection. If we are unable to protect our trade secrets, other companies may be able
to compete more effectively against us.
We rely on trade secrets to protect certain
aspects of our technology, including our proprietary processes for manufacturing and purifying bacteriophages. Trade secrets are
difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public
during the regulatory approval process. Although we use reasonable efforts to protect our trade secrets, our employees, consultants,
contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors.
Enforcing a claim that a third party illegally obtained and is using our trade secret information is expensive and time-consuming,
and the outcome is unpredictable. In addition, courts outside the United States may be less willing to or may not protect trade
secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
If we are sued for infringing intellectual
property rights of third parties or if we are forced to engage in an interference proceeding, it will be costly and time-consuming,
and an unfavorable outcome in that litigation or interference would have a material adverse effect on our business.
Our ability to commercialize our product
candidates depends on our ability to develop, manufacture, market and sell our product candidates without infringing the proprietary
rights of third parties. Numerous United States and foreign patents and patent applications, which are owned by third parties,
exist in the general field of anti-infective products or in fields that otherwise may relate to our product candidates. If we are
shown to infringe, we could be enjoined from use or sale of the claimed invention if we are unable to prove that the patent is
invalid. In addition, because patent applications can take many years to issue, there may be currently pending patent applications,
unknown to us, which may later result in issued patents that our product candidates may infringe, or which may trigger an interference
proceeding regarding one of our owned or licensed patents or applications. There could also be existing patents of which we are
not aware that our product candidates may inadvertently infringe or which may become involved in an interference proceeding.
The biotechnology and pharmaceutical industries
are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement.
For so long as our product candidates are in clinical trials, we believe our clinical activities fall within the scope of the exemptions
provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably
related to the development and submission of information to the FDA. As our clinical investigational drug product candidates progress
toward commercialization, the possibility of a patent infringement claim against us increases. While we attempt to ensure that
our active clinical investigational drugs and the methods we employ to manufacture them, as well as the methods for their use we
intend to promote, do not infringe other parties’ patents and other proprietary rights, we cannot be certain they do not,
and competitors or other parties may assert that we infringe their proprietary rights in any event.
We may be exposed to future litigation
based on claims that our product candidates, or the methods we employ to manufacture them, or the uses for which we intend to promote
them, infringe the intellectual property rights of others. Our ability to manufacture and commercialize our product candidates
may depend on our ability to demonstrate that the manufacturing processes we employ and the use of our product candidates do not
infringe third-party patents. If third-party patents were found to cover our product candidates or their use or manufacture, we
could be required to pay damages or be enjoined and therefore unable to commercialize our product candidates, unless we obtained
a license. A license may not be available to us on acceptable terms, if at all.
Risks Related to Our Industry
If our competitors are able to develop
and market products that are more effective, safer or more affordable than ours, or obtain marketing approval before we do, our
commercial opportunities may be limited.
Competition in the biotechnology and pharmaceutical
industries is intense and continues to increase. Some companies that are larger and have significantly more resources than we do
are aggressively pursuing antibacterial development programs, including traditional therapies and therapies with novel mechanisms
of action. In addition, other companies are developing phage-based products for non-therapeutic uses, and may elect to use their
expertise in phage development and manufacturing to try to develop products that would compete with ours.
We also face potential competition from
academic institutions, government agencies and private and public research institutions engaged in the discovery and development
of drugs and therapies. Many of our competitors have significantly greater financial resources and expertise in research and development,
preclinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing, sales and marketing than we do.
Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements
with large and established pharmaceutical companies.
Our competitors may succeed in developing
products that are more effective, have fewer side effects and are safer or more affordable than our product candidates, which would
render our product candidates less competitive or noncompetitive. These competitors also compete with us to recruit and retain
qualified scientific and management personnel, establish clinical trial sites and patient registration for clinical trials, as
well as to acquire technologies and technology licenses complementary to our programs or advantageous to our business. Moreover,
competitors that are able to achieve patent protection, obtain regulatory approvals and commence commercial sales of their products
before we do, and competitors that have already done so, may enjoy a significant competitive advantage.
The Generating Antibiotics Incentives Now
Act is intended to provide incentives for the development of new, qualified infectious disease products. These incentives may result
in more competition in the market for new antibiotics, and may cause pharmaceutical and biotechnology companies with more resources
than we have to shift their efforts towards the development of products that could be competitive with our product candidates.
There is a substantial risk of product
liability claims in our business. If we do not obtain sufficient liability insurance, a product liability claim could result in
substantial liabilities.
Our business exposes us to significant
potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products.
Regardless of merit or eventual outcome, product liability claims may result in:
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delay
or failure to complete our clinical trials;
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withdrawal
of clinical trial participants;
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decreased
demand for our product candidates;
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injury
to our reputation;
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substantial
monetary awards against us; and
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diversion
of management or other resources from key aspects of our operations.
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If we succeed in marketing products, product
liability claims could result in an FDA investigation of the safety or efficacy of our products, our manufacturing processes and
facilities or our marketing programs. An FDA investigation could also potentially lead to a recall of our products or more serious
enforcement actions, or limitations on the indications, for which they may be used, or suspension or withdrawal of approval.
We have product liability insurance that
covers our clinical trials up to a $10.0 million annual per claim and aggregate limit. We intend to expand our insurance coverage
to include the sale of commercial products if marketing approval is obtained for our product candidates or any other compound that
we may develop. However, insurance coverage is expensive and we may not be able to maintain insurance coverage at a reasonable
cost or at all, and the insurance coverage that we obtain may not be adequate to cover potential claims or losses.
Even if we receive regulatory approval
to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction,
which would negatively affect our ability to achieve profitability.
Our product candidates may not gain market
acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved
products will depend on a number of factors, including:
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the
effectiveness of the product;
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the
prevalence and severity of any side effects;
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potential
advantages or disadvantages over alternative treatments;
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relative
convenience and ease of administration;
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the
strength of marketing and distribution support;
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the
price of the product, both in absolute terms and relative to alternative treatments; and
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sufficient
third-party coverage or reimbursement.
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If our product candidates receive regulatory
approval but do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate
product revenues sufficient to attain profitability.
Foreign governments tend to impose
strict price controls, which may adversely affect our future profitability.
In some foreign countries, particularly
in the European Union, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with
governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement
or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our
product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, our profitability will be negatively affected.
We may incur significant costs complying
with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
Our research and development activities
use biological and hazardous materials that are dangerous to human health and safety or the environment. We are subject to a variety
of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of
these materials and wastes resulting from these materials. We are also subject to regulation by the Occupational Safety and Health
Administration, or OSHA, state and federal environmental protection agencies and to regulation under the Toxic Substances Control
Act. OSHA, state governments or federal Environmental Protection Agency, or EPA, may adopt regulations that may affect our research
and development programs. We are unable to predict whether any agency will adopt any regulations that could have a material adverse
effect on our operations. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the
ordinary course of our business in complying with these laws and regulations.
Although we believe our safety procedures
for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate
the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event
of contamination or injury, we could be held liable for any resulting damages, and any liability could significantly exceed our
insurance coverage.
Risks Related to Our Common Stock
The price of our common stock has
been and may continue to be volatile.
The stock markets in general, the markets
for biotechnology stocks and, in particular, the stock price of our common stock, have experienced extreme volatility. The market
for our common stock is characterized by significant price volatility when compared to the shares of larger, more established companies
that trade on a national securities exchange and have large public floats, and we expect that our share price will continue to
be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share
price is attributable to a number of factors. Our common shares are, compared to the shares of such larger, more established companies,
sporadically and thinly traded. As a consequence of this limited liquidity, the trading of relatively small quantities of shares
by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of shares of our common stock are sold on the market without
commensurate demand. We are also a speculative or “risky” investment due to the early stage of our drug development
programs and our lack of profits to date, and uncertainty of future market acceptance for our potential products and our ability
to continue as a going concern. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the
market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that has
a large public float and broader stockholder base. Many of these factors are beyond our control and may decrease the market price
of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing
market price for our common shares will be at any time, including as to whether our common stock will sustain their current market
prices, or as to what effect that the sale of shares or the availability of common stock for sale at any time will have on the
prevailing market price.
Price declines in our common stock could
also result from general market and economic conditions and a variety of other factors, including:
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adverse
results or delays in our clinical trials;
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adverse
actions taken by regulatory agencies with respect to our product candidates, clinical trials or the manufacturing processes of
our product candidates;
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announcements
of technological innovations, patents or new products by our competitors;
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regulatory
developments in the United States and foreign countries;
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any
lawsuit involving us or our product candidates;
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announcements
concerning our competitors, or the biotechnology or pharmaceutical industries in general;
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developments
concerning any strategic alliances or acquisitions we may enter into;
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actual
or anticipated variations in our operating results;
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changes
in recommendations by securities analysts or lack of analyst coverage;
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deviations
in our operating results from the estimates of analysts;
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our
inability, or the perception by investors that we will be unable, to continue to meet all applicable requirements for continued
listing of our common stock on the NYSE MKT, and the possible delisting of our common stock;
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sales
of our common stock by our executive officers, directors and principal stockholders or sales of substantial amounts of common
stock; and
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loss
of any of our key scientific or management personnel.
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In the past, following periods of volatility
in the market price of a particular company’s securities, litigation has often been brought against that company. Any such
lawsuit could consume resources and management time and attention, which could adversely affect our business.
We may be required to issue a significant
number of additional shares of common stock for no additional consideration to certain of our stockholders.*
In April 2016 we entered into a Common
Stock Issuance Agreement, or CSIA, with certain former holders, or the Holders, of our Series B Preferred Stock. We may be required
to issue a significant number of additional shares of common stock for no additional consideration to the Holders. Pursuant to
the CSIA, we agreed that if in the future we conduct one or more bona fide equity financings in which we sell shares of our common
stock or preferred stock at a price of less than $40.50 per share, we will issue to the Holders, for no additional consideration,
a number of additional shares of common stock, or Additional Shares, based on a specified formula. We refer to such rights of the
Holders to receive Additional Shares as the Additional Issuance Rights. Specifically, in the event we conduct such a financing,
the Holders would be entitled to receive (absent consideration of any applicable restrictions on the number of shares that can
be issued in a non-public offering under NYSE MKT rules and interpretations without stockholder approval) in the aggregate a number
of Additional Shares equal to (A) the product of (x) 103,705 multiplied by (y) a fraction, the numerator of which is $40.50 and
the denominator of which is the lowest price per share paid by investors in such dilutive financing, or the Effective Price, less
(B) 103,705 and all Additional Shares issued previously to the Holders pursuant to the Additional Issuance Rights. The foregoing
formula will be reduced to the extent the resulting number of shares would exceed 19.99% of the outstanding shares of common stock
immediately prior to the applicable financing, and is subject to further reductions related limitations under Section 713(a) of
the NYSE MKT Company Guide.
Pursuant to Section 713(a) of the NYSE
MKT Company Guide, stockholder approval is generally required prior to the issuance of common stock or common stock equivalents
in connection with a transaction other than a public offering involving the sale, issuance, or potential issuance by the issuer
of common stock or common stock equivalents equal to 20% or more of the outstanding shares of common stock as of immediately prior
to the transaction for less than the greater of book or market value of the stock. At our 2016 annual meeting of stockholders on
June 20, 2016, our stockholders approved the issuance by us of up to 103,705 Additional Shares, for purposes of Section 713(a)
of the NYSE MKT Company Guide, to the extent required to satisfy the Additional Issuance Rights. On June 3, 2016, we completed
a registered public offering of common stock and warrants to purchase common stock at a combined price per share and associated
warrant of $23.50. As a result of this offering, we issued to the Holders an aggregate of 75,020 Additional Shares. In November
2016, we completed a registered public offering of common stock and warrants to purchase common stock at a price of $7.50 per share
and accompanying warrant. In May 2017, we completed a public offering of common stock and warrants to purchase common stock, at
a price of $1.49 per share of common stock and $0.01 per accompanying warrant. Pursuant to the formula set forth in the CSIA, the
Holders may claim that we have an obligation to issue them, in the aggregate, up to 552,169 Additional Shares as a result of the
November 2016 public offering and the May 2017 public offering. However, under Section 713(a) of the NYSE MKT Company Guide, we
are only permitted to issue 28,684 Additional Shares to the Holders without further stockholder approval. As of the date of this
report, no Additional Shares have been issued to the Holders in connection with the November 2016 public offering or the May 2017
public offering. We may be required to obtain stockholder approval to issue additional shares beyond what we are currently allowed
to issue them under Section 713(a) of the NYSE MKT, or provide other forms of consideration to the Holders, as a result of
the November 2016 and May 2017 public offerings.
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Our
inability to comply in full with our potential obligation under the CSIA to issue shares to the Holders in connection with the
completion of our November 2016 public offering and May 2017 public offering could have additional adverse consequences, including,
without limitation:
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the
Holders may bring an action against us for breach of contract, or threaten to bring an action against us, either of which could
require us to expend significant time and resources to resolve the matter, and we may not be successful;
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we
may need to seek approval from our stockholders in order to issue Additional Shares to the Holders, which would require us to
expend time and resources, and our stockholders may not ultimately approve such issuance; and
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we
may need to provide other consideration to the Holders to settle potential claims arising from our inability to satisfy our potential
contractual obligations under the CSIA, which could involve:
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cash
make-whole payments, which in turn would deplete our cash resources faster than we would otherwise anticipate; and
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other
unfavorable terms that could make it difficult for us to raise financing in the future, which would raise further doubts about
our ability to continue as a going concern.
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The occurrence of any of the foregoing,
or even the potential for them to occur, could result in a material decline in our stock price.
Stockholders will incur dilution of their
percentage ownership interest in our common stock to the extent we issue Additional Shares to the Holders pursuant to the Additional
Issuance Rights. In addition, because the Additional Shares will be issued for no additional consideration, any such issuance would
reduce our net tangible book value per share.
Any issuance or potential issuance of Additional
Shares could adversely affect our stock price, make it more difficult for us to raise capital on favorable terms, or at all, and
have a material adverse effect on our business, results of operations and financial condition
A significant number of shares of
our common stock are subject to issuance upon exercise of outstanding warrants and options, which upon such exercise may result
in dilution to our security holders.*
As of March 31, 2017, we had outstanding
warrants to purchase an aggregate of 775,137 shares of our common stock at a weighted average exercise price of $22.86 per share,
and outstanding options to 120,360 shares of our common stock at a weighted average exercise price of $41.60 per share. The $22.86
weighted-average exercise price set forth above with respect to the 775,137 shares of common stock issuable upon the exercise of
outstanding warrants does not take into account the exercise price adjustment that will result under the terms of the warrants
issued in November 2016 (exercisable for 533,500 shares of common stock in the aggregate at an exercise price of $7.50 per share)
in connection with our April 2017 1-for-10 reverse stock split. Under the terms of the November 2016 warrants, following a reverse
stock split, on the 16th trading day immediately following such reverse stock split, or May 16, 2017, the exercise price of the
November 2016 warrants will be reduced to the lowest volume-weighted average price between and including April 25, 2017 and May
15, 2017. The exercise price and/or the number of shares of common stock issuable upon exercise of the warrants may be adjusted
in certain circumstances, including certain issuances of securities at a price less than the then-current exercise price, subdivisions
and stock splits, stock dividends, combinations, reorganizations, reclassifications, consolidations, mergers or sales of properties
and assets and upon the issuance of certain assets or securities to holders of our common stock, as applicable. Although we cannot
determine when these warrants or options will ultimately be exercised, it is reasonable to assume that such warrants and options
will be exercised only if the exercise price is below the market price of our common stock. To the extent any of our outstanding
warrants or options are exercised, additional shares of our common stock will be issued that will generally be eligible for resale
in the public market (subject to limitations under Rule 144 under the Securities Act for certain of our warrants and with respect
to shares held by our affiliates), which will result in dilution to our security holders. The issuance of additional securities
could also have an adverse effect on the market price of our common stock.
Our principal stockholders and management
beneficially own a majority of our stock and will be able to exert significant control over matters subject to stockholder approval.*
As of March 31, 2017, our executive officers,
directors, greater than 5% stockholders and their affiliates beneficially owned a majority of our outstanding voting stock. Therefore,
these stockholders could have the ability to influence us through this ownership position. These stockholders may be able to significantly
affect or, acting together, control matters requiring stockholder approval, including elections of directors, amendments of our
organizational documents, and approval of any merger, sale of assets, or other major corporate transaction. This may prevent or
discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one
of our stockholders.
Provisions of Washington law and
our current articles of incorporation and bylaws may discourage another company from acquiring us and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions of Washington law and our current
articles of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable,
including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate
or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders
to replace or remove our board of directors. These provisions include:
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authorizing
the issuance of “blank check” preferred stock without any need for action by stockholders;
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providing
for a classified board of directors with staggered terms;
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requiring
supermajority stockholder voting to effect certain amendments to our articles of incorporation and bylaws; and
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establishing
advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
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In addition, because we are incorporated
in Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which, among other
things, restricts the ability of stockholders owning 10% or more of our outstanding voting stock from merging or combining with
us. These provisions could discourage potential acquisition attempts and could reduce the price that investors might be willing
to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions.
Although we believe these provisions collectively
provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they
would apply even if an offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove our current management by making it difficult for stockholders to
replace members of our board of directors, which is responsible for appointing the members of our management
We have never paid dividends on our
common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We have never declared or paid cash dividends
on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently
intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital
appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.
Maintaining and improving our financial
controls and the requirements of being a public company may strain our resources, divert management’s attention and affect
our ability to attract and retain qualified board members.
As a public company, we are subject to
the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules of the NYSE MKT. The requirements of these
rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or
costly and place strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and financial condition.
The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Ensuring
that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort
that needs to be re-evaluated frequently.
We currently do not have an internal audit
group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical
accounting knowledge. Implementing any appropriate changes to our internal controls may require specific compliance training for
our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant
period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and
any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could
increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls
are necessary for us to produce reliable financial reports and are important to help prevent fraud.
In accordance with NYSE MKT rules, we are
required to maintain a majority independent board of directors. The various rules and regulations applicable to public companies
make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate
directors’ and officers’ insurance, our ability to recruit and retain qualified officers and directors will be significantly
curtailed.
If securities or industry analysts
do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock
will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently
have three securities analysts and may never obtain additional research coverage by other securities and industry analysts. If
no additional securities or industry analysts commence coverage of our company, the trading price for our stock could be negatively
impacted. If we obtain additional securities or industry analyst coverage and if one or more of the analysts who covers us downgrades
our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more
of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which
could cause our stock price and trading volume to decline.
We are an “emerging growth
company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies”
will make our common stock less attractive to investors.*
We are an “emerging growth company,”
as defined under the JOBS Act. For so long as we are an “emerging growth company,” we intend to take advantage of certain
exemptions from reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved.
We could be an “emerging growth
company” for up to five years, although we may lose such status earlier, depending on the occurrence of certain events.
We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year (a)
following the fifth anniversary of our initial public offering conducted after we became a reporting company under the Exchange
Act pursuant to our registration statement on Form 10 (File No. 000-23930), (b) in which we have total annual gross revenue of
approximately $1.0 billion or (c) in which we are deemed to be a “large accelerated filer” under the Exchange Act,
which means that the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30th of the
prior year, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior
three-year period.
We cannot predict if investors will find
our common stock less attractive or our company less comparable to certain other public companies because we will rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and our stock price may be more volatile.
Under the JOBS Act, “emerging growth
companies” can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until
such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from
new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public
companies that are not “emerging growth companies.”
Sales of a substantial number of
shares of our common stock in the public market by our existing stockholders could cause our stock price to decline.
Sales of a substantial number of shares
of our common stock in the public market or the perception that these sales might occur, could depress the market price of our
common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict
the effect that sales may have on the prevailing market price of our common stock.
Certain holders of our common stock are
entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under
the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for
shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could
have a material adverse effect on the trading price of our common stock.
Future sales and issuances of our
common stock or rights to purchase common stock by us, including pursuant to our equity incentive plans, could result in additional
dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
We expect that significant additional capital
will be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts,
expanded research and development activities and costs associated with operating as a public company. To the extent we raise additional
capital by issuing equity or convertible securities, our stockholders may experience substantial dilution. 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. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may
be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new
investors could gain rights superior to our existing stockholders.
Pursuant to our 2016 Equity Incentive Plan,
or the 2016 Plan, our management is authorized to grant stock options and other equity-based awards to our employees, directors
and consultants. The number of shares available for future grant under the 2016 Plan will automatically increase on January 1st
of each year by up to 5% of all shares of our capital stock outstanding as of December 31st of the preceding calendar
year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. In
addition, we may grant or provide for the grant of rights to purchase shares of our common stock pursuant to our Employee Stock
Purchase Plan, or ESPP. The number of shares of our common stock reserved for issuance under the ESPP will automatically increase
on January 1st
of each calendar year by the lessor of 1% of the total number of shares of our common stock outstanding
on December 31st of the preceding calendar year and 30,000 shares, subject to the ability of our board of directors to take
action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available
for issuance under the 2016 Plan and ESPP each year. Increases in the number of shares available for future grant or purchase may
result in additional dilution, which could cause our stock price to decline.