Item
1. Business.
Explanatory
Note
Unless
otherwise noted, references in this Annual Report on Form 10-K to “Cardax,” the “Company,” “we,”
“our,” or “us” means Cardax, Inc., the registrant, and, unless the context otherwise requires, together
with its wholly-owned subsidiary, Cardax Pharma, Inc., a Delaware corporation (“
Pharma
”), and Pharma’s
predecessor, Cardax Pharmaceuticals, Inc., a Delaware corporation (“
Holdings
”), which merged with and into
Cardax, Inc. on December 30, 2015.
Unless
otherwise noted, references in this Annual Report on Form 10-K to our “product” or “products” includes
our dietary supplements, pharmaceutical candidates, and any of our other current or future products, product candidates,
and technologies, to the extent applicable.
Special
Note Regarding Forward-Looking Statements
There
are statements in this annual report that are not historical facts. These “forward-looking statements” can be identified
by use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “hope,”
“intend,” “may,” “plan,” “positioned,” “project,” “propose,”
“should,” “strategy,” “will,” or any similar expressions. You should be aware that these forward-looking
statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read
this entire annual report carefully, especially the risks discussed under the section entitled “Risk Factors.” Although
we believe that our assumptions underlying such forward-looking statements are reasonable, we do not guarantee our future performance,
and our actual results may differ materially from those contemplated by these forward-looking statements. Our assumptions used
for the purposes of the forward-looking statements specified in the following information represent estimates of future events
and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances, including the
development, acceptance, and sales of our products, the continued availability of our exclusive “brick and mortar”
sales channel for our commercial product, and our ability to raise additional funding sufficient to implement our strategy.
As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives require the exercise of judgment. In light of these numerous risks and uncertainties, we
cannot provide any assurance that the results and events contemplated by our forward-looking statements contained in this annual
report will in fact transpire.
These forward-looking statements are not guarantees of future performance. You are cautioned
to not place undue reliance on these forward-looking statements, which speak only as of their dates.
We do not undertake any
obligation to update or revise any forward-looking statements, except as required by law.
Cautionary
Note Regarding Industry Data
Unless
otherwise indicated, information contained in this annual report concerning our company, our business, the services we provide
and intend to provide, our industry and our general expectations concerning our industry are based on management estimates. Such
estimates are derived from publicly available information released by third party sources, as well as data from our internal research,
and reflect assumptions made by us based on such data and our knowledge of the industry, which we believe to be reasonable.
Overview
We
are a biopharmaceutical company engaged in the development and commercialization of dietary supplements and pharmaceuticals. We
are a smaller reporting company as defined by applicable federal securities regulations.
Our
executive offices are located at 2800 Woodlawn Drive, Suite 129, Honolulu, Hawaii 96822; our telephone number is (808) 457-1400.
Our website is located at https://www.cardaxpharma.com. The information on our website is not part of this annual report.
Our
Business
We
are a biopharmaceutical company engaged in the development and commercialization of dietary supplements for inflammatory health
and pharmaceuticals
for chronic diseases driven by inflammation and oxidative stress
.
We believe we are well positioned for significant and sustained growth via the development and commercialization of dietary
supplements and pharmaceuticals utilizing synthetically manufactured astaxanthin, zeaxanthin, and related xanthophyll carotenoids,
which support health and longevity by reducing inflammation and oxidative stress at the cellular and mitochondrial level
without inhibiting normal function. The safety and efficacy of our products have not been directly evaluated in clinical trials
or confirmed by the U.S. Food and Drug Administration (the “FDA”).
Our
Products
Our
product platform consists of a commercially available dietary supplement, ZanthoSyn®, and pharmaceutical candidates, CDX-101
and CDX-301, which are in pre-clinical development.
ZanthoSyn®
is marketed as a novel astaxanthin dietary supplement with superior absorption and purity. Astaxanthin is a naturally occurring
molecule with safe anti-inflammatory activity that supports joint health, cardiovascular health, metabolic health, liver health,
and longevity. The form of astaxanthin utilized in ZanthoSyn® has demonstrated excellent safety in peer-reviewed published
studies and is Generally Recognized as Safe (“
GRAS
”) according to FDA regulations.
We
sell ZanthoSyn® primarily through wholesale and e-commerce channels. We launched our e-commerce channel in 2016 and began
selling to General Nutrition Corporation (“
GNC
”) stores in 2017. ZanthoSyn® is currently available at over
three thousand GNC corporate stores in the United States. ZanthoSyn® has been the top selling product at GNC stores in Hawaii
for the past year.
We
market ZanthoSyn® primarily through a two-pronged approach:
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Physician
outreach and education, where ZanthoSyn
®
is positioned as the first safe, physician friendly, anti-inflammatory
for health and longevity, and GNC serves as a convenient and credible distribution channel for physicians recommending ZanthoSyn
®
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GNC
store outreach, education, and in-store sales support, building on the ability to utilize ZanthoSyn
®
as a foundation
of health and wellness regimens
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Our
sales and marketing program was initially launched in Hawaii, where robust physician outreach and education coupled with GNC store
outreach, education, and in-store sales support increased consumer awareness and catalyzed strong sales growth. We have also launched
this program in major markets on the West Coast and East Coast and expect to extend this program nationally as resources permit.
To support these efforts, we have hired additional sales and marketing personnel.
In
September 2018, we initiated a human clinical trial entitled,
Cardiovascular Health Astaxanthin Supplement Evaluation
(“
CHASE
”), targeting cardiovascular inflammatory health. The randomized, double-blind, placebo-controlled
clinical trial will evaluate the effect of low-dose and high-dose ZanthoSyn® on cardiovascular health as measured by C-Reactive
Protein (“CRP”) levels, over 12 weeks in up to 360 subjects with documented cardiovascular risk factors. The study
will also include an optional open label extension through 48 weeks.
While
the FDA does not require human clinical trials for dietary supplements, we believe that positive results from human clinical trials
will help to promote scientific and consumer awareness of astaxanthin’s health and longevity applications.
Synthetic
Astaxanthin vs. Natural Astaxanthin
We
believe synthetic astaxanthin offers significant advantages compared to astaxanthin from microalgae, krill, or other sources:
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Synthetic
astaxanthin can be formulated for superior bioavailability; in a human study comparing ZanthoSyn® (our synthetic astaxanthin
dietary supplement) to a leading microalgal astaxanthin product, the astaxanthin blood levels following administration of
ZanthoSyn® were nearly 3 times higher than the microalgal astaxanthin product at the same dose.
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Synthetic
astaxanthin has been extensively tested in a wide range of toxicity studies, including acute, subacute, subchronic, and chronic
toxicity studies, carcinogenicity studies, genotoxicity studies, and developmental and reproductive toxicity studies; whereas
to our knowledge microalgal or other sources of astaxanthin have not undergone the same amount of safety testing in such toxicity
studies.
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Synthetic
astaxanthin is manufactured with superior purity and precision, whereas astaxanthin extracted from microalgae and krill oil
is obtained in a complex mixture, which may include many unknown marine byproducts.
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Synthetic
manufacture of astaxanthin is scalable, whereas we believe the ability to readily scale the production and extraction of astaxanthin
from microalgae or other sources will be limited as demand for astaxanthin grows.
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Synthetic
manufacture of astaxanthin emits fewer greenhouse gases and consumes less energy, raw material, and land than traditional
microalgal astaxanthin production.
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Pharmaceutical
Development
We
are developing CDX-101 and CDX-301 for pharmaceutical applications:
CDX-101, our astaxanthin
pharmaceutical candidate, is being developed for cardiovascular inflammation and dyslipidemia. Pre-clinical and clinical studies
with astaxanthin have demonstrated proof-of-concept for the treatment of cardiovascular risk factors including inflammation and
triglycerides. We believe that an initial indication of severe hypertriglyceridemia provides an efficient clinical pathway to
drug approval for CDX-101. CDX-101 is currently in pre-clinical development, including the planning of IND enabling studies.
CDX-301, our zeaxanthin
pharmaceutical candidate, is being developed for macular degeneration. Zeaxanthin protects the macula against blue light and oxidative
damage. Pre-clinical and clinical studies with zeaxanthin have demonstrated proof-of-concept for the treatment of macular disorders.
We believe that an initial indication of Stargardt disease, a juvenile form of macular degeneration, provides an efficient clinical
pathway to drug approval for CDX-301. On November 30, 2018, we submitted a request for orphan drug designation to the FDA for
zeaxanthin as a treatment of Stargardt disease, and on February 1, 2019, the FDA responded with initial comments to which we expect
to respond shortly. CDX-301 is currently in pre-clinical development, including the planning of IND enabling studies.
We
have retained Paresh N. Soni, M.D., Ph.D., to guide clinical and regulatory strategy, interact with the FDA, and advise us on
a full range of development issues. We have also retained Frederick D. Sancilio, Ph.D., to assist us in our orphan drug development
strategy, including identifying initial candidates for orphan drug designation.
Our
pharmaceutical candidates are currently in pre-clinical development and have not been directly evaluated in clinical trials or
approved by the FDA for marketing.
Corporate
Information
Our
common stock is traded on the OTCQB under the trading symbol “CDXI”. We are a Delaware corporation.
Our
executive offices are located at 2800 Woodlawn Drive, Suite 129, Honolulu, Hawaii 96822; our telephone number is (808) 457-1400.
Our website is located at http://www.cardaxpharma.com.
Emerging
Growth Company Status
We
are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act, commonly referred to as
the “JOBS Act.” We will remain an “emerging growth company” for up to five years from the date of the
first sale of our common equity securities pursuant to an effective registration statement, or until the earliest of (i) the
last day of the fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large
accelerated filer” as defined by I Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market
value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during
the preceding three year period. We will no longer be an emerging growth company from and after December 31, 2018, although
we will continue to be a smaller reporting company.
As
an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that
are applicable to other public companies that are not “emerging growth companies” including, but not limited to:
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not
being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act (we will also
not be subject to the auditor attestation requirements of Section 404(b) as long as we are a “smaller reporting company,”
which includes issuers that had a public float of less than $75 million as of the last business day of their most recently
completed second fiscal quarter);
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reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden
parachute payments not previously approved.
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In
addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “
Securities Act
”)
for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay
the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Research
and Development
Our
research and development program is comprised of employees, consultants, including regulatory, scientific, and medical professionals,
and third-party collaborators or contract organizations, including academic institutions, contract research organizations, and
contract manufacturing organizations. We previously utilized dedicated internal synthetic chemistry, biology, and bioanalytical
chemistry laboratories and a research and development staff to conduct discovery stage synthesis of products (with transfer of
materials and/or methods for additional process development and/or testing),
in vitro
testing of products and related components
to elucidate the mechanism of action, and analysis of biological samples from internal research and/or contract organizations
to detect and quantify levels of products and related components following administration of product in various studies. Our research
and development staff has also worked with other professionals to identify, contract and transfer materials and methods, and oversee
research and manufacturing by contract organizations. Contract organizations provide us with access to larger scale manufacturing,
animal proof-of-concept studies, pharmacokinetics, and toxicity, and analysis that would not otherwise be available to us without
significant expense. We anticipate that the majority of our research and development will be conducted by contract organizations
with direction and oversight by our current internal research and development personnel.
In
addition to conducting or overseeing research and development activities, our research and development personnel analyze and interpret
other research on astaxanthin, as well as related compounds, competing products, applicable health applications, and industry
trends. In the United States National Library of Medicine’s online repository, PubMed.gov, there are more than 1,800 peer-reviewed
journal articles that reference astaxanthin in the title or abstract, over 500 of which were published in the last three years,
with the vast majority published by organizations and researchers that are not affiliated with us. This type of “open-source”
research has served to significantly advance the understanding of astaxanthin, and has also presented our research and development
personnel with the critical task of keeping up-to-date on all of the latest research and interpreting and integrating the findings
with our research and that of others in order to serve as the preeminent thought leaders on astaxanthin’s mechanism of action
and its application in biological systems.
Our
research and development expenditures totaled $269,077 and $97,479 for the years ended December 31, 2018 and 2017, respectively.
These expenditures primarily reflect the cost of product development activities. The compensation of our research and development
personnel are included as a component of salaries and wages in the consolidated statements of operations. Our research and
development expenditures for the year ended December 31, 2017 were reclassified to conform to the presentation of expenditures
for the year ended December 31, 2018, in accordance with Note 2 to the consolidated financial statements.
Government
Regulation
Most
aspects of our business are subject to some degree of government regulation. For some of our products, government regulation is
significant and, in general, there appears to be a trend toward more stringent regulation throughout the world, as well as global
harmonization of various regulatory requirements. We expect to devote significant time, effort and expense to address the extensive
government and regulatory requirements applicable to our business. We believe that we are no more or less adversely affected by
existing government regulations than our competitors.
FDA
Regulation
Biopharmaceutical
companies must comply with comprehensive regulation by the FDA and other regulatory agencies in the United States and comparable
authorities in other countries. While the FDA does not require human clinical trials for dietary supplements, we have conducted
and may continue to conduct clinical trials with our dietary supplements to promote scientific and consumer awareness. We may
also conduct Phase I, Phase II, and/or Phase III clinical trials with our pharmaceutical candidates.
We
must obtain regulatory approvals by the FDA and similar health authorities in foreign countries to the extent applicable prior
to human clinical testing and marketing of any pharmaceutical and for post-approval clinical studies for additional indications
of approved drugs. We anticipate that any pharmaceutical candidate will be subject to rigorous preclinical and clinical testing
and pre-market approval procedures by the FDA and similar health authorities in foreign countries to the extent applicable. The
extent to which our products are regulated by the FDA will depend upon the types of products we ultimately develop. We are currently
evaluating and pursuing various developmental strategies and cannot predict, during this stage of our development, the scope of
FDA or other agency regulation to which we or our products will be subject. Various federal statutes and regulations also govern
or influence the preclinical and clinical testing, record-keeping, approval, labeling, manufacture, quality, shipping, distribution,
storage, marketing and promotion, export, and reimbursement of pharmaceuticals.
The
steps ordinarily required before a drug product may be marketed in the United States include:
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preclinical
studies;
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submission
to the FDA of an investigational new drug (“
IND
”) application, which must become effective before human
clinical trials may commence;
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adequate
and well-controlled human clinical trials to establish the safety and efficacy of the pharmaceutical candidate in the desired
indication for use;
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submission
to the FDA of a new drug application (“
NDA
”), together with payment of a substantial user fee; and
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FDA
approval of the NDA, including inspection and approval of the product manufacturing facility and select sites at which human
clinical trials were conducted.
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Preclinical
studies typically involve laboratory evaluation of pharmaceutical candidate chemistry, formulation, and stability, as well as
animal studies to assess the potential safety and efficacy of the pharmaceutical candidate. The results of preclinical studies
are submitted to the FDA as part of an IND and are reviewed by the FDA before the commencement of clinical trials. Unless the
FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. Submission of an IND may not result
in FDA clearance to commence clinical trials, and the FDA’s failure to object to an IND does not guarantee FDA approval
of a marketing application.
Clinical
trials involve the administration of the test agent to humans under the supervision of a qualified principal investigator. In
the United States, clinical trials must be conducted in accordance with Good Clinical Practices. In addition, each clinical trial
must be approved and conducted under the auspices of an institutional review board and with the subject’s informed consent.
We would be subject to similar regulatory considerations if we conduct clinical trials outside the United States.
The
goal of Phase I clinical trials is to establish initial data about safety and tolerability of the pharmaceutical candidate in
humans. The investigators seek to evaluate the effects of various dosages and to establish an optimal dosage level and schedule.
The
goal of Phase II clinical trials is to provide evidence about the desired therapeutic efficacy of the pharmaceutical candidate
in limited studies with small numbers of carefully selected subjects. Investigators also gather additional safety data.
Phase
III clinical trials consist of expanded, large-scale, multi-center studies in the target patient population. This phase further
tests the product’s effectiveness, monitors side effects, and, in some cases, compares the product’s effects to a
standard treatment, if one is already available. Phase III trials are designed to more rigorously test the efficacy of a pharmaceutical
candidate and are normally randomized, double-blinded, and placebo-controlled. Phase III trials are typically monitored by an
independent data monitoring committee, or DMC, which periodically reviews data as a trial progresses. A DMC may recommend that
a trial be stopped before completion for a number of reasons including safety concerns, patient benefit, or futility.
Data
obtained from this development program are submitted as part of an NDA to the FDA and possibly to corresponding agencies in other
countries for review. The NDA requires agency approval prior to marketing in the relevant country. Extensive regulations define
the form, content and methods of gathering, compiling and analyzing the pharmaceutical candidate’s safety and efficacy data.
The
process of obtaining regulatory approval can be costly, time consuming and subject to unanticipated delays. Regulatory agencies
may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied and may also require
additional testing for safety and efficacy and/or post-marketing surveillance or other ongoing requirements for post-marketing
studies. In some instances, regulatory approval may be granted with the condition that confirmatory Phase IV clinical trials are
carried out, and if these trials do not confirm the results of previous studies, regulatory approval for marketing may be withdrawn.
Moreover, each regulatory approval of a product is limited to specific indications. The FDA or other regulatory authorities may
approve only limited label information for the product. The label information describes the indications and methods of use for
which the product is authorized, may include Risk Evaluation and Mitigation Strategies and, if overly restrictive, may limit a
sponsor’s ability to successfully market the product. Regulatory agencies routinely revise or issue new regulations, which
can affect and delay regulatory approval of pharmaceuticals.
Furthermore,
pharmaceutical manufacturing processes must conform to current Good Manufacturing Practices, or cGMPs. Manufacturers, including
a drug sponsor’s third-party contract manufacturers, must expend time, money and effort in the areas of production, quality
control and quality assurance, including compliance with stringent record-keeping requirements. Manufacturing establishments are
subject to periodic inspections by the FDA or other health authorities, in order to assess, among other things, compliance with
cGMP. Before approval of the initiation of commercial manufacturing processes, the FDA will usually perform a preapproval inspection
of the facility to determine its compliance with cGMP and other rules and regulations. In addition, foreign manufacturers must
also comply with cGMPs in order to supply products for use in the United States, and are subject to periodic inspection by the
FDA or by regulatory authorities in certain countries under reciprocal agreements with the FDA. Manufacturing processes and facilities
for pharmaceuticals are highly regulated. Regulatory authorities may choose not to certify or may impose restrictions, or even
shut down existing manufacturing facilities that they determine are non-compliant.
FDA
GRAS Determination
“
GRAS
”
is an acronym for the phrase “generally recognized as safe,” which the FDA utilizes to describe those substances that,
in the generally recognized opinion of the scientific community, will not be harmful to consumers, provided the substance is used
as intended. According to applicable FDA regulations, any substance that is intentionally added to food is a food additive, which
is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as
having been adequately shown to be safe under the conditions of its intended use. Under sections 201(s) and 409 of the Federal
Food, Drug, and Cosmetic Act (the “
FD&C Act
”), and FDA’s implementing regulations in 21 CFR 170.3
and 21 CFR 170.30, the use of a food substance may be GRAS either through scientific procedures or, for a substance used in food
before 1958, through experience based on common use in food. General recognition of safety through scientific procedures requires
the same quantity and quality of scientific evidence as is required to obtain approval of the substance as a food additive and
ordinarily is based upon published studies, which may be corroborated by unpublished studies and other data and information. General
recognition of safety through experience based on common use in foods requires a substantial history of consumption for food use
by a significant number of consumers.
Manufacturers
of GRAS substances may provide the FDA with a notification of GRAS determination, which includes a description of the substance,
the applicable conditions of use, and an explanation of how the substance was determined to be safe. Upon review of such a notification,
the FDA may respond with a “no questions” position, whereby the manufacturer’s determination that a product
is GRAS for its intended purposes is affirmed. Alternatively, manufacturers may elect to “self-affirm” a given substance
as GRAS without FDA notification but should retain all applicable safety data used for GRAS determination in the case of FDA inquiry.
Synthetic
copies of naturally-occurring dietary ingredients or related components do not qualify as dietary ingredients under the FD&C
Act, but substances that have been affirmed by the FDA as GRAS, self-affirmed as GRAS, or approved as direct food additives in
the U.S. may be marketed as dietary ingredients, subject to FDA regulations for dietary ingredients.
FDA
NDI Notification
The
Dietary Supplement Health and Education Act of 1994 (the “
DSHEA
”) (Pub. L. 103-417) was signed into law on
October 25, 1994 and amended the FD&C Act by adding: (i) section 201(ff) (21 U.S.C. 321(ff)), which defines the term “dietary
supplement”, and (ii) section 413 (21 U.S.C. 350b), which defines the term “new dietary ingredient” (“
NDI
”)
and requires the manufacturer or distributor of an NDI, or of the dietary supplement that contains the NDI, to submit a premarket
notification to FDA at least 75 days before introducing/delivering the supplement into interstate commerce, unless the NDI and
any other dietary ingredients in the dietary supplement have been present in the food supply without chemical alteration (21 U.S.C.
350b(a)(1)). The NDI notification must contain applicable information, including history of use and citations to published articles,
from which the manufacturer or distributor of the NDI or dietary supplement has concluded that the dietary supplement containing
the NDI will be reasonably expected to be safe under the conditions of its intended use. NDI notifications are not required for
the marketing of approved food additives or GRAS substances as NDIs unless the dietary ingredient has been chemically altered.
FDA
Orphan Drug Designation
The
Orphan Drug Act was signed into law on January 4, 1983. The Congressional findings for the Orphan Drug Act were as follows: (i)
there are many rare diseases and conditions that affect such small numbers of individuals residing in the United States; (ii)
adequate drugs for many rare diseases and conditions have not been developed; (iii) drugs for rare diseases and conditions are
commonly referred to as “orphan drugs”; (iv) because so few individuals are affected by any one rare disease or condition,
a pharmaceutical company that develops an orphan drug may reasonably expect the drug to generate relatively small sales in comparison
to the cost of developing the drug and consequently to incur a financial loss; (v) there is reason to believe that some promising
orphan drugs will not be developed unless changes are made in the applicable Federal laws to reduce the costs of developing such
drugs and to provide financial incentives to develop such drugs; and (vi) it is in the public interest to provide such changes
and incentives for the development of orphan drugs.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition that (i)
affects less than 200,000 persons in the United States, or (ii) affects more than 200,000 in the United States and for which there
is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or
condition will be recovered from sales in the United States of such drug. Orphan drug designation must be requested before submitting
an NDA. After the FDA grants orphan drug designation, the identity of the drug and its potential orphan use are disclosed publicly
by the FDA.
In
the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards
clinical trial costs, tax advantages, and NDA user-fee waivers. In addition, if a drug receives the first FDA approval for the
indication for which it has orphan designation, the drug is entitled to orphan drug exclusivity, which means the FDA may not approve
any other application, including a full NDA, to market the same drug for the same indication for a period of seven years, except
in limited circumstances, such as a showing of clinical superiority over the drug with orphan exclusivity or where the manufacturer
with orphan exclusivity is unable to assure sufficient quantities of the approved orphan-designated drug. Competitors, however,
may receive approval of different drugs for the indication that the orphan drug has exclusivity or obtain approval for the same
drug but for a different indication for which the orphan drug has exclusivity. Orphan drug exclusivity also could block the approval
of one of our drugs for seven years if a competitor obtains approval of the same drug as defined by the FDA or if our drug is
determined to be contained within the competitor’s drug for the same indication or disease. If a drug designated as an orphan
drug receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug exclusivity.
In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation
was materially defective or if the manufacturer is unable to assure sufficient quantities of the drug to meet the needs of patients
with the rare disease or condition. There can be no assurance that any request for orphan drug designation will be granted by
the FDA.
Other
Regulations
Pharmaceutical
companies are subject to various federal and state laws pertaining to healthcare “fraud and abuse,” including anti-kickback
and false claims laws. The Anti-Kickback Statute is a federal criminal statute that makes it illegal for any person, including
a prescription drug manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, offer, receive or pay any
remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, order or
prescription of a particular drug, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
Some of the state prohibitions apply to referral of patients for healthcare services reimbursed by any source, not only the Medicare
and Medicaid programs.
In
the course of practicing medicine, physicians may legally prescribe FDA approved drugs for an indication that has not been approved
by the FDA and which, therefore, is not described in the product’s approved labeling, so-called “off-label use.”
The FDA does not ordinarily regulate the behavior of physicians in their choice of treatments. The FDA and other governmental
agencies do, however, restrict communications on the subject of off-label use by a manufacturer or those acting on behalf of a
manufacturer. Companies may not promote FDA-approved drugs for off-label uses. The FDA and other governmental agencies do permit
a manufacturer (and those acting on its behalf) to engage in some limited, non-misleading, non-promotional exchanges of scientific
information regarding unapproved indications. The United States False Claims Act prohibits, among other things, anyone from knowingly
and willfully presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims
for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims
for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions,
including imprisonment, fines and civil monetary penalties, as well as possible exclusion from federal health care programs (including
Medicare and Medicaid). In addition, under this and other applicable laws, such as the Food, Drug and Cosmetic Act, there is an
ability for private individuals to bring similar actions. Further, there is an increasing number of state laws that require manufacturers
to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required
to comply with the law.
We
are subject to various laws and regulations regarding laboratory practices and the experimental use of animals in connection with
our research. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory and enforcement
powers, including the ability to suspend or delay issuance of approvals, seize or recall products, withdraw approvals, enjoin
violations and institute criminal prosecution, any one or more of which could have a material adverse effect upon our business,
financial condition, and results of operations.
We
must comply with regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act and other federal, state and local regulations. We are subject to federal, state and local laws and regulations governing
the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain hazardous or potentially
hazardous materials. We may be required to incur significant costs to comply with environmental and health and safety regulations
in the future. Our research and development involves the controlled use of hazardous materials, including, but not limited to,
certain hazardous chemicals.
Our
activities are also potentially subject to federal and state consumer protection and unfair competition laws. We are also subject
to the United States Foreign Corrupt Practices Act, or the FCPA, which prohibits companies and individuals from engaging in specified
activities to obtain or retain business or to influence a person working in an official capacity. Under the FCPA, it is illegal
to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, governmental staff members,
political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in
an official capacity. In addition, federal and state laws protect the confidentiality of certain health information, in particular,
individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Department
of Health and Human Services promulgated health information privacy and security rules under the Health Insurance Portability
and Accountability Act of 1996. In addition, many state laws apply to the use and disclosure of health information.
Competition
The
industry in which we intend to compete is subject to intense competition. We believe that our ability to compete will be dependent
in large part upon our ability to continually enhance and improve our products and technologies. In order to do so, we plan to
effectively utilize and expand our research and development capabilities. Competition is based primarily on scientific and technological
superiority, technical support, availability of patent protection, protection of trade secrets, access to adequate capital, ability
to develop, acquire and market products successfully, ability to obtain governmental approvals and ability to serve the particular
needs of customers. We intend to compete on the basis of safety, effectiveness, convenience, manufacturing superiority, intellectual
property, and where appropriate, price.
Numerous
pharmaceutical and biotechnology companies are developing or marketing anti-inflammatories. These companies include, but are not
limited to, AbbVie, Amgen, Astellas, AstraZeneca, Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Eisai, Eli Lilly, Gilead,
GlaxoSmithKline, Johnson & Johnson, Merck, MT Pharma, Nestle/Pamlab, Novartis, Pfizer, Reata, Roche/Genentech, Sanofi-Aventis,
Servier, Takeda, and Vivus.
Many
other companies are also developing or marketing astaxanthin products from various sources for various applications. Leading
manufacturers of astaxanthin from microalgae include Cyanotech, which produces the BioAstin brand; Fuji Health Science (parent
company: Fuji Chemical), which produces the AstaREAL brand; and Algatechnologies, which produces the AstaPure brand. Many other
companies, including Valensa International (parent company: EID Parry), acquire astaxanthin from these or other manufacturers.
We believe that large-scale, multi-fold expansion of naturally produced microalgal astaxanthin would require large amounts of
land, and fresh water for open pond systems or large amounts of infrastructure and energy for closed systems, and, consequently,
a significant if not overwhelming amount of investment capital. Furthermore, microalgal astaxanthin products, which are lipophilic
extracts of a commercially cultivated microalgae, typically have relatively low astaxanthin content, with the majority of the
product comprised of other lipophilic, non-astaxanthin microalgal compounds. In contrast, our synthetically manufactured astaxanthin
products have very high astaxanthin content, with consistent purity. Higher relative astaxanthin content reduces the size/number
of capsules or tablets required to achieve equivalent circulating levels of astaxanthin. We may also face competition from other
synthetic astaxanthin products, although competitors in this space are limited by the substantial cost and technical expertise
required to develop large-scale, industrial production of astaxanthin.
Our
success will also depend in large part on our ability to obtain and maintain international and domestic patents, other intellectual
property, and other legal protections for the proprietary technology that we consider important to our business. We intend
to continue to seek appropriate patent protection for our products where applicable by filing patent applications in the United
States and other selected countries. We intend for these patent applications to cover, where applicable, claims for composition
of matter, uses, manufacturing processes, and formulations. Our success will also depend on our ability, and the ability of our
current and/or future strategic partners to maintain trade secrets related to proprietary production methods for products that
we, or our partners, intend to market.
Raw
Materials and Components
We
utilize contract manufacturers and/or other third-party suppliers for the production of our products. The raw materials and supplies
required for the production of our products may be available, in some instances from one supplier, and in other instances, from
multiple suppliers. In those cases where raw materials are only available through one supplier, such supplier may be either a
sole source (the only recognized supply source available to us) or a single source (the only approved supply source for us among
other sources). We, our contract manufacturers, and/or other third-party suppliers will adopt appropriate policies to attempt,
to the extent feasible, to minimize our raw material supply risks, including maintenance of greater levels of raw materials inventory
and implementation of multiple raw materials sourcing strategies, especially for critical raw materials. Although to date we have
not experienced any significant delays in obtaining any raw materials from suppliers, we cannot provide assurance that we, our
contract manufacturers, and/or other third-party suppliers will not face shortages from one or more of them in the future.
Our
ZanthoSyn® product manufacturing process relies on certain third-party manufacturers and suppliers that are not
exclusive to us.
Customers
We
sell ZanthoSyn® primarily through wholesale and e-commerce channels. We launched our e-commerce channel in 2016 and began
selling to GNC stores in 2017. ZanthoSyn® is currently available at over three thousand GNC corporate stores in the United
States.
We
currently sell ZanthoSyn® to GNC under an exclusive sales contract for the “brick and mortar” retail channel in
the United States, which comprises the majority of our revenues, the loss of which would have a material adverse effect on the
Company. During the years ended December 31, 2018 and 2017, sales to GNC accounted for more than 90% and more than 75% of our
revenues, respectively. No other customer accounted for 10% or more of our revenues during these years.
Intellectual
Property
We
have obtained and are continuing to seek patent protection for compositions of matter, pharmaceutical compositions, and pharmaceutical
uses, in certain disease areas, of our various carotenoid analogs and derivatives. Such carotenoids include, but are not limited
to, astaxanthin, zeaxanthin, lutein, and/or lycophyll, and esters and other analogs and derivatives of these compounds. More specifically,
we seek to protect: (i) the composition of matter of novel carotenoid analogs and derivatives, (ii) pharmaceutical compositions
comprising synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives, and (iii) the pharmaceutical
use of synthetic preparations of novel or naturally occurring carotenoid analogs and derivatives in specific disease areas, including,
but not limited to, the treatment of inflammation and related tissue damage, liver disease, and reperfusion injury, as well as
the pharmaceutical use of synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives for
the reduction of platelet aggregation. We intend to enforce and defend our intellectual property rights consistent with our strategic
business objectives.
We
own 28 issued patents, including 14 in the United States and 14 others in Europe, China, India, Japan, and Hong Kong, related
to the technology described above. These patents will expire during the years of 2023 to 2028, subject to any patent term extensions
of the individual patent. We have 1 patent application in the United States and 2 foreign patent applications pending in Europe
and Brazil, also related to the technology described above. Of these patents and patent applications, 28 patents and 2 patent
applications have coverage related to astaxanthin analogs and derivatives; however, our proprietary technologies and business
opportunities are not dependent on any single patent or sub-set of patents—the portfolio, which includes coverage related
to compositions of matter, pharmaceutical compositions, and pharmaceutical uses, as described above, provides the comprehensive
coverage that we deem material to our business.
Employees
As
of the date of this report, we have 12 full-time employees and 1 part-time employee. None of our employees are subject to a collective
bargaining agreement. We believe the relations with our employees are satisfactory.
Item
1A. Risk Factors.
An
investment in our common stock, any warrants to purchase our common stock, or any other security that may be issued by us involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
elsewhere in this annual report, before making an investment decision. If any of the following risks actually occur, our business,
financial condition, or results of operations could suffer. In that case, the trading price of our shares of common stock could
decline, and you may lose all or part of your investment. You should read the section entitled “Forward-Looking Statements”
above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements
in the context of this annual report.
Risks
Related to Our Business, Industry, and Financial Condition
We
have a history of operating losses and have received a going concern opinion from our auditors.
We
have incurred substantial net losses since our inception and may continue to incur losses for the foreseeable future, as we continue
our product development activities. As a result of our limited operating history, we have limited historical financial data that
can be used in evaluating our business and our prospects and in projecting our future operating results. Through December 31,
2018, we have accumulated a total deficit of $61,943,318.
Additionally,
we have received a “going concern” opinion from our independent registered public accounting firm. We expect that
our marketing program for ZanthoSyn® will continue to focus on outreach to physicians, healthcare professionals, retail personnel,
and consumers, and anticipate further losses in the development of our consumer business. We also plan to advance the research
and development of our pharmaceutical candidates and anticipate further losses in the development of our pharmaceutical business.
As a result of these and other factors, management has determined there is substantial doubt about the Company’s ability
to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital
and implement our business plan. If we are unable to achieve or sustain profitability or to secure additional financing on acceptable
terms, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as
a going concern. Any such inability to continue as a going concern may result in our common stock holders losing their entire
investment. There is no guarantee that we will become profitable or secure additional financing on acceptable terms. Our consolidated
financial statements contemplate that we will continue as a going concern and do not contain any adjustments that might result
if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital
needs, the acceleration or modification of our expansion plans, increased expenses, potential acquisitions or other events will
all affect our ability to continue as a going concern.
We
have limited experience as a commercial company.
In
2016, we launched our first commercial product, ZanthoSyn®, and we have limited sales to date. As such, we have limited historical
financial data upon which to base our projected revenue, planned operating expenses or upon which to evaluate our company and
our commercial prospects. Based on our limited experience in developing and marketing new products, we may not be able to effectively:
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drive
adoption of our current and future products, including ZanthoSyn®;
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attract
and retain customers for our products;
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provide
appropriate levels of customer support for our products;
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implement
effective marketing strategies to promote awareness of our products;
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develop,
manufacture, and commercialize new products or achieve an acceptable return on our research and development efforts and expenses;
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comply
with regulatory requirements applicable to our products;
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anticipate
and adapt to changes in our market;
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maintain
and develop strategic relationships with vendors and manufacturers to acquire necessary materials for the production of our
existing or future products;
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scale
our manufacturing activities to meet potential demand at a reasonable cost;
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avoid
infringement and misappropriation of third-party intellectual property;
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obtain
any necessary licenses to third-party intellectual property on commercially reasonable terms;
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obtain
valid and enforceable patents that give us a competitive advantage;
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protect
our proprietary technology; and
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attract,
retain, and motivate qualified personnel.
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In
addition, a high percentage of our expenses is and will continue to be fixed. Accordingly, if we do not generate revenue as and
when anticipated, our losses may be greater than expected and our operating results will suffer.
We
are dependent upon the success of our products and technologies, which may not be successfully developed or commercialized.
While
the FDA does not require clinical trials for dietary supplements, we have conducted and may continue to conduct clinical trials
with our dietary supplements to promote scientific and consumer awareness. We may also conduct clinical trials with our pharmaceutical
candidates. A failure of any clinical trial can occur at any stage of testing. The results of initial clinical testing may not
necessarily indicate the results that will be obtained from later or more extensive testing. Additionally, any observations made
with respect to blinded clinical data are inherently uncertain as we cannot know which set of data come from subjects treated
with active versus placebo. Investors are cautioned not to rely on observations coming from blinded data and not to rely on initial
clinical trial results as necessarily indicative of results that will be obtained in subsequent clinical trials or clinical practice.
Additionally,
our products are subject to a variety of FDA and other applicable regulatory authorities. The extent of regulations applicable
to our products, and the approvals or designations our products may receive from regulatory authorities, such as the FDA, are
dependent upon the nature and development of our products and how such products are ultimately commercialized and marketed.
A
number of different factors could prevent us from developing or commercializing our products on a timely basis, or at all.
We,
the FDA, other applicable regulatory authorities, or an institutional review board (“IRB”), may suspend clinical trials
of a product at any time for various reasons, including if we or they believe the subjects participating in such trials are being
exposed to unacceptable health risks. Among other reasons, adverse side effects of a product on subjects in a clinical trial could
result in the FDA or other regulatory authorities suspending or terminating the trial and refusing to approve or allow continued
marketing of a particular product for any or all indications or applications of use.
Clinical
trials require the enrollment of a sufficient number of subjects who meet certain eligibility criteria. Rates of subject enrollment
are affected by many factors, and delays in subject enrollment can result in increased costs and longer development times.
Clinical
trials also require the review and oversight of IRBs, which approve and continually review clinical investigations and protect
the rights and welfare of human subjects. An inability or delay in obtaining IRB approval could prevent or delay the initiation
and completion of clinical trials, and the FDA may decide not to consider any data or information derived from a clinical investigation
not subject to initial and continuing IRB review and approval.
Numerous
factors could affect the timing, cost, or outcome of our development and commercialization efforts, including the following:
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delays
in filing or acceptance of investigational new drug applications for our pharmaceutical candidates;
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difficulty
in securing centers to conduct clinical trials;
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conditions
imposed on us by the FDA or other regulatory authorities that are applicable to our business regarding the scope or design
of our clinical trials or the method or scope of our sales and marketing practices;
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problems
in engaging IRBs to oversee trials or problems in obtaining or maintaining IRB approval of studies;
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difficulty
in enrolling subjects in conformity with required protocols or projected timelines;
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third-party
contractors failing to comply with regulatory requirements or to meet their contractual obligations to us in a timely manner;
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our
products having unexpected and different chemical and pharmacological properties in humans than in laboratory testing and
interacting with human biological systems in unforeseen, ineffective or harmful ways;
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the
need to suspend or terminate clinical trials if the subjects are being exposed to unacceptable health risks;
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insufficient
or inadequate supply or quality of our products or other materials necessary to conduct our clinical trials;
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our
products not having the desired effects or having undesirable side effects or other unexpected characteristics;
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the
cost of our clinical trials being greater than we anticipate;
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negative
or inconclusive results from our clinical trials or the clinical trials of others for similar products or inability to generate
statistically significant data confirming the efficacy or safety of the product being tested;
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changes
in the FDA’s other applicable regulatory authorities’ requirements for testing during the course of testing;
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reallocation
of our limited financial and other resources to other programs; and
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adverse
results obtained by other companies developing similar products.
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It
is possible that none of the products we may develop will obtain the appropriate regulatory approvals necessary to begin selling
them or that any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may
market the product. The time required to obtain FDA and other approvals is unpredictable, but often can take years following the
commencement of clinical trials, depending upon the complexity of the product. Any analysis we perform of data from clinical activities
is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval.
Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from
the particular product.
We
also must comply with clinical trial and post-approval safety and adverse event reporting requirements. Adverse events related
to our products must be reported to the FDA in accordance with regulatory timelines based on their severity and expectedness.
Failure to make timely safety reports and to establish and maintain related records could result in withdrawal of marketing authorization.
We
may also become subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and
marketing authorization, pricing, and third-party reimbursement. The foreign regulatory approval process includes all of the risks
associated with the FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign
jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside of the United States.
We
have limited experience in managing communications with regulatory authorities, including filing investigational new drug applications,
filing new drug applications, submitting promotional materials, and generally directing the regulatory processes in all territories.
We
may be responsible for managing communications with regulatory authorities, including filing INDs, filing NDAs, submitting promotional
materials, and generally directing the regulatory processes in all territories. We have limited experience directing such activities
and may not be successful with our planned development strategies, on the planned timelines, or at all. Even if any of our products
are designated for “fast track” or “priority review” status or if we seek approval under accelerated approval
(Subpart H) regulations, such designation or approval pathway does not necessarily mean a faster development process or regulatory
review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Accelerated
development and approval procedures will only be available if the indications for which we are developing products remain unmet
medical needs and if our clinical trial results support use of surrogate endpoints, respectively. Even if these accelerated development
or approval mechanisms are available to us, depending on the results of clinical trials, we may elect to follow the more traditional
approval processes for strategic and marketing reasons, since drugs approved under accelerated approval procedures are more likely
to be subjected to post-approval requirements for clinical studies to provide confirmatory evidence that the drugs are safe and
effective. If we fail to conduct any such required post-approval studies or if the studies fail to verify that any of our products
are safe and effective, our FDA approval could be revoked. It can be difficult, time-consuming, and expensive to enroll patients
in such clinical trials because physicians and patients are less likely to participate in a clinical trial to receive a drug that
is already commercially available. Drugs approved under accelerated approval procedures also require regulatory pre-approval of
promotional materials that may delay or otherwise hinder commercialization efforts.
We
operate in highly competitive industries, and our failure to compete effectively could adversely affect our market share, financial
condition and growth prospects. If competitors are better able to develop and market products that are more effective, or gain
greater acceptance in the marketplace than our products, our commercial opportunities may be reduced or eliminated.
The
dietary supplement and pharmaceutical industries are constantly evolving, and scientific advances are expected to continue at
a rapid pace. This results in intense competition among companies operating in the industry. Other, larger companies may have,
or may be developing, products that compete with our products and may significantly limit the market acceptance of our products
or render them obsolete. Our technical and/or business competitors would include major pharmaceutical companies, biotechnology
companies, consumer health companies, universities, and nonprofit research institutions and foundations. Most of these competitors
have significantly greater research and development capabilities than we have, as well as substantial marketing, financial, and
managerial resources. ZanthoSyn®, our lead product, primarily competes against products that provide anti-inflammatory health
benefits. In addition, there are several other companies, both public and private, that service the same markets as we do, all
of which compete to some degree with us.
The
primary competitive factors facing us include safety, efficacy, price, quality, breadth of product line, manufacturing quality
and capacity, service, marketing, and distribution capabilities. Our current and future competitors may have greater resources,
more widely accepted and innovative products and stronger name recognition than we do. Our ability to compete is affected by our
ability to:
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develop
or acquire new products and innovative technologies;
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obtain
regulatory clearance and compliance for our products;
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manufacture
and sell our products cost-effectively;
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meet
all relevant quality standards for our products in their particular markets;
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respond
to competitive pressures specific to each of our geographic and product markets;
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protect
the proprietary technology of our products and avoid infringement of the proprietary rights of others;
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market
our products;
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attract
and retain skilled employees, including sales representatives;
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maintain
and establish distribution relationships; and
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engage
in acquisitions, joint ventures, or other collaborations.
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Competitors
could develop products that are more effective, achieve favorable reimbursement status from third-party payors, cost less, or
are ready for commercial introduction before our products. If our competitors are better able to develop and patent products earlier
than we can, or develop more effective and/or less expensive products that render our products obsolete or non-competitive, our
business will be harmed and our commercial opportunities will be reduced or eliminated.
In
addition, competitors and other parties may also seek to impact regulatory status of our products through the filing of citizen
petitions or other similar documents.
We
believe that the market in which we compete in is also highly sensitive to the introduction of new products, including various
prescription drugs, which may rapidly capture a significant share of the market. In the United States, we expect to also compete
for sales with heavily advertised national brands manufactured by large pharmaceutical, biotechnology, and consumer health companies,
as well as other retailers.
As
some products gain market acceptance, we may experience increased competition for those products as more participants enter the
market. Currently, we are not a manufacturer. To the extent that we engage third-party manufacturers or use strategic alliances
to produce our products, our manufacturing capabilities may not be adequate or sufficient to compete with large scale, direct,
or third-party manufacturers. Certain of our potential competitors are larger than us and have longer operating histories, customer
bases, greater brand recognition, and greater resources for marketing, advertising, and product promotion. They may be able to
secure inventory from vendors on more favorable terms, operate with a lower cost structure, or adopt more aggressive pricing policies.
In addition, our potential competitors may be more effective and efficient in introducing new products. We may not be able to
compete effectively, and our attempt to do so may require us to increase marketing and/or reduce our prices, which may result
in lower margins. Failure to effectively compete could adversely affect our market share, financial condition, and growth prospects.
Market
acceptance of ZanthoSyn® and any future products are vital to our future success.
The
commercial success of ZanthoSyn® and any future products is dependent upon the acceptance of such products. ZanthoSyn®
and any future products may not gain and maintain any significant degree of market acceptance among potential consumers, retailers,
healthcare providers, or acceptance by third-party payors, such as health insurance companies. The health applications for ZanthoSyn®
and any future products can also be addressed by other products or techniques. The medical community widely accepts alternative
treatments, and certain of these other treatments have a long history of use. We cannot be certain that our proposed products
and the procedures in which they are used will be able to replace those established treatments or that users will accept and utilize
our products or any other medical products that we may market.
Market
acceptance will depend upon numerous factors, many of which are not under our control, including:
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the
safety and efficacy of our products;
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favorable
regulatory approval and product labeling;
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the
availability, safety, efficacy, and ease of use of alternative products or treatments;
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our
ability to educate potential users on the advantages of our products;
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the
price of our products relative to alternative technologies; and
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the
availability of third-party reimbursement.
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If
our proposed products do not achieve significant market acceptance, our future revenues and profitability would be adversely affected.
The
pharmaceutical and dietary supplement industries are subject to extensive and complex healthcare regulation. Any determination
that we have violated federal or state laws applicable to us that regulate healthcare would have a material adverse effect on
our business, prospects, and financial condition.
Federal
and state laws regulating healthcare are extensive and complex. The laws applicable to our business are subject to evolving interpretations,
and therefore we cannot be sure that a review of our operations by federal or state courts or regulatory authorities will not
result in a determination that we have violated one or more provisions of federal or state law. Any such determination could have
a material adverse effect on our business, prospects, and financial condition.
If
we fail to comply with FDA regulations our business could suffer.
The
manufacture and marketing of pharmaceuticals and dietary supplements are subject to extensive regulation by the FDA and foreign
and state regulatory authorities. In the United States, pharmaceutical and dietary supplement companies such as ours must comply
with laws and regulations promulgated by the FDA. These laws and regulations require various authorizations prior to a product
being marketed in the United States. Manufacturing facilities and practices are also subject to FDA regulations. The FDA regulates
the clinical testing, manufacture, labeling, sale, distribution, and promotion of pharmaceuticals and dietary supplements in the
United States. Our failure to comply with regulatory requirements, including any future changes to such requirements, could have
a material adverse effect on our business, prospects, financial condition, and results of operations.
Even
after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements of registering
our facilities and listing our products with the FDA. We are subject to reporting regulations. These regulations require us to
report to the FDA if any of our products may have caused or contributed to a death or serious injury and such product or a similar
product that we market would likely cause or contribute to a death or serious injury. Unless an exemption applies, we must report
corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the product
or to remedy a violation of the Food, Drug, and Cosmetic Act. The FDA also requires that we maintain records of corrections or
removals, regardless of whether such corrections and removals are required to be reported to the FDA. In addition, the FDA closely
regulates promotion and advertising, and our promotional and advertising activities could come under scrutiny by the FDA.
The
FDA also requires that manufacturing be in compliance with its Quality System Regulation, or QSR. The QSR covers the methods and
documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage, and shipping of
our products. Our failure to maintain compliance with the QSR requirements could result in the shutdown of, or restrictions on,
our manufacturing operations, to the extent we have any, and the recall or seizure of our products, which would have a material
adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements,
we may have to qualify a new supplier and could experience manufacturing delays as a result.
The
FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions against
us, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. Violations
of regulatory requirements, at any stage, including after approval, may result in various adverse consequences, including the
delay by a regulatory agency in approving or refusal to approve a product, withdrawal or recall of an approved product from the
market, other voluntary agency-initiated action that could delay further development or marketing, as well as the imposition of
criminal penalties against the manufacturer and NDA holder.
The
extent of FDA regulations applicable to us, and whether our products are ultimately designated as drugs (including active pharmaceutical
ingredients) or dietary supplements (including dietary ingredients), will depend upon how our products are ultimately commercialized.
Furthermore, our products may be commercialized by us or by other parties through licensing arrangements, joint ventures, or other
alliances, and our burden of complying with any regulations applicable to our products will depend upon the nature and extent
of any relationships with such partners. While dietary supplements are not as extensively regulated as pharmaceuticals, the extent
of any regulations to which we may be subject will depend upon the specific products we ultimately produce.
We
may seek orphan drug designation for our products, but any orphan drug designations we receive may not confer marketing exclusivity
or other expected benefits.
Under
the Orphan Drug Act of 1983 (the “
Orphan Drug Act
”), the FDA may grant orphan drug designation to a drug intended
to treat a rare disease or condition that (i) affects less than 200,000 persons in the United States, or (ii) affects more than
200,000 in the United States and for which there is no reasonable expectation that the cost of developing and making available
in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug. The
Orphan Drug Act mainly provides incentives intended to make the development of orphan drugs financially viable but does not provide
for separate regulatory standards for orphan drugs. Drugs that receive an orphan drug designation do not require prescription
drug user fees at the time of marketing application, may qualify the drug development sponsor for certain tax credits, and can
be marketed without generic competition for seven years.
We
may seek orphan drug designation for any products that we believe may qualify for orphan drug designation; however, there can
be no assurance that we will request an orphan drug designation for any product, or if requested, that we will receive such orphan
drug designation. If we are unable to secure orphan drug designation, our regulatory and commercial prospects may be negatively
impacted. Even if we obtain orphan drug designation for a product, we may not be able to obtain marketing approval or maintain
orphan drug exclusivity for that product. We may not be the first to obtain marketing approval of any product for which we have
obtained orphan drug designation for the orphan-designated indication due to the uncertainties associated with developing pharmaceuticals.
In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than
the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective
or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.
Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from
competition because different drugs with different active moieties may be approved for the same condition. Even after an orphan
drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA
concludes that the later drug is clinically superior in that it is shown to be safer, more effective, or makes a major contribution
to patient care, or the manufacturer of the product with orphan exclusivity is unable to maintain sufficient product quantity.
Orphan drug designation may not shorten the development time or regulatory review time of a drug or give the drug any advantage
in the regulatory review or approval process, nor does it prevent competitors from obtaining approval of the same drug for indications
other than those in which we have been granted orphan drug designation.
Healthcare
and insurance legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may
obtain.
The
United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare
system that could prevent or delay marketing approval of our products, restrict or regulate post-approval activities, and affect
our ability to profitably sell any product for which we obtain marketing approval.
In
the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act,
changed the way Medicare covers and pays for pharmaceuticals. The legislation expanded Medicare coverage for drug purchases by
the elderly by establishing Medicare Part D and introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs under Medicare Part B. In addition, this legislation provided authority for limiting the number of drugs that Medicare will
cover in any therapeutic class under the new Medicare Part D program. Cost reduction initiatives and other provisions of this
legislation could decrease the coverage and reimbursement rate that we receive for any of our approved products. While the Medicare
Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy
and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from
the Medicare Modernization Act may result in a similar reduction in payments from private payors.
In
March 2010, former President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act of 2010, or, collectively, the Affordable Care Act, a law intended to broaden access to health
insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new
transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical
device manufacturers, and impose additional health policy reforms. Among other things, the Affordable Care Act expanded manufacturers’
rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs, effective
the first quarter of 2010, and revising the definition of “average manufacturer price,” or AMP, for reporting purposes,
which could increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also extended
Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an
alternative rebate formula for certain new formulations of certain existing products that is intended to increase the amount of
rebates due on those drugs.
The
Centers for Medicare and Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid
drug rebates to the utilization that occurs in the United States territories, such as Puerto Rico and the Virgin Islands. Also
effective in 2010, the Affordable Care Act expanded the types of entities eligible to receive discounted 340B pricing, although,
with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B
pricing on orphan drugs. In addition, because 340B pricing is determined based on AMP and Medicaid drug rebate data, the revisions
to the Medicaid rebate formula and AMP definition described above could cause the required 340B discounts to increase. Furthermore,
as of 2011, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drugs and
requires manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare
Part D coverage gap, referred to as the “donut hole.” Substantial new provisions affecting compliance have also been
enacted, which may affect our business practices with healthcare practitioners. Notably, a significant number of provisions are
not yet, or have only recently become, effective. Although it is too early to determine the full effect of the Affordable Care
Act, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program,
and may also increase our regulatory burdens and operating costs.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011,
the former President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee
on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction
did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s
automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up
to 2% per fiscal year.
We
expect that the Affordable Care Act, as well as other healthcare reform measures that have and may be adopted in the future, may
result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product,
and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result
in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms
may prevent us from being able to generate revenue, attain profitability or commercialize our products.
The
impact of continued health care reform efforts with respect to the Affordable Care Act is currently unknown, and may adversely
affect our business model.
Since
its enactment, there have been judicial and Congressional challenges to numerous provisions of the Affordable Care Act. In January
2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation
of legislation that would repeal portions of the Affordable Care Act. The Budget Resolution is not a law, but it is widely viewed
as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. On January 20,
2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable
Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that
would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of
pharmaceuticals or medical devices. Additionally, on October 12, 2017, President Trump issued another executive order requiring
the Secretaries of the Departments of Health and Human Services (“
HHS
”), Labor, and the Treasury to consider
proposing regulations or revising existing guidance to allow more employers to form association health plans that would be allowed
to provide coverage across state lines, increase the availability of short-term, limited duration health insurance plans, which
are generally not subject to the requirements of the Affordable Care Act, and increase the availability and permitted use of health
reimbursement arrangements. On October 13, 2017, the Department of Justice announced that HHS was immediately stopping its cost
sharing reduction payments to insurance companies based on the determination that those payments had not been appropriated by
Congress. Furthermore, on December 22, 2017, President Trump signed tax reform legislation into law that, in addition to overhauling
the federal tax system, also, effective as of January 1, 2019, repeals the penalties associated with the individual mandate. Congress
or the President of the United States may also consider subsequent legislation or executive action to replace or eliminate elements
of the Affordable Care Act. We will continue to evaluate the effect that the Affordable Care Act and any future measures to modify,
repeal or replace the Affordable Care Act have on our business. We are not able to provide any assurance that the continued healthcare
reform debate will not result in legislation, regulation, or executive action by the President of the United States that is adverse
to our business.
We
cannot predict the effect the recent U.S. tax reform will have on us.
On
December 22, 2017, President Trump signed the Tax Act into law, resulting in sweeping changes to the tax code. The Tax Act,
inter
alia,
reduced the corporate tax rate to 21%, reduced interest expense deductibility, increased capitalization amounts for
deferred acquisition costs, eliminated the corporate alternative minimum tax, and reduced the dividend received deduction. Most
of the changes in the Tax Act are effective as of January 1, 2018. We are currently unable to predict whether this legislation
would have a cumulative positive or negative impact on us.
We
rely on third parties to supply and manufacture our products. If these third parties do not perform as expected or if our agreements
with them are terminated, our business, prospects, financial condition, and results of operations would be materially adversely
affected.
We
outsource our manufacturing to third parties. Our reliance on contract manufacturers and suppliers exposes us to risks, including
the following:
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We
rely on our suppliers and manufacturers to provide us with the needed products or components in a timely fashion and of an
acceptable quality. An uncorrected defect or supplier’s variation in a component could harm our or our third-party manufacturers’
ability to manufacture, and our ability to sell, products and may subject us to product liability claims.
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The
facilities of our third-party manufacturers must satisfy production and quality standards set by applicable regulatory authorities.
Regulatory authorities periodically inspect manufacturing facilities to determine compliance with these standards. If we or
our third-party manufacturers fail to satisfy these requirements, the facilities could be shut down.
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These
manufacturing operations could also be disrupted or delayed by fire, earthquake or other natural disaster, a work stoppage
or other labor-related disruption, failure in supply or other logistical channels, electrical outages, or other reasons. If
there was any such disruption to any of these manufacturing facilities, our third-party manufacturers would potentially be
unable to manufacture our products.
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A
third-party manufacturer or supplier could decide to terminate our manufacturing or supply arrangement, including due to a
disagreement between us and such third-party manufacturer, if the third-party manufacturer determines not to further manufacture
our products, or if we fail to comply with our obligations under such arrangements.
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If
any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have
to share, the intellectual property rights to the innovation.
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We
currently rely on a limited number of suppliers to provide key components for our products. If these or other suppliers become
unable to provide components in the volumes needed or at an acceptable price or quality, we would have to identify and qualify
acceptable replacements from alternative suppliers. We may experience stoppages in the future. We may not be able to find a sufficient
alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and
supply our products could be impaired.
To
the extent we are able to identify alternative suppliers, qualifying suppliers is a lengthy process. There are a limited number
of manufacturers and suppliers that may satisfy applicable requirements. In addition, FDA regulations may require additional testing
of any components from new suppliers prior to our use of these materials or components, which testing could delay or prevent the
supply of components. Moreover, a new manufacturer would have to be educated in, or develop substantially equivalent processes
for, production of our products, which could take a significant period of time.
Each
of these risks could delay the development or commercialization of our products or result in higher costs or deprive us of potential
product revenues. Furthermore, delays or interruptions in the manufacturing process could limit or curtail our ability to meet
demand for our products and/or make commercial sales, unless and until the manufacturing capability at the facilities are restored
and re-qualified or alternative manufacturing facilities are developed or brought on-line and “scaled up.” Any such
delay or interruption could have a material adverse effect on our business, prospects, financial condition, and results of operations.
An
unexpected interruption or shortage in the supply or significant increase in the cost of components could limit our ability to
manufacture any products, which could reduce our sales and margins.
To
the extent we engage in relationships with contract manufacturers in the future, an unexpected interruption of supply or a significant
increase in the cost of components, whether to us or to our contract manufacturers for any reason, such as regulatory requirements,
import restrictions, loss of certifications, disruption of distribution channels as a result of weather, terrorism or acts of
war, or other events, could result in significant cost increases and/or shortages of our products. Our inability to obtain sufficient
amounts of our products or to pass through higher cost of products we offer could have a material adverse effect on our business,
financial condition, or results of operations.
We
have limited experience in marketing our products.
We
have undertaken limited marketing efforts for ZanthoSyn® and any future products. Our sales and marketing teams compete against
the experienced and well-funded sales organizations of competitors. Our future revenues and ability to achieve profitability will
depend largely on the effectiveness of our sales and marketing team, and we will face significant challenges and risks related
to marketing our services, including, but not limited to, the following:
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the
ability of sales representatives to obtain access to or persuade adequate numbers of healthcare providers to recommend and/or
purchase and/or use our products;
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the
ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
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the
costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
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assuring
compliance with government regulatory requirements affecting the healthcare industry in general and our products in particular.
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We
may seek to establish a network of distributors in selected markets to market, sell, and distribute our products. If we fail to
select or use appropriate distributors, or if the sales and marketing strategies of such distributors prove ineffective in generating
sales of our products, our future revenues would be adversely affected, and we might never become profitable.
We
may rely on third-party distributors for sales, marketing, and distribution activities.
We
may rely on third-party distributors to sell, market, and distribute ZanthoSyn® and any future products. Because we may rely
on third-party distributors for sales, marketing, and distribution activities, we may be subject to a number of risks associated
with our dependence on these third-party distributors, including:
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lack
of day-to-day control over the activities of third-party distributors;
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third-party
distributors may not fulfill their obligations to us or otherwise meet our expectations;
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third-party
distributors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements
in a manner unfavorable to us for reasons outside of our control; and
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disagreements
with our distributors could require or result in costly and time-consuming litigation or arbitration.
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If
we fail to establish and maintain satisfactory relationships with third-party distributors, we may be unable to sell, market,
and distribute our products, our future revenues and market share may not grow as anticipated, and we could be subject to unexpected
costs which would harm our results of operations and financial condition. There is no assurance that our sales through GNC stores
will continue on terms that are favorable to us or at all.
The
loss of our largest customer would substantially reduce revenues.
Our
customers are material to our success. If we are unable to maintain good relationships with our existing customers, our business
could suffer. We currently sell ZanthoSyn® to GNC under an exclusive sales contract for the “brick and mortar”
retail channel in the United States. GNC has the ability to terminate the exclusive nature of this agreement. The loss of GNC
as the exclusive seller or the reduction of increasing sales through GNC would have a material adverse effect on the Company.
Commercialization
of our products requires sophisticated sales and marketing teams.
We
have limited prior experience with commercializing our products. To successfully continue to commercialize our dietary
supplement products and to commercialize any pharmaceutical products, we need to establish and maintain sophisticated
sales and marketing teams and/or utilize the resources of any licensee, contractor, or other third party. While we intend
to use current Company employees and service providers to lead our marketing efforts, we may choose to expand our marketing and
sales team. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need
to undergo extensive training. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives,
or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and
productive sales personnel, our ability to commercialize our products and to generate revenues will be impaired, and our
business will be harmed.
We
may not be able to establish or maintain the third-party relationships that are necessary to develop or potentially commercialize
some or all of our products.
We
expect to depend on collaborators, partners, licensees, contract research organizations, contract manufacturing organizations,
clinical research organizations, and other third parties to support our discovery efforts, to manufacture our products and to
conduct clinical trials for some or all of our products. We cannot guarantee that we will be able to successfully negotiate agreements
for or maintain relationships with collaborators, partners, licensees, contractors, clinical investigators, vendors, and other
third parties on favorable terms, if at all. Our ability to successfully negotiate such agreements will depend on, among other
things, potential partners’ evaluation of the superiority of our technology over competing technologies, the quality of
the preclinical and clinical data that we have generated and the perceived risks specific to developing our products. If we are
unable to obtain or maintain these agreements, we may not be able to develop, manufacture, obtain regulatory approvals for, or
commercialize our products. We cannot necessarily control the amount or timing of resources that our contract partners will devote
to our research and development programs, products or potential products, and we cannot guarantee that these parties will fulfill
their obligations to us under these arrangements in a timely fashion. We may not be able to readily terminate any such agreements
with contract partners even if such contract partners do not fulfill their obligations to us. We may experience stoppages in the
future. We may not be able to find a sufficient alternative provider in a reasonable time period, or on commercially reasonable
terms, if at all, and our ability to produce and supply our products could be impaired.
We
expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability.
We
expend substantial funds to develop our products, and additional substantial funds will be required for further research and development,
including preclinical and clinical testing, and to manufacture and market any products that are approved for commercial sale.
Because the successful development of our products is uncertain, we are unable to precisely estimate the actual funds we will
require to develop and potentially commercialize them. In addition, we may not be able to generate enough revenue, even if we
are able to commercialize any of our products, to become profitable.
We
may be subject to product liability claims. Our insurance may not be sufficient to cover these claims, or we may be required to
recall our products.
Our
business is to develop and commercialize, among other things, pharmaceuticals and dietary supplements. As a result, we will face
an inherent risk of product liability claims. The pharmaceutical and dietary supplement industries have been historically litigious.
Since our products are to be used in the human body, manufacturing errors, design defects, or packaging defects could result in
injury or death to the patient or consumer. This could result in a recall of one or more of our products and substantial monetary
damages. Any product liability claim brought against us, with or without merit, could result in a diversion of our resources,
an increase in our product liability insurance premiums, and/or an inability to secure coverage in the future. We may also have
to pay any amount awarded by a court in excess of our policy limits. In addition, any recall of our products, whether initiated
by us or by a regulatory authority, may result in adverse publicity for us that could have a material adverse effect on our business,
prospects, financial condition, and results of operations. Our product liability insurance policies have various exclusions; therefore,
we may be subject to a product liability claim or recall for which we have no insurance coverage. In such a case, we may have
to pay the entire amount of the award or costs of the recall. Finally, product liability insurance supplements or renewals may
be expensive and may not be available in the future on acceptable terms, or at all.
If
we experience product recalls, we may incur significant and unexpected costs and damage to our reputation and, therefore, could
have a material adverse effect on our business, financial condition, or results of operations.
We
may be subject to product recalls, withdrawals, or seizures if any of our products are believed to cause injury or illness or
if we are alleged to have violated governmental regulations in the manufacture, labeling, promotion, sale, or distribution of
our products. A recall, withdrawal, or seizure of any of our products could materially and adversely affect consumer confidence
in our brands and lead to decreased demand for our products. In addition, a recall, withdrawal, or seizure of any of our products
would require significant management attention, would likely result in substantial and unexpected expenditures and could materially
and adversely affect our business, financial condition, or results of operations.
If
we are unable to obtain and maintain protection of our intellectual property, the value of our products may be adversely affected.
Our
business is dependent in part upon our ability to use intellectual property rights to protect our products from competition. To
protect our products, we rely on a combination of patent and other intellectual property laws, employment, confidentiality, and
invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual
provisions with our partners, licensors, and other third parties. These methods, however, afford us only limited protection against
competition from other products.
We
attempt to protect our intellectual property position, in part, by filing patent applications and obtaining patents related to
our proprietary technology, inventions, and improvements that are important to our business. However, our patent position is not
likely by itself to prevent others from commercializing products that compete directly with our products. Moreover, we do not
have patent protection for certain components of our products and our patent applications can be challenged. In addition, we may
fail to receive any patent for which we have applied, and any patent owned by us or issued to us could be challenged, invalidated,
or held to be unenforceable. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability of a patent,
we would lose at least part, and perhaps all, of the patent protection on a product. Even if a defendant does not prevail on a
legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability
to enforce such claims against the defendant and others.
We
also note that any patent granted may not provide a competitive advantage to us. Our competitors may independently develop technologies
that are substantially similar or superior to our technologies. Further, third parties may design around our patented or proprietary
products and technologies.
We
rely on certain trade secrets and we may not be able to adequately protect our trade secrets even with contracts with our personnel
and third parties. Also, any third party could independently develop and have the right to use, our trade secret, know-how, and
other proprietary information. If we are unable to protect our intellectual property rights, our business, prospects, financial
condition, and results of operations could suffer materially.
Our
ability to market our products may be impaired by the intellectual property rights of third parties.
Our
success depends in part on our products not infringing on the patents and proprietary rights of other parties. For instance, in
the United States, patent applications filed in recent years are confidential for 18 months, while older applications are not
published until the patent issues. As a result, there may be patents and patent applications of which we are unaware, and avoiding
patent infringement may be difficult.
Our
industry is characterized by a large number of patents, patent applications, and frequent litigation based on allegations of patent
infringement. Competitors may own patents or proprietary rights, or have filed patent applications, related to products that are
similar to ours. We may not be aware of all of the patents and pending applications potentially adverse to our interests that
may have been issued to others. Moreover, since there may be unpublished patent applications that could result in patents with
claims relating to our products, we cannot be sure that our current products will not infringe any patents that might be issued
or filed in the future. Based on the litigious nature of our industry and the fact that we may pose a competitive threat to some
companies who own or control various patents, we believe it is possible that one or more third parties may assert a patent infringement
claim seeking damages or enjoining us from the manufacture or marketing of one or more of our products. Such a lawsuit may have
already been filed against us without our knowledge or may be filed in the future. If any future claim of infringement against
us was successful, we may be required to pay substantial damages, cease the infringing activity, or obtain the requisite licenses
or rights to use the technology, which may not be available to us on acceptable terms, if at all. Even if we were able to obtain
rights to a third party’s intellectual property rights, these rights may be non-exclusive, thereby giving our competitors
potential access to the same rights and weakening our market position. Moreover, regardless of the outcome, patent litigation
could significantly disrupt our business, divert our management’s attention and consume our financial resources. We cannot
predict if or when any third-party patent holder will file suit for patent infringement.
We
may be involved in lawsuits or proceedings to protect or enforce our intellectual property rights or to defend against infringement
claims, which could be expensive and time consuming.
Litigation
may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of
the proprietary rights of others. Interference proceedings conducted by a patent and trademark office may be necessary to determine
the priority of inventions with respect to our patent applications. Litigation or interference proceedings, including the defense
against infringement or invalidity claims, would be expensive and could result in substantial costs and diversion of resources
and management attention. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or
is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not
cover the technology or the product. An adverse determination of any litigation or defense proceedings could put one or more of
our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
In addition, we may be enjoined from marketing one or more of our products if a court finds that such products infringe the intellectual
property rights of a third party.
During
litigation, we may not be able to prevent the confidentiality of certain of our proprietary rights because of the substantial
amount of discovery required in connection with intellectual property litigation. In addition, during the course of litigation,
there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If investors
or customers perceive these results to be negative, it could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
Our
insurance liability coverage is limited and may not be adequate to cover potential losses.
In
the ordinary course of business, we purchase insurance coverage (e.g., liability coverage) to protect us against claims made by
third parties and employees for product liability, property damage, or personal injuries. However, the protection
provided by such insurance is limited in significant respects and, in some instances, we have no coverage and certain of our insurance
policies have substantial “deductibles” or have limits on the maximum amounts that may be recovered. Insurers also
have exclusions or limitations of coverage for claims related to certain perils including, but not limited to, product
liability, mold, and terrorism. If a series of losses occurred, such as from a series of lawsuits, each of which
were subject to the deductible amount, or if the maximum limit of the available insurance was substantially exceeded, we could
incur losses in amounts that would have a material adverse effect on our results of operations and financial condition.
Our
operating results may fluctuate, which may result in volatility of our share price.
Our
operating results, including components of operating results, can be expected to fluctuate from time to time in the future. Some
of the factors that may cause these fluctuations include:
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impact of acquisitions;
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market
acceptance of our existing products, as well as products in development;
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the
timing of regulatory approvals;
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our
ability or the ability of third-party distributors to sell, market, and distribute our products;
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our
ability or the ability of our contract manufacturers to manufacture our products efficiently; and
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timing of our research and development expenditures.
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If
we are unable to manage our expected growth, our future revenue and operating results may be adversely affected.
Our
anticipated growth is expected to place a significant strain on our management, operational and financial resources. Our current
and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth. To manage our growth,
we will be required to improve existing, and implement new, operational and financial systems, procedures, and controls, and to
expand, train, and manage our growing employee base. We expect that we may need to increase our management personnel to oversee
our expanding operations. Recruiting and retaining qualified individuals can be difficult. If we are unable to manage our growth
effectively, or are unsuccessful in recruiting qualified management personnel, our business, prospects, financial condition, and
results of operations could be harmed.
We
are highly dependent on our senior management, and if we are not able to retain them or to recruit and retain additional qualified
personnel, our business will suffer.
We
are highly dependent upon our senior management, including David G. Watumull, our President and Chief Executive Officer, David
M. Watumull, our Chief Operating Officer, Gilbert M. Rishton, our Chief Science Officer, Paresh N. Soni, our Chief Clinical and
Regulatory Strategist, Timothy J. King, our Vice President, Research, Gilbert Shin, our Vice President, Retail Sales and Marketing,
and John B. Russell, our Chief Financial Officer. The loss of services of David G. Watumull or any other member of our senior
management could have a material adverse effect on our business, prospects, financial condition, and results of operations. We
carry $1 million “key person” life insurance policies on David G. Watumull and David M. Watumull but do not carry
similar insurance for any of our other senior executives.
We
may choose to increase our management personnel. For example, we will need to obtain certain additional functional capability,
including regulatory, sales, quality assurance and control, either by hiring additional personnel or by outsourcing these functions
to qualified third parties. We may not be able to engage these third parties on terms favorable to us. Also, we may not be able
to attract and retain qualified personnel on acceptable terms given the competition for such personnel among companies that operate
in our markets. The trend in the pharmaceutical industry of requiring sales and other personnel to enter into non-competition
agreements prior to starting employment exacerbates this problem, since personnel who have made such a commitment to their current
employers are more difficult to recruit. If we fail to identify, attract, retain, and motivate these highly skilled personnel,
or if we lose current employees, our business, prospects, financial conditions, and results of operations could be adversely affected.
Our
ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available
on terms favorable to us.
The
ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part
on our cash flow from operations and the availability of equity and debt financing. We cannot assure you that our cash flow from
operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms or at all to implement
our growth strategy. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans,
take advantage of business opportunities, or respond to competitive pressures, any of which could harm our business. Additionally,
if adequate additional financing is not available on acceptable terms, we may not be able to continue our business operations.
Any additional capital, investment or financing of our business may result in dilution of our stockholders or be on terms and
conditions that impair our ability to profitably conduct our business.
You
may have limited access to information regarding our Company because we are a limited reporting company exempt from many regulatory
requirements.
As
a filer subject to Section 15(d) of the Exchange Act, the Company is not required to prepare proxy or information statements;
our common stock is not subject to the protection of the going private regulations; the Company is subject to only limited portions
of the tender offer rules; our officers, directors, and more than ten (10%) percent stockholders are not required to file beneficial
ownership reports about their holdings in our Company; such persons are not subject to the short-swing profit recovery provisions
of the Exchange Act; and stockholders of more than five percent (5%) are not required to report information about their ownership
positions in the securities. As a result, investors will have reduced visibility as to the Company and its financial condition.
Risks
Related to Ownership of Our Common Stock
Our
common stock has a limited trading market, which could affect your ability to sell shares of our common stock and the price you
may receive for our common stock.
Our
common stock is currently traded in the over-the-counter market and “bid” and “asked” quotations regularly
appear on the OTCQB maintained by OTC Markets, Inc. under the symbol “CDXI”. There is only limited trading activity
in our securities. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot
predict the extent to which investors’ interest in our common stock will provide an active and liquid trading market, which
could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital
in the future. Due to our limited public float, we may be vulnerable to investors taking a “short position” in our
common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility to our
trading market. The volatility of the market for our common stock could have a material adverse effect on our business, results
of operations, and financial condition. There cannot be any guarantee that an active trading market for our securities will develop
or, if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing
their entire investment in our common stock.
We
may voluntarily file for deregistration of our common stock with the Commission.
Compliance
with the periodic reporting requirements required by the Securities and Exchange Commission (the “
Commission
”
or “
SEC
”) consumes a considerable amount of both internal, as well external, resources and represents a significant
cost for us. Our senior management team has relatively limited experience managing a company subject to the reporting requirements
of the Exchange Act, and the regulations promulgated thereunder. Our management will be required to design and implement appropriate
programs and policies in responding to increased legal, regulatory compliance, and reporting requirements, and any failure to
do so could lead to the imposition of fines and penalties and harm our business. In addition, if we are unable to continue to
devote adequate funding and the resources needed to maintain such compliance, while continuing our operations, we may be in non-compliance
with applicable SEC rules or the securities laws, and be delisted from the OTCQB or other market we may be listed on, which would
result in a decrease in or absence of liquidity in our common stock, and potentially subject us and our officers and directors
to civil, criminal, and/or administrative proceedings and cause us to voluntarily file for deregistration of our common stock
with the Commission.
Future
sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds
in future securities offerings.
We
intend to raise additional capital through the sale of our securities. Future sales of a substantial number of shares of our common
stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price
of our common stock and could make it more difficult for us to raise funds in the future through the sale of our securities.
We
may issue shares of preferred stock that subordinate your rights and dilute your equity interests.
We
believe that for us to successfully execute our business strategy we will need to raise investment capital and it may be preferable
or necessary to issue preferred stock to investors. Preferred stock may grant the holders certain preferential rights in voting,
dividends, liquidation, or other rights in preference over a company’s common stock.
The
issuance by us of preferred stock could dilute both the equity interests and the earnings per share of existing holders of our
common stock. Such dilution may be substantial, depending upon the number of shares issued. The newly authorized shares of preferred
stock could also have voting rights superior to our common stock, and in such event, would have a dilutive effect on the voting
power of our existing stockholders.
Any
issuance of preferred stock with voting rights could, under certain circumstances, have the effect of delaying or preventing a
change in control of us by increasing the number of outstanding shares entitled to vote and by increasing the number of votes
required to approve a change in control of us. Shares of voting or convertible preferred stock could be issued, or rights to purchase
such shares could be issued, to render more difficult or discourage an attempt to obtain control of us by means of a tender offer,
proxy contest, merger or otherwise. Such issuances could therefore deprive our stockholders of benefits that could result from
such an attempt, such as the realization of a premium over the market price that such an attempt could cause. Moreover, the issuance
of such shares of preferred stock to persons friendly to our Board of Directors could make it more difficult to remove incumbent
managers and directors from office even if such change were to be favorable to stockholders generally.
The
market price of our common stock may be volatile and may be affected by market conditions beyond our control.
The
market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, our shares of common stock are sporadically and thinly traded. As a
consequence of this lack of 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, as compared to
a seasoned issuer which could better absorb those sales without adverse impact on its share price. Second, we are a speculative
or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future
market acceptance for our potential products. As a consequence of this enhanced risk, more risk-averse 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 seasoned issuer. 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 stock will be at any time,
including as to whether our common stock will sustain its current market price, or as to what effect the sale of shares or the
availability of common stock for sale at any time will have on the prevailing market price.
The
market price of our common stock is subject to significant fluctuations in response to, among other factors:
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changes
in our financial performance or a change in financial estimates or recommendations by securities analysts;
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announcements
of innovations or new products or services by us or our competitors;
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the
emergence of new competitors or success of our existing competitors;
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operating
and market price performance of other companies that investors deem comparable;
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changes
in our Board of Directors or management;
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sales
or purchases of our common stock by insiders;
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commencement
of, or involvement in, litigation;
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changes
in governmental regulations; and
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general
economic conditions and slow or negative growth of related markets.
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In
addition, if the market for stock in our industry, or the stock market in general, experiences a loss of investor confidence,
the market price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations.
If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that, even
if unsuccessful, could be costly to defend and distract our Board of Directors and management.
We
do not intend to pay dividends for the foreseeable future, and you must rely on increases in the market prices of our common stock
for returns on your investment.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common
stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors
and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable
law and other factors our Board of Directors deems relevant.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The
Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has
a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions.
Our common stock is a “penny stock”, and we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule.
This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make
a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior
to sale. As a result, this rule affects the ability of broker-dealers to sell our securities and affects the ability of purchasers
to sell any of our securities in the secondary market.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made
about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
There
can be no assurance that our shares of common stock will qualify for exemption from the Penny Stock Rule. In any event, even if
our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which
gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission
finds that such a restriction would be in the public interest.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“
FINRA
”)
has adopted similar rules that may also limit a stockholder’s ability to buy and sell our common stock. FINRA rules require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for such customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was
enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or 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 circumstances could cause
us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal
year following the fifth anniversary of the first sale of our common stock pursuant to an effective registration statement,
(2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, (3) the date on which
we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates
exceeds $700.0 million as of the prior June 30th, and (4) 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
because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may suffer or 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 elected to use the extended transition
period for complying with new or revised accounting standards that have different effective dates for public and private companies
until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of
the extended transition period under the JOBS Act. We will no longer be an emerging growth company from and after December
31, 2018, although we will continue to be a smaller reporting company.
Provisions
in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts
by our stockholders to replace or remove our current management.
Provisions
in our corporate charter and our bylaws may discourage, delay, or prevent a merger, acquisition, or other change in control of
us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for
their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our
common stock, thereby depressing the market price of our common stock. 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
members of our board of directors. Because our board of directors is responsible for appointing the members of our management
team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
Among others, these provisions include the following:
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our
board of directors will have the right to elect directors to fill a vacancy created by the expansion of our board of directors
or the resignation, death, or removal of a director, which will prevent stockholders from being able to fill vacancies on
our board of directors;
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our
stockholders will not be able to act by written consent or call special stockholders’ meetings; as a result, a holder,
or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’
meetings or special stockholders’ meetings called by our board of directors, the chairman of our board, the chief executive
officer, or the president;
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our
certificate of incorporation will prohibit cumulative voting in the election of directors, which limits the ability of minority
stockholders to elect director candidates;
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our
stockholders will be required to provide advance notice and additional disclosures in order to nominate individuals for election
to our board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage
or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors
or otherwise attempting to obtain control of our company; and
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our
board of directors will be able to issue, without stockholder approval, shares of undesignated preferred stock, which makes
it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede
the success of any attempt to acquire us.
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Moreover,
because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation
Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for
a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting
stock, unless the merger or combination is approved in a prescribed manner.
Risks
Related to Market Conditions
The
sale of material amounts of common stock could encourage short sales by third parties and further depress the price of our common
stock. As a result, you may lose all or part of your investment.
The
significant downward pressure on our common stock price caused by the sale of a significant number of shares could cause our common
stock price to decline, thus allowing short sellers of our common stock an opportunity to take advantage of any decrease in the
value of our common stock. The presence of short sellers in our common stock may further depress the price of our common stock.