Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405) during the precedent 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company and emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of October 31, 2019: $44,427,991.
As of August 11, 2020, the registrant
had 2,333,810,405 outstanding shares of common stock.
This Report on Form 10-K (“Report”)
includes “forward-looking statements” within the meaning of the federal securities laws. All statements other than
statements of historical fact are “forward-looking statements” for purposes of this Report, including any projections
of earnings, revenue or other financial items, any statements regarding the plans and objectives of management for future operations,
any statements concerning proposed new products or services, any statements regarding future economic conditions or performance,
any statements regarding expected benefits from any transactions and any statements of assumptions underlying any of the foregoing.
In some cases, forward-looking statements can be identified by use of terminology such as “may,” “will,”
“should,” “believes,” “intends,” “expects,” “plans,” “anticipates,”
“estimates,” “goal,” “aim,” “potential” or “continue,” or the negative
thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements
contained in this Report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements
will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements.
Thus, investors should refer to and carefully review information in future documents we file with the United States Securities
and Exchange Commission (“Commission”). Our future financial condition and results of operations, as well as any forward-looking
statements, are subject to inherent risk and uncertainties, including, but not limited to, the risk factors set forth in “Part
I, Item 1A – Risk Factors” set forth in this Report and for the reasons described elsewhere in this Report. Among others,
these include our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; whether
the United States Food and Drug Administration (“FDA”) approves our Investigational New Drug Application (“IND”)
after it has been submitted to, and reviewed by the FDA so that we can commence our planned clinical trial involving locally advanced,
inoperable, non-metastatic pancreatic cancer (“LAPC”); the success and timing of our preclinical studies and clinical
trials; the potential that results of preclinical studies and clinical trials may indicate that any of our technologies and product
candidates are unsafe or ineffective; our dependence on third parties in the conduct of our preclinical studies and clinical trials;
the difficulties and expenses associated with obtaining and maintaining regulatory approval of our product candidates; the material
adverse impact that the coronavirus pandemic may have on our business, including our planned clinical trial involving LAPC, which
could materially affect our operations as well as the business or operations of third parties with whom we conduct business; and
whether the FDA will approve our product candidates after our clinical trials are completed, assuming the FDA allows our clinical
trials to proceed after review of our proposed IND submission for LAPC. All forward- looking statements and reasons why results
may differ included in this Report are made as of the date hereof, and we do not intend to update any forward-looking statements
except as required by law or applicable regulations. Except where the context otherwise requires, in this Report, the “Company,”
“we,” “us” and “our” refer to PharmaCyte Biotech, Inc., a Nevada corporation, and, where appropriate,
its subsidiaries.
PART I
ITEM 1. BUSINESS.
Overview
We are a biotechnology company focused
on developing cellular therapies for cancer and diabetes based upon a proprietary cellulose-based live cell encapsulation technology
known as “Cell-in-a-Box®.” The Cell-in-a-Box® technology is intended to be used as a
platform upon which therapies for several types of cancer, including locally advanced, inoperable, non-metastatic pancreatic cancer
(“LAPC”), and Type 1 and insulin dependent Type 2 diabetes will be developed.
We are developing therapies for pancreatic
and other solid cancerous tumors by using genetically engineered live human cells that we believe are capable of converting a cancer
prodrug into its cancer-killing form, encapsulating those cells using the Cell-in-a-Box® technology and placing
those capsules in the body as close as possible to the tumor. In this way, we believe that when the cancer prodrug is administered
to a patient with a particular type of cancer that may be affected by the prodrug, the killing of the patient’s tumor may
be optimized. We anticipate that shortly after the filing of this Report we will file an Investigational New Drug Application (“IND”)
with the United States Food and Drug Administration (“FDA”) to allow us to commence a human clinical trial involving
LAPC although no assurance as to the timing can be given.
We are also examining ways to exploit the
benefits of the Cell-in-a-Box® technology to develop therapies for cancer that involve prodrugs based upon certain
constituents of the Cannabis plant; these constituents are of the class of compounds known as “cannabinoids”.
Until the FDA allows us to commence the clinical trial involving LAPC described in our IND to be filed with the FDA, we are not
spending any further resources developing this program.
In addition, we are developing a therapy
to delay the production and accumulation of malignant ascites fluid that results from many types of abdominal cancerous tumors.
Malignant ascites fluid is secreted by abdominal cancerous tumors into the abdomen after the tumors have reached a certain stage
of growth. This fluid contains cancer cells that can seed and form new tumors throughout the abdomen. This fluid accumulates in
the abdominal cavity, causing swelling of the abdomen, severe breathing difficulties and extreme pain. We are using our therapy
for pancreatic cancer to determine if it can prevent or delay the production and accumulation of malignant ascites fluid. As with
our Cannabis program, until the FDA allows us to commence the clinical trial involving LAPC described in our IND to be filed
with the FDA, we are not spending any further resources developing this program.
We are also developing a therapy for Type
1 diabetes and insulin-dependent Type 2 diabetes. Our diabetes therapy consists of encapsulated genetically modified human liver
cells and insulin-producing stem cells. The encapsulation for each type of cell will be done using the Cell-in-a-Box®
technology. Implanting these cells in the body is designed to function as a bio-artificial pancreas for the purpose of insulin
production. As with the two previous programs, we are not spending any further resources developing this program until the FDA
allows us to commence the clinical trial involving LAPC described in our IND to be filed with the FDA. However, work at the University
of Technology, Sydney (“UTS”) on the Melligen cells continues. Melligen cells are human liver cells that have been
genetically engineered to produce, store and release insulin in response to the levels of blood sugar in the body. The work is
being funded by the Company and UTS. Our portion of the funding was previously paid by us to UTS. In prior animal pre-clinical
studies, the Company has successfully encapsulated Melligen cells using Cell-in-a-Box® technology.
The Cell-in-a-Box® encapsulation
technology potentially enables genetically engineered live human cells to be used as miniature factories for the production of
various biologically active molecules. The technology results in the formation of pin-head sized cellulose-based porous capsules
in which genetically modified live human cells can be encapsulated and maintained. In a laboratory setting, this proprietary live
cell encapsulation technology has been shown to create a micro-environment in which encapsulated cells survive and flourish. They
are protected from environmental challenges, such as the sheer forces associated with bioreactors, passage through catheters and
needles, etc., which we believe enables greater growth and production. The capsules are largely composed of cellulose (cotton)
and are bio inert.
Finally,
we have licensed from Hai Kang Life Corporation Limited (“Hai Kang”) the right
to sell and distribute COVID-19 (defined below) diagnostic kits. Pursuant to a License Agreement with Hai Kang (“Hai Kang
License Agreement”), the Company may directly (or through a third party) conduct research, use, develop, market, sell, distribute,
import and export the kits for human and veterinary uses in North America, the United Kingdom and certain other European sites.
Cancer Therapy
Targeted Chemotherapy
Our live-cell encapsulation technology-based
therapies consist of encapsulated genetically modified living cells, with the type of encapsulated cell dependent on the disease
being treated. For our lead product candidate, a therapy for pancreatic cancer, we propose that approximately 20,000 genetically
modified live cells that produce an enzyme (an isoform of cytochrome P450), which we believe will convert the chemotherapy prodrug
ifosfamide into its cancer-killing form, will be encapsulated using Cell-in-a-Box® technology. In the clinical trial,
if the FDA allows us to proceed, approximately 300 of these capsules will be placed in the patients’ blood supply and guided
into place using interventional radiography so that they finally reside as close to the tumor in the pancreas as possible. Low
doses (one gram per square meter of body surface area of the patient) of the chemotherapy prodrug ifosfamide will then be given
to the patient intravenously.
The prodrug ifosfamide is normally activated
in the patient’s liver. By activating the prodrug near the tumor using the Cell-in-a-Box® capsules, we believe
our cellular therapy will act as a type of “bio-artificial liver.” Using this “targeted chemotherapy,”
we are seeking to create an environment that enables optimal concentrations of the “cancer-killing” form of ifosfamide
at the site of the tumor. Because the cancer-killing form of ifosfamide has a short biological half-life, we believe that this
approach will result in little to no collateral damage to other organs in the body. We also believe this treatment will significantly
reduce tumor size with no treatment-related side effects.
Figure 1: Proposed treatment for pancreatic
cancer by targeted deployment and activation of chemotherapy using Cell-in-a-Box® encapsulated cells.
Note: Charts A and B are generalized graphic depictions
of the principal mechanisms of our proposed treatment for pancreatic cancer using our product candidate, the combination of Cell-in-a-Box®
encapsulated cells plus low-doses of ifosfamide, under expected conditions. This combination therapy will be the subject of a clinical
trial we plan to conduct, subject to FDA approval allowing us to move forward with our clinical trial. No regulatory authority
has granted marketing approval for the Cell-in-a-Box® technology, the related encapsulated cells, or Cell-in-a-Box®
and encapsulated cells plus low-dose ifosfamide combination.
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Chart (A)
Cell-in-a-Box® capsules containing live ifosfamide-activating
cells (shown in white) will be implanted in the blood vessels leading to the tumor in the pancreas. Then low dose ifosfamide will
be given intravenously.
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Chart (B)
Chart B shows the human pancreas and generalized depictions
of two pancreatic cancer tumors (shown in pink) as examples. In this chart, ifosfamide is converted to its cancer-killing form
by the encapsulated live cells implanted near the tumors (shown in maroon).
Legend
Blue Arrows: Ifosfamide enters capsules
Red Arrows: Conversion to active
form
White Arrows: Activated ifosfamide
targets tumors
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Figure 2: Mechanism of action of treatment
for pancreatic cancer by targeted deployment of the encapsulated live cells and activation of the chemotherapy prodrug drug ifosfamide.
The immune system cells are too large to enter the capsule.
Pancreatic Cancer Therapy
We believe an unmet medical need exists
for patients with LAPC whose pancreas tumor no longer responds after 4-6 months of treatment with either Abraxane®
plus gemcitabine or the 4-drug combination known as FOLFIRINOX (folinic acid, fluorouracil, irinotecan and oxaliplatin). Both combinations
are the current standards of care for pancreatic cancer. We believe that these refractory patients have no effective treatment
alternative once their tumors no longer respond to these therapies. Two of the most commonly used treatments for these patients
are 5-fluorouiracil (“5-FU”) or capecitabine (a prodrug of 5-FU) plus radiation (chemoradiation therapy). We believe
that both treatments are only marginally effective in treating the tumor and both result in serious side effects. More recently,
radiation treatment alone is being used at some cancer centers in the United States (“U.S.”).
Other treatments are being tried at various
cancer centers in the U.S. in an attempt to address this lack of an effective treatment for many LAPC patients, but their success
is far from certain. We are developing a therapy comprised of Cell-in-a-Box® encapsulated live cells implanted near
the pancreas tumor followed by the infusion of low doses of the cancer prodrug ifosfamide. We believe that our therapy can serve
as a “consolidation therapy” that can be used with the current standards of care for LAPC and thus address this critical
unmet medical need.
Subject to our filing an IND and the FDA
allowing us to move forward with our clinical trial, we plan to commence a clinical trial involving patients with LAPC whose tumors
have ceased to respond to either Abraxane® plus gemcitabine or FOLFIRINOX after 4-6 months of either therapy. We
had a Pre-Investigational New Drug Application meeting (“Pre-IND meeting”) with the Center for Biologics Evaluation
and Research of the FDA (“CBER”) in January 2017. At that Pre-IND meeting, the FDA communicated its agreement with
certain aspects of our clinical development plan, charged us with completing numerous tasks and provided us with the guidance on
the tasks we believe we need to complete for a successful IND submission for LAPC, although no assurance can be given whether the
FDA will allow us to commence a Phase 2b clinical trial. We believe that we will be permitted to conduct a Phase 2b clinical trial
because of the data developed from the two earlier trials conduct by Bavarian Nordic, a fully integrated biotechnology company
in Denmark, using the same technology and same cell line. The results of those trials are discussed below. The trial would initially
take place in the U.S. with possible study sites in Europe at a later date.
Our Investigational New Drug Application
Our proposed IND submission to the FDA
with respect to LAPC will consist of all available preclinical information (e.g. animal toxicity studies), Chemistry, Manufacturing
and Controls information and other pre-clinical information about our product candidate to treat LAPC, as well as information regarding
our proposed clinical trial program and other information and documentation required by FDA regulations. Our FDA regulatory affairs
consultant is leading the preparation of the IND.
Summary of the Company’s Activities
During the Period of this Report
During fiscal year 2020, we have focused
our research and development (“R&D”) efforts at completing Cell-in-a-Box® encapsulation engineering
runs and production runs using cells from our Master Cell Bank (“MCB”) that contain the genetically engineered human
cells that can activate the prodrug ifosfamide into its cancer killing form. The MCB encapsulated cells from the final manufacturing
run will be used for our planned clinical trial in LAPC. Several tests and experiments were completed to optimize the growth
properties of the cells pre-and post-encapsulation – we believe resolving prior issues with growth properties in both phases
of the encapsulation process.
These activities during fiscal year 2020
include:
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1.
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Completion of two back to back manufacturing runs of our product candidate for use in the LAPC clinical trial.
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2.
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Completion of all release testing on our product candidate for use in the LAPC clinical trial.
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3.
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Completion of the final cGMP audit of the manufacturing facility for our product candidate for use in the LAPC clinical trial.
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4.
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Commencement of the FDA required 24-Month stability study of our product candidate for use in the LAPC clinical trial.
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5.
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Successful development of the FDA required “Change History” for our LAPC product candidate.
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6.
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Successful completion of the pyrogenicity testing of our encapsulation material.
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7.
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Preparation of our “Drug Master File” (“DMF”)
for submission to the FDA.
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8.
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Completion of our Angiography Procedure Manual.
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9.
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A new research agreement with UTS to create an advanced version of the Melligen cells to treat diabetes.
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10.
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Appointment of cellular expert David A. Judd to our Medical and Scientific Advisory Board.
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11.
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Confirmation that Dr. Manuel Hidalgo will be the Principal Investigator for the clinical trial
of our LAPC product candidate.
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Successfully Completed the First Two Manufacturing Runs
of our Product Candidate for the treatment of LAPC
Austrianova Singapore Pte. Ltd. (“Austrianova”), our contract manufacturer, successfully completed two staggered and back to back manufacturing runs for the production of the
Company’s product candidate for the treatment of LAPC. After months of extensive R&D by a team of experts from Austrianova
and the Company, a total of eight different changes were made to the manufacturing process. It was not until the eighth and final
change was made that the encapsulated cells grew as well in Austrianova’s GMP manufacturing facility in Thailand as they
grew at Austrianova’s R&D facility in Singapore.
Once the manufacturing runs were completed
successfully, a representative sample of frozen syringes filled with the encapsulated genetically modified live cells inside were
shipped to external testing laboratories for the release testing of the clinical trial product that is required by the FDA related
to safety. Austrianova conducted “release testing” in-house related to the “functionality” of the encapsulated
cells.
Completed All Release Testing on our Product Candidate
for Use in the LAPC Clinical Trial
Both batches of our manufactured product
candidate underwent and passed all 10 of the necessary “release tests” required by the FDA. Once completed, Austrianova
prepared the paperwork to issue us a “Certificate of Analysis” for each batch of our product candidate. Austrianova
also completed the FDA required batch records from each manufacturing run. The batch records underwent an extensive review by us
to ensure that the product candidate is cGMP compliant. These tests and the batch records provided essential data for us to complete
our IND to be submitted to the FDA to allow us to commence a clinical trial to treat LAPC.
Completed the Final cGMP Audit of the Manufacturing Facility
for our Product Candidate for Use in the LAPC Clinical Trial
cGMP Validation, the company’s cGMP
consultant, completed its post manufacturing audit of the manufacturing facility in Thailand. The facility successfully passed
the audit. This facility is where our product candidate was manufactured.
Began the FDA Required 24-Month Stability Study of our
Product Candidate for Use in the LAPC Clinical Trial
We commenced a rolling two-year study
stability study (“Stability Study”) to demonstrate how the frozen CypCaps™ manufactured by Austrianova for patients
with LAPC perform over time after being frozen for certain periods of time and then thawed and tested for safety and functionality.
While the Stability Study will continue for 24 months, the FDA requires 3 months of stability data to be included in our IND to
be submitted to the FDA.
The tests for the Stability Study started
approximately 3 months (the first time point in the 2-year study) from the issuance of the Certificate of Analysis for the second
successful manufacturing run and will continue for 24 months. Data from the balance of the Stability Study will be provided to
the FDA as the data becomes available.
Successfully Developed the FDA Required “Change
History” for our Product Candidate
We successfully completed development of
the “change history” information and data for CypCaps™ (2nd generation product candidate) compared
to CapCells™ (1st generation product candidate). The history of the changes to the manufacturing of the two generations
of product is a critical component of our IND to be submitted to the FDA and is specifically required by the FDA.
Austrianova developed the needed information
and data to be in a position to satisfy our cGMP consultant and our regulatory consultant. We believe that the information and
supporting data should be sufficient to meet the FDA comparability requirements of the two generations of encapsulated live human
cells.
The first generation of product candidate
was referred to as “CapCells™”, and the current generation of product candidate is referred to as “CypCaps™.”
Although the cellulose material is basically the same, a material of improved quality is used in the 2nd generation product candidate.
The differences relate to control of impurities with heavy metal content and microbial and endotoxin levels being below the limits
in the relevant literature for powdered cellulose. In addition, the production process for the cellulose is more closely controlled
in the 2nd generation product candidate. The original cell line used is also now better characterized at the genetic
level. Lastly, the encapsulated cells undergo a maturation process in the 2nd generation product candidate and are stored frozen
for a longer shelf life.
In short, while both generations of product
use the identical cell line, the CypCaps™ have improved quality and control of the cells, improved encapsulation material
reproducibility, better controlled cell filling and a much-improved shelf life, resulting in a more robust product overall.
The FDA requires that all relevant information
and data from different generations of the same manufactured medicinal product be compared to one another to ensure that the original
manufactured product is essentially the same as the current one. There can be improvements to the product, but to use the data
from the two clinical trials in the 1990s to support the Company’s proposed Phase 2b clinical trial, it was imperative to
develop information and data to support that the two generations of the products are essentially the same – the only difference
being improvement to the overall product using the same manufacturing process.
Successfully Completed the Pyrogenicity Testing of our
Encapsulation Material
We successfully completed the pyrogenicity
testing that is required by the FDA of the encapsulation material used to manufacture our CypCaps™. The capsules, which house
live human cells, passed the test and are deemed non-pyrogenic.
All medical products that are delivered
to the body have to be pyrogen free. Pyrogens are fever inducing substances that can cause side effects and influenza-like symptoms.
Substances produced by bacteria (endotoxins) can be pyrogens, but other nonbacterial substances can also be pyrogenic.
Preparation of our “Drug Master File” for
submission to the FDA
Austrianova prepared the “Drug Master
File” for submission of our LAPC product candidate to the FDA to provide detailed information about facilities, processes
and materials used in the manufacturing, processing and packaging of our LAPC product candidate. It is a prerequisite to securing
approval and commercialization of a product candidate and the information contained the “Drug Master File” is used
to support, among other applications, an IND.
Completed our Angiography Procedure Manual
We completed a medical manual that is necessary
for the completion of our IND. The manual, “Angiography Manual – Transarterial Chemoinfusion of the Pancreas”
(“Angiography Procedure Manual”), will be used to guide Interventional Radiologists on the placement of a catheter
that begins at the femoral artery in the leg and ends as close to the pancreatic tumor as possible in patients participating in
our planned clinical trial. By following the directions in this manual, Interventional Radiologists will be able to precisely place
the CypCaps™ inside patients.
Entered into a New Research Agreement to Create an Advanced
Version of the Melligen Cells to Treat Diabetes
We entered into a new research agreement
with UTS in Australia to create a new version of Melligen cells for the treatment of diabetes with the potential to express higher
levels of insulin in a more stable cell line.
Melligen cells are human liver cells that
have been genetically engineered to produce, store and release insulin in response to the levels of blood sugar in the body. We
obtained the exclusive worldwide license rights from UTS to use these cells to develop a therapy for Type 1 and insulin-dependent
Type 2 diabetes. We plan to encapsulate Melligen cells using the Cell-in-a-Box® technology to protect the Melligen
cells from immune system attack in the body and thus function as a “bioartificial pancreas” for purposes of insulin
production.
The work undertaken by us, UTS and our
International Diabetes Consortium over the last few years resulted in an opportunity to re-engineer the Melligen cells with the
aim of increasing their insulin production as well as the bioactivity of the produced insulin. With this new agreement in place,
the related research will be done in Australia under the leadership of Prof. Ann Simpson, the developer of the original Melligen
cell line.
Appointed Cellular Expert David A. Judd to our Medical
and Scientific Advisory Board
We appointed David A. Judd to our Medical
and Scientific Advisory Board. Mr. Judd has had over 30 years of experience in the research and development of cell culture materials
and methods for the culturing various types of human cells. Most importantly, Mr. Judd has worked for many years with the cells
that we propose to use in our treatment of cancer and has a wealth of knowledge regarding their growth properties.
Mr. Judd made significant contributions to our efforts in working
with Austrianova to ensure that the cells from our MCB grow as they should, both pre-and post-encapsulation. During a critical
time in realigning certain aspects of the manufacturing process, Mr. Judd accompanied us as an advisor to Austrianova’s cGMP
manufacturing facility in Bangkok, Thailand, where the encapsulation of our cells took place.
Mr. Judd is a graduate of the Biotechnology
program at Rochester Institute of Technology, the first Biotechnology program in the U.S. He has over 30-years of experience in
cell culture and biochemistry in research and in a cGMP environment. Also, he has extensive experience in research and development
of cell culture medium, both in the upstream and downstream processes.
Mr. Judd is currently employed by the Grand
Island Biotechnology Company (Gibco) and is involved in research, process development and cGMP production of biotechnology and
cell therapy processes. Mr. Judd has been employed by Gibco (now owned by ThermoFischer Scientific) for 29 years and is a co-inventor
on 5 patents involving cell culture materials.
We Confirmed that Dr. Manuel Hidalgo
Will Be the Principal Investigator for the Clinical Trial of our LAPC Product Candidate
Dr. Manuel Hidalgo confirmed that he will
be the Principal Investigator for our planned clinical trial for LAPC. Dr. Hidalgo is a leading physician-scientist who specializes
in pancreatic cancer and drug development. He currently serves as Chief of the Division of Hematology and Medical Oncology at Weill
Cornell Medicine and New York-Presbyterian/Weill Cornell Medical Center. Previously, Dr. Hidalgo was a Professor of Medicine at
the Harvard Medical School and the Chief of the Division of Hematology Oncology and Director of the Rosenberg Clinical Cancer Center
at the Beth Israel Deaconess Medical Center.
Other Activities of the Company During
the Period of this Report
Entered into a License Agreement
for COVID-19 Diagnostic Kits
Effective as of April 2, 2020, we entered
into the Hai Kang License Agreement with Hai Kang (“Licensor”), pursuant to which the Licensor granted to us a license
to certain technology owned or controlled by the Licensor related to COVID-19 diagnostic kits (“Kits”). Pursuant to
the Hai Kang License Agreement, we may directly (or through a third party) conduct research, use, develop, market, sell, distribute,
import and export Products for human and veterinary uses in North America, the United Kingdom and certain other European cities.
Received
Medical Devices Registration and Submitted a Pre-EUA Application to the FDA for our COVID-19 Diagnostic Kit
We
registered as a Medical Devices Establishment, specifically as an Initial Importer FDA’s Center for Devices and Radiological
Health (“CDRH”) Device Registration and Listing Database. CDRH requires this registration for companies that plan to
import medical devices from overseas suppliers. We also established ourselves as the sole U.S. agent for Hai Kang for the importation
of SARS-CoV-2 in vitro diagnostic test kits. We plan to market the diagnostic tests kits only to certain Clinical Laboratory Improvement
Amendments (“CLIA”) certified labs throughout the U. S., but as of the date of this Report, have not yet commenced
marketing.
We
also submitted a Pre-Emergency Use Authorization (“EUA”) application to the FDA. An EUA is a means for the FDA
to expeditiously authorize new drugs and new medical devices during a declared national emergency.
For COVID-19 diagnostic test kits, the FDA recommends that manufacturers and suppliers file a Pre-EUA with the FDA in order to
interactively work towards an eventual EUA submission and authorization by the FDA. We are in the process of exchanging information
with the FDA about our diagnostic test kits.
Cannabinoids to Treat Cancer
Numerous studies have demonstrated the
anti-cancer effects of certain cannabinoids (constituents of Cannabis). Two of the most widely studied cannabinoids in this
regard are tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”). Cannabinoids are: (i) anti-proliferative
(slow tumor growth); (ii) anti-metastatic (slow tumor spread); (iii) anti-angiogenic (slowing blood vessel development); and (iv)
pro-apoptotic initiate programed cell death). In in vitro and in vivo models, the anti-cancer effects of cannabinoids
are broad. They have been shown to apply to lung, brain, thyroid, lymphoma, liver, skin, pancreas, uterus breast and prostate cancers.
In a review of 51 scientific studies, among other properties, it was observed that cannabinoids can regulate cellular signaling
pathways critical for cell growth and survival. These properties indicate that cannabinoids could be useful in the treatment of
cancer.
We have several competitors that are developing
Cannabis-based treatments for cancer. GW Pharmaceuticals, PLC has an approved cannabinoid product for the treatment of multiple
sclerosis spasticity and is developing a product portfolio to treat a variety of illnesses, including glioblastoma (brain cancer).
Cannabis Science, Inc. is developing topical cannabinoid treatments for basal and squamous cell skin cancers and Kaposi’s
sarcoma, and is exploring pre-clinical development of cannabinoid-based anti-cancer drugs in a collaborative agreement with the
Dana Farber/Harvard Cancer Center. OWC Pharmaceutical Research Corp. is developing Cannabis-based products targeting a variety
of indications and has a collaborative agreement with an academic medical center in Israel to study the effects of cannabinoids
on multiple myeloma (a cancer of plasma cells). Cannabis Pharmaceuticals, Inc. is developing personalized anti-cancer and palliative
Cannabis-based treatments aimed mainly at improving the cachexia, anorexia syndrome and quality-of-life issues that are
often characteristic of patients with devastating diseases like cancer.
In contrast to the work being done by these
companies, we plan to focus on developing specific therapies based on chosen molecules rather than using complex Cannabis
extracts. Our therapy will use the Cell-in-a-Box® technology in combination with genetically modified cell lines
designed to activate cannabinoid molecules for the treatment of diseases and their related symptoms. Our initial target will be
glioblastoma – a very difficult-to treat form of brain cancer.
In May 2014, we entered into a research
agreement with the University of Northern Colorado (“UNC”). The goal of the original research was to develop methods
for the identification, separation and quantification of constituents of Cannabis, some of which are prodrugs, which may
be used in combination with the Cell-in-a-Box® technology to treat cancer.
In January 2017, we entered into a second
research agreement with UNC. The goal of this research is to assess the synthesis of the patG gene and its incorporation into a
vector, transfection of human embryonic kidney cells using this vector and assessment of cannabinoic acid decarboxylase activity.
During 2017, UNC identified an organism
whose genome contains the genetic code for production of an enzyme capable of activating a cannabinoid prodrug into its active
cancer-killing form. Our Cannabis program now has two primary areas of focus. The first is confirming the anti-cancer activity
of cannabinoids, such as THC and CBD, particularly in our main “target” tumor – glioblastoma. UNC’s laboratory
research has confirmed that a purified cannabinoid showed a potent dose-dependent decrease in cell viability for various cancers,
suggesting that this cannabinoid exhibits significant anti-proliferative effects (stops the growth of cancer cells). This activity
has been demonstrated in brain (glioblastoma), pancreas, breast, lung, colon and melanoma cancer cells. The second area of focus
is in finding an enzyme capable of converting an inactive, side-effect-free, cannabinoid prodrug into its active cancer-killing
form.
Clinically, targeted cannabinoid-based
chemotherapy would be accomplished by implanting the encapsulated bio-engineered cells near the site of a tumor, along with administration
of a cannabinoid prodrug which would become activated at the site of the tumor by an enzyme produced by the encapsulated cells.
The end goal is better efficacy than existing therapies with few, if any, treatment related side effects.
Until the IND involving LAPC has been
submitted to the FDA and the FDA allows us to commence our clinical trial, we are not spending any further resources developing
this program.
Malignant Ascites Fluid Therapy
We have been studying the development of
a possible therapy to delay the production and accumulation of malignant ascites fluid that results from many types of abdominal
tumors. Malignant ascites fluid is secreted by an abdominal tumor into the abdomen after the tumor reaches a certain stage of growth.
This fluid contains cancer cells that can seed and form new tumors throughout the abdomen. As this ascites fluid accumulates in
the abdominal cavity, it can cause gross swelling of the abdomen, severe breathing difficulties and extreme pain.
Once an abdominal tumor reaches a certain
stage of development, it secretes malignant ascites fluid into the abdominal cavity. When that occurs, malignant ascites fluid
must be removed by paracentesis on a periodic basis. This procedure is painful and costly. We know of no available therapy that
prevents or delays the production and accumulation of malignant ascites fluid. We have been involved in eight preclinical studies
conducted by Translational Drug Development (“TD2”), an early stage CRO specializing in oncology, to determine if the
combination of Cell-in-a-Box® encapsulated cells plus low doses of ifosfamide can delay the production and
accumulation of malignant ascites fluid. The data from these eight studies indicated that the treatment might play a role in malignant
ascites fluid production and accumulation, but the conclusions were difficult to interpret with certainty. As a result, we plan
to conduct another preclinical study in Germany to determine if our conclusions from the TD2 studies are valid. If the ninth study
is successful, we plan to submit an IND to seek approval from the FDA to conduct a Phase 1 clinical trial in the U.S.
Until the IND involving LAPC has been
submitted to the FDA and the FDA allows us to commence our clinical trial, we are not spending any further resources developing
this program.
Diabetes Therapy
A Bio-Artificial Pancreas for Diabetes
We are developing a therapy for Type 1
diabetes and insulin-dependent Type 2 diabetes based upon the encapsulation of a human liver cell line genetically engineered to
produce, store and secrete insulin at levels in proportion to the levels of blood sugar in the human body. We are also considering
an alternative route to bringing a biological treatment for diabetes into the clinic. We are exploring the possibility of encapsulating
human insulin-producing stem cells and then transplanting them into a diabetic patient.
The cell line we select will be encapsulated
using the Cell-in-a-Box® encapsulation technology. If appropriate animal testing is completed successfully, we intend
to submit an IND to seek the FDA’s approval to transplant encapsulated insulin-producing cells into diabetic patients. The
goal for these approaches is to develop a bio-artificial pancreas for purposes of insulin production for diabetics who are insulin-dependent.
Our diabetes program began with two of
the most critical components of a biological diabetes therapy - a line of human cells which release insulin in response to the
blood glucose level in their environment and a technology to protect the cells from an attack by the immune system once they are
transplanted into a patient’s body to replace his or her own destroyed insulin-producing cells. This technology is the Cell-in-a-Box®
encapsulation technology. The cells used are called Melligen cells. They are patent-protected and have been licensed to us
by UTS.
Regulations for the use of living cells
as a medical product require that the potential of the cells to grow and form a tumor in a patient be assessed. This so-called
“tumorigenicity study” has been completed successfully by our International Diabetes Consortium. Melligen cells showed
very low tumorigenicity – the level one would expect to pass regulatory scrutiny.
Putting Melligen cells and the Cell-in-a-Box®
technology together, we conducted the first functional study in diabetic mice. The results did not meet our expectations. We discovered
that, contrary to what we had expected and what we had read in published scientific papers on the Melligen cells published by UTS,
the cells are not stable. With extensive testing and experiments, we discovered that the Melligen cells lose some of their specific
beneficial properties over time.
Recently we reached an agreement with UTS
to enter into a new research agreement to create an advanced version of the Melligen cells for the treatment of diabetes. Under
the new research agreement, improvements will be made to the Melligen cells that we expect will increase their stability, increase
their insulin production and increase the bioactivity of the produced insulin.
Prof. Ann Simpson, who created the Melligen
cells, and her team of research scientists at UTS will be conducting this new research project. The work is being funded by the
Company and UTS. Our portion of the funding was previously paid to UTS. Until we have submitted our IND to the FDA for the treatment
of LAPC and the FDA allows us to commence our clinical trial, we will not be spending any further resources developing our Diabetes
Program.
Impact of the COVID-19 Pandemic on Our Operations
The coronavirus SARS-Cov2 (“COVID-19”)
pandemic is causing significant, industry-wide delays in clinical trials. Subject to the FDA allowing us to proceed with clinical
trials following review of our IND, once submitted, it is possible that we will be able to commence human testing in the 4th
quarter of 2020 or the 1st quarter of 2021. Currently, many clinical trials are being delayed due to COVID-19. There are
numerous reasons for these delays. For example, patients have shown reluctance to enroll or continue in a clinical trial due to
fear of exposure to COVID-19 when they are in a hospital or doctor’s office. There are local, regional and state-wide shelter-in-place
orders and regulations. These discourage patient visits to a doctor’s office if the visit is not COVID-19 related. Healthcare
providers and health systems are shifting their resources away from clinical trials toward the care of COVID-19 patients. The
FDA and other healthcare providers are making product candidates for the treatment of COVID-19 a priority over product candidates
unrelated to COVID-19. As of the date of this Report, the COVID-19 pandemic has had an impact upon our operations with respect
to the delivery of materials and pre-IND testing, although we believe that impact is not material. They primarily relate to delays
in tasks associated with the preparation of our IND.
As a result of the COVID-19 pandemic,
submission and FDA review of our IND with respect to LAPC may be delayed which will, in turn, delay commencement of our planned
clinical trial to treat LAPC. Moreover, enrollment may be difficult for the reasons discussed above. In addition, after enrollment
in the trial, if enrolled patients contract COVID-19 during their participation in our trial or are subject to isolation or shelter
in place restrictions, this may cause them to drop out of our trial, miss scheduled therapy appointments or follow-up visits or
otherwise fail to follow our trial protocol. If patients are unable to follow the trial protocol or if our trial results are otherwise
affected by the consequences of the COVID-19 pandemic on patient participation or actions taken to mitigate COVID-19 spread, the
integrity of data from our trial may be compromised or not accepted by the FDA. This could adversely impact or delay our clinical
development program.
Given that we are uncertain when we will
be able to commence our clinical trial to treat LAPC, it is highly speculative to project the effects of COVID-19 on our proposed
clinical development program and the Company generally. The effects of COVID-19 are difficult to predict, and no one is able to
say with certainty when the pandemic will subside and life as we knew it before the pandemic will return to normal.
Relationship between PharmaCyte, S.G.
Austria and Austrianova
The principal developers of the Cell-in-a-Box®
technology are Prof. Dr. Walter H. Günzburg (“Prof. Günzburg”) and Dr. Brian Salmons (“Dr. Salmons”).
Both are officers of SG Austria Pte. Ltd. (“SG Austria”) and its wholly owned subsidiary Austrianova. The success of
SG Austria and Austrianova, on the one hand, and our success, on the other hand, are co-dependent in almost every respect. SG Austria
and Austrianova benefit from our success. If we commercialize or sublicense our encapsulation technology for the development of
therapies for cancer and diabetes, payments are owed by us to SG Austria or Austrianova. In turn, we are dependent upon SG Austria
and Austrianova because of the knowledge and expertise of Prof. Günzburg and Dr. Salmons concerning the Cell-in-a-Box®
technology and the actual process of cell encapsulation. This technology serves as the basis for all our efforts in developing
treatments for both cancer and diabetes. In addition, we own a 14.5% equity interest in SG Austria and have contractual relationships,
including license agreements, with SG Austria and Austrianova.
Key Consultants
Prof. Günzburg and Dr. Salmons are
involved in numerous aspects of the scientific endeavors relating to our Cancer and Diabetes Programs, having initially commenced
work for us as consultants at the beginning of 2014 under an oral agreement. They provide services to us as consultants through
their consulting company, Vin-de-Bona Trading Company Pte Ltd (“Vin-de-Bona”). This arrangement was formalized in writing
as of April 1, 2014, when we entered a Consulting Agreement with Vin-de-Bona (“Vin-de-Bona Consulting Agreement”).
The Vin-de-Bona Consulting Agreement had an initial term of 12 months, with additional terms of 12 months automatically renewing
unless either party terminates an additional term upon 30 days’ prior written notice. The professional services rendered
to us by Prof. Günzburg and Dr. Salmons are charged at a negotiated and confidential hourly rate.
The Vin-de-Bona Consulting Agreement requires
that Prof. Günzburg and Dr. Salmons not disclose or use our confidential information for any purpose, other than performing
services under the Vin-de-Bona Consulting Agreement, without our prior written consent. Also, during the term of the Vin-de-Bona
Consulting Agreement and for a period of twelve months after termination or expiration of the agreement, Prof. Günzburg and
Dr. Salmons are prohibited from soliciting any of our customers, employees, suppliers or other persons with whom they had dealings
during the tenure of their consultancy for us.
In September 2014, Prof. Günzburg
was appointed as our Chief Scientific Officer. He served in that capacity through 2019. Prof. Günzburg was compensated for
being our Chief Scientific Officer by our issuing Vin-de-Bona 500,000 restricted shares of our common stock each year in which
he served as our Chief Scientific Officer.
Dr. Löhr, a noted European oncologist
and gastroenterologist, also participates in the development of our cancer program. Dr. Löhr, currently with the Karolinska
Institute in Stockholm, Sweden, served as the PI of the earlier Phase 1/2 and Phase 2 clinical trials (discussed below) of the
combination of CapCells® with low dose ifosfamide in patients with advanced, inoperable pancreatic cancer. CapCells®
are now known as CypCaps™ denoting encapsulated cells using the Cell-in-a-Box® technology
that will be used in our LAPC trial, subject to IND submission and approval by the FDA. Like Dr. Günzburg and Dr. Salmons,
Dr. Löhr is involved in planning and overseeing much of our planned clinical trial clinical trial to treat LAPC. Dr. Löhr
is the Chairman of our Medical and Scientific Advisory Board and a consultant to us. Dr. Löhr receives annually 500,000 shares
of our restricted common stock to serve as the Chairman of our Medical and Scientific Advisory Board. Since April 15, 2014, Dr.
Löhr also receives fees to provide professional consulting services to us through his consulting company based upon a confidential
hourly rate.
History of the Business
In 2013, we restructured our operations
to focus on biotechnology. On January 6, 2015, we changed our name from “Nuvilex, Inc.” to “PharmaCyte Biotech,
Inc.” to reflect the nature of our business.
We are a biotechnology company focused
on developing and preparing to commercialize cellular therapies for cancer and diabetes using our live cell encapsulation technology.
This resulted from entering into the following agreements.
Commencing in May 2011, we entered into
a series of agreements and amendments with SG Austria to acquire certain assets from SG Austria as well as an exclusive, worldwide
license to use, with a right to sublicense, the Cell-in-a-Box® technology and trademark for the development of therapies
for cancer. (“SG Austria APA”)
In June 2013, we and SG Austria entered
a Third Addendum to the SG Austria APA (“Third Addendum”). The Third Addendum materially changed the transaction contemplated
by the SG Austria APA. Under the Third Addendum, we acquired 100% of the equity interests in Bio Blue Bird and received a 14.5%
equity interest in SG Austria. We paid: (i) $500,000 to retire all outstanding debt of Bio Blue Bird; and (ii) $1.0 million to
SG Austria. We also paid SG Austria $1,572,193 in exchange for a 14.5% equity interest of SG Austria. The transaction required
SG Austria to return to us the 100,000,000 shares of our common stock held by SG Austria and for us to return to SG Austria the
100,000 shares of common stock of Austrianova we held.
Effective as of the same date we entered
the Third Addendum, we and SG Austria also entered a Clarification Agreement to the Third Addendum (“Clarification Agreement”)
to clarify and include certain language that was inadvertently left out of the Third Addendum. Among other things, the Clarification
Agreement confirmed that the Third Addendum granted us an exclusive, worldwide license to use, with a right to sublicense, the
Cell-in-a-Box® technology and trademark for the development of therapies for cancer.
With respect to Bio Blue Bird, Bavarian
Nordic A/S (“Bavarian Nordic”) and GSF-Forschungszentrum für Umwelt u. Gesundheit GmbH (collectively, “Bavarian
Nordic/GSF”) and Bio Blue Bird entered into a non-exclusive License Agreement (“Bavarian Nordic/GSF License Agreement”)
in July 2005, whereby Bio Blue Bird was granted a non-exclusive license to further develop, make, have made (including services
under contract for Bio Blue Bird or a sub-licensee, by Contract Manufacturing Organizations, Contract Research Organizations, Consultants,
Logistics Companies or others), obtain marketing approval, sell and offer for sale the clinical data generated from the pancreatic
cancer clinical trials that used the cells and capsules developed by Bavarian Nordic/GSF (then known as “CapCells”)
or otherwise use the licensed patent rights related thereto in the countries in which patents had been granted. Bio Blue Bird was
required to pay Bavarian Nordic a royalty of 3% of the net sales value of each licensed product sold by Bio Blue Bird and/or its
Affiliates and/or its sub-licensees to a buyer. The term of the Bavarian Nordic/GSF License Agreement continued on a country by
country basis until the expiration of the last valid claim of the licensed patent rights.
Bavarian Nordic/GSF and Bio Blue Bird amended
the Bavarian Nordic License Agreement in December 2006 (“First Amendment to Bavarian Nordic/GSF License Agreement”)
to reflect that: (i) the license granted was exclusive; (ii) a royalty rate increased from 3% to 4.5%; (iii) Bio Blue Bird assumed
the patent prosecution expenses for the existing patents; and (iv) to make clear that the license will survive as a license granted
by one of the licensors if the other licensor rejects performance under the Bavarian Nordic License Agreement due to any actions
or declarations of insolvency.
In June 2013, we acquired from Austrianova
an exclusive, worldwide license to use the Cell-in-a-Box® technology and trademark for the development of a therapy
for Type 1 and insulin-dependent Type 2 diabetes (“Diabetes Licensing Agreement”). This allows us to develop a therapy
to treat diabetes through encapsulation of a human cell line that has been genetically modified to produce, store and release insulin
in response to the levels of blood sugar in the human body.
In October 2014, we entered into an exclusive,
worldwide license agreement with the UTS (“Melligen Cell License Agreement”) in Australia to use insulin-producing
genetically engineered human liver cells developed by UTS to treat Type 1 diabetes and insulin-dependent Type 2 diabetes. These
cells, named “Melligen”, were tested by UTS in mice and shown to produce insulin in direct proportion to the amount
of glucose in their surroundings. In those studies, when Melligen cells were transplanted into immunosuppressed diabetic mice,
the blood glucose levels of the mice became normal. In other words, the Melligen cells reportedly reversed the diabetic condition.
In December 2014, we acquired from Austrianova
an exclusive, worldwide license to use the Cell-in-a-Box® technology and trademark in combination with genetically
modified non-stem cell lines which are designed to activate cannabinoid prodrug molecules for development of therapies for diseases
and their related symptoms using of the Cell-in-a-Box® technology and trademark (“Cannabis Licensing Agreement”).
This allows us to develop a therapy to treat cancer and other diseases and symptoms through encapsulation of genetically modified
cells designed to convert cannabinoids to their active form using the Cell-in-a-Box® technology and trademark.
In July 2016, we entered into a Binding
Memorandum of Understanding with Austrianova (“Austrianova MOU”). Pursuant to the Austrianova MOU, Austrianova will
actively work with us to seek an investment partner or partners who will finance clinical trials and further develop products for
our therapy for cancer, in exchange for which we, Austrianova and any future investment partner will each receive a portion of
the net revenue from the sale of cancer products.
In October 2016, Bavarian Nordic/GSF and
Bio Blue Bird further amended the Bavarian Nordic License Agreement (“Second Amendment to Bavarian Nordic/GSF License Agreement”)
in order to: (i) include the right to import in the scope of the license; (ii) reflect ownership and notification of improvements;
(iii) clarify which provisions survive expiration or termination of the Bavarian Nordic License Agreement; (iv) provide rights
to Bio Blue Bird to the clinical data after the expiration of the licensed patent rights; and (v) change the notice address and
recipients of Bio Blue Bird.
In May 2018, the Company entered into a
series of binding term sheet amendments (“Binding Term Sheet Amendments”). The Binding Term Sheet Amendments provide
that our obligation to make milestone payments to Austrianova is eliminated in their entirety under the: (i) Cannabis License Agreement;
and (ii) the Diabetes License Agreement, as amended. The Binding Term Sheet Amendments also provide that our obligation to make
milestone payments to SG Austria for therapies for cancer to be eliminated in their entirety. In addition, the Binding Term Sheet
Amendments also provides that the scope of the Diabetes License Agreement is expanded to include all cell types and cell lines
of any kind or description now or later identified, including, but not limited to, primary cells, mortal cells, immortal cells
and stem cells at all stages of differentiation and from any source specifically designed to produce insulin for the treatment
of diabetes.
In addition, one of the Binding Term Sheet
Amendments provides that we will have a 5-year right of first refusal from August 30, 2017 in the event that Austrianova chooses
to sell, transfer or assign at any time during this period the Cell-in-a-Box® technology, tradename and Associated
Technologies (defined below), intellectual property, trade secrets and know-how, which includes the right to purchase any manufacturing
facility used for the Cell-in-a-Box® encapsulation process and a non-exclusive license to use the special cellulose
sulfate utilized with the Cell-in-a-Box® encapsulation process (collectively, “Associated Technologies”);
provided, however, that the Associated Technologies subject to the right of first refusal do not include Bac-in-a-Box®.
Additionally, for a period of one year from August 30, 2017 one of the Binding Term Sheet Amendments provides that Austrianova
will not solicit, negotiate or entertain any inquiry regarding the potential acquisition of the Cell-in-a-Box® and
its Associated Technologies.
The Binding Term Sheet Amendments further
provide that: (i) the royalty payments on gross sales as specified in the SG Austria APA, the Cannabis License Agreement and the
Diabetes License Agreement are changed to 4%; and (ii) the royalty payments on amounts received by us from sublicensees on sublicensees’
gross sales under the same agreements are changed to 20% of the amount received us from our sublicensees, provided, however,
that in the event the amounts received by us from sublicensees is 4% or less of sublicensees’ gross sales, Austrianova
will receive 50% of what we receive (up to 2%) and then additionally 20% of any amount we receive over that 4%.
One of the Binding Term Sheet Amendments
requires that we pay $900,000 to Austrianova ratably over a nine-month period in the amount of two $50,000 payments each month
during the nine-month period on the days of the month to be agreed upon between the parties, with a cure period of 20 calendar
days after receipt by us of written notice from Austrianova that we have failed to pay timely a monthly payment. As of April 30,
2020, the $900,000 amount has been paid in full. The Binding Term Sheet Amendments also provide that Austrianova receives 50% of
any other financial and non-financial consideration received from our sublicensees of the Cell-in-a-Box® technology.
Goal and Strategies to Implement
Our goal is to become an industry-leading
biotechnology company using the Cell-in-a-Box® technology as a platform upon which therapies for cancer and diabetes
are developed and obtain marketing approval for these therapies from regulatory agencies in the U.S., the European Union, Australia
and Canada.
Our strategies to implement our goal consist
of the following:
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Submission of our LAPC related IND to the FDA and for the FDA to allow us to commence a clinical trial to treat LAPC;
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Completion of preclinical studies and clinical trials that demonstrate the effectiveness of our cancer therapy in reducing the production and accumulation of malignant ascites fluid in the abdomen that is characteristic of pancreatic and other abdominal cancers;
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Completion of preclinical studies and clinical trials that involve the encapsulation of the Melligen cells and genetically modified stem cells using the Cell-in-a-Box® technology to develop a therapy for Type 1 and insulin-dependent Type 2 diabetes;
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Enhancement of our ability to expand into the biotechnology arena through further research and partnering agreements with one or more third parties involved in the development of cancer and diabetes therapies and COVID-19 project;
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Acquisition of contracts that generate revenue or provide research and development capital utilizing our sublicensing rights;
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Further development of uses of the Cell-in-a-Box® technology platform through contracts, licensing agreements and joint ventures with other companies; and
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Completion of testing, expansion and marketing of existing and newly derived product candidates.
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Market Opportunity and the Competitive
Landscape
The two areas we are developing
for live cell encapsulation-based therapies are cancer and diabetes.
The Cell-in-a-Box® capsules
are comprised of cotton’s natural component - cellulose. Other materials used by competitors include alginate, collagen,
chitosan, gelatin and agarose. Alginate appears to be the most widely used of these. We believe the inherent strength and durability
of our cellulose-based capsules provides us with advantages over the competition. For example, the Cell-in-a-Box®
capsules have remained intact for approximately two years in humans and for several months in animals during clinical trials and
preclinical studies. They do so with no evidence of rupture, damage, degradation, fibrous overgrowth or immune system response.
The cells within the capsules also remained alive and functioning during these studies. Other encapsulating materials degrade in
the human body over time, leaving the encapsulated cells open to immune system attack. Damage to surrounding tissues has also been
reported to occur over time when other types of encapsulation materials begin to degrade
The cells encapsulated using the Cell-in-a-Box®
technology can be frozen for extended periods of time. When thawed, the cells are recovered with approximately 85% to 90% viability.
We are unaware of any other cell encapsulation material that is capable of protecting their encapsulated cells to this degree.
The implications of this property of the Cell-in-a-Box® technology are obvious - long-term storage of encapsulated
cells and shipment of encapsulated cells over long distances.
We believe our live cell encapsulation
technology may have significant new advantages and opportunities for us in numerous and developing ways. For example:
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Cancerous diseases may be treated by placing encapsulated drug-converting cells that convert a chemotherapy prodrug near the cancerous tumor;
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Confinement and maintenance of therapeutic cells that activate a chemotherapy prodrug may be placed at the site of implantation in a blood vessel near the cancerous tumor results in “targeted chemotherapy;”
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Increased efficacy of a chemotherapy prodrug may allow for lower doses of the drug to be given to a patient, significantly reducing or even eliminating side effects from the chemotherapy;
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Encapsulating genetically modified live cells has the potential for the treatment of systemic diseases of various types, including diabetes;
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Multi-layered patent and trade secret protection and marketing exclusivity for our technology exists and is being expanded;
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Cell-in-a-Box® capsules can prevent immune system attack of functional cells inside them without the need for immunosuppressive drug therapy; and
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Safety and effectiveness of the Cell-in-a-Box® technology and the cells used with our technology have already been shown in both human clinical trials and animal studies.
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The field of diabetes cell therapy development
is competitive. There are numerous companies developing cell-based therapies for diabetes. These competitors include companies
such as Viacyte, Inc. in collaboration with Gore, Semma Therapeutics, Inc. in collaboration with Defymed, SAS, Diabetes Research
Institute Foundation, Beta-O2 Technologies Ltd., Diatranz Otsuka Ltd., Sernova Corp. and BetaCell NV. All these entities are developing
some form of encapsulation-based disease therapies. Although such competition exists, we believe these other companies are developing
encapsulation-based therapies using encapsulation materials and methodologies that produce capsules or devices that are far less
robust than ours or that are associated with other problems, such as extremely short shelf-life of the product and/or fibrotic
overgrowth of their encapsulation products when implanted in the body. We believe these properties are not characteristic of the
Cell-in-a-Box® capsules.
Pancreatic cancer is increasing in most
industrialized countries. The American Cancer Society estimates that in 2020 there will be 57,600 people in the U.S. diagnosed
with pancreatic cancer. It also estimates 47,050 patients with pancreatic cancer will die in 2020.
Our goal is to satisfy a clear unmet medical
need for patients with LAPC whose tumors no longer respond after 4-6 months of treatment with the chemotherapy combination of Abraxane®
plus gemcitabine or FOLFIRINOX. For these patients, there is currently no effective therapy. We believe there will be no
therapy comparable to our Cell-in-a-Box® plus low dose of ifosfamide combination therapy when it is used in these
patients.
We face intense competition in the field
of treating pancreatic cancer. In addition to commercial entities such as Halozyme, Inc., OncoMed Pharmaceuticals, Inc. and Boston
Biomedical, Inc., to name a few of the smaller companies, several academic institutions and cancer centers are trying to improve
the outcome for pancreatic cancer patients. There are several drugs already available and in the pipelines of pharmaceutical companies
worldwide, not the least of which is the combination of the drugs of Abraxane® and gemcitabine. This is the primary
FDA-approved combination of drugs for treating advanced pancreatic cancer. In Europe, and more recently in the U.S., the 4-drug
combination known as FOLFIRINOX has also found use as a first-line treatment for advanced pancreatic cancer. Some of our competitive
strengths include the Orphan Drug Designation we have been granted by the FDA and the European Medicines Agency (“EMA”)
for our pancreatic cancer therapy, our trade secrets, the patents we are seeking and the licensing agreements we have that are
described in this Report. Yet many of our competitors have substantially greater financial and marketing resources than we do.
They also have stronger name recognition, better brand loyalty and long-standing relationships with customers and suppliers. Our
future success will be dependent upon our ability to compete.
We believe our therapy for pancreatic cancer
has already shown promise through the completion of a Phase 1/2 and a Phase 2 clinical trial in advanced, inoperable pancreatic
cancer. Our therapy for diabetes has also shown promise. Completed research studies have resulted in positive responses in animal
models using the Melligen cells. We believe we are in a strong competitive position considering our unique encapsulation technology
and the genetically modified cells that we have the exclusive worldwide license to use in most industrialized countries.
As discussed above in the section on cannabinoids,
PharmaCyte has several major competitors developing Cannabis-based therapies for cancer.
Previous Clinical Trials Using Our Encapsulation
Technology
Two previous clinical trials using what
is now our encapsulation technology were carried out in Europe by Bavarian Nordic in 1998-1999 and 2000, respectively. Both employed
the combination of the cellulose-based live cell encapsulation technology with low doses of the anticancer drug ifosfamide. However,
the FDA may not accept the results of these trials for various reasons, none of which are in our control. In such event, we may
have to conduct a Phase 1 trial, not a Phase 2b trial, or even further pre-clinical animal trials.
The results of the two clinical trials
have been published in the peer-reviewed scientific literature and are summarized as follows:
Phase 1/2 Clinical Trial
Dates of Trial and Location: This
clinical trial was opened on July 28, 1998 and closed on September 20, 1999. It was carried out at the Division of Gastroenterology,
University of Rostock, Germany.
Identity of Trial Sponsors: The
clinical trial was sponsored by Bavarian Nordic.
Trial Design: The clinical trial
was an open-label, prospective, single-arm and single center trial.
Patient Information: A total of
17 patients were enrolled in the clinical trial (51 were screened). A total of 14 patients were treated because two of the original
17 patients developed severe infections before the start of the clinical trial and had to be treated by other means. For the other
patient, angiography was not successful, causing the patient to be disqualified from participating in the clinical trial.
Trial Criteria: Criteria for enrolling
in the clinical trial included inoperable pancreatic adenocarcinoma Stage 3-4 (according to IUCC criteria) as determined by histology
and measured by computerized tomography (“CT”) scan and the patients must not have had any prior chemotherapy for their
disease.
Duration of Treatment and Dosage Information:
On day 0, celiac angiography was performed and 300 (in 13 patients, 250 in one) of the capsules containing the ifosfamide-activating
cells were placed by supraselective catheterization of an artery leading to the tumor. Each capsule (~0.7 mm in diameter) contained
about 20,000 cells. The cells overexpressed CYP2B1 (a cytochrome P450 isoform), which catalyzed the conversion of the anticancer
prodrug ifosfamide into its “cancer-killing” form.
On day 1, patients were monitored for evidence
of any clinically relevant adverse reactions, e.g. allergy and/or pancreatitis. On days 2-4, each patient received low-dose (1
g/m2 body surface area) ifosfamide in 250 ml of normal saline administered systemically as a 1-hour infusion. This was
accompanied by a 60% dose equivalent of the uroprotective drug Mesna, which is used to reduce the side effects of ifosfamide chemotherapy,
given as three intravenous injections. This regimen was repeated on days 23-25 for all but two patients who received only one round
of ifosfamide. A total of only two cycles of ifosfamide were given to the remainder of the patients.
Specific Clinical Endpoints: Median
survival time from the time of diagnosis, the percentage of patients who survived one year or more and the quality of life of each
patient were examined in the clinical trial.
Observational Metrics Utilized and Actual
Results Observed: Standard National Cancer Institute (“NCI”) criteria for evaluating tumor growth were used
to assess results:
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stable disease (tumors 50-125% of initial size) (“SD”);
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partial remission (more than 50% reduction in tumor volume) (“PR”); and
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minor response (tumor reduction of between 25% and 50%) (“MR”).
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Effects of the treatment on tumor size
were measured by CT scans. Control CT scans were scheduled for weeks 10 and 20, respectively. During the final visit a control
angiography was performed. On the initial CT scan, the scan demonstrating the largest diameter of the primary tumor was identified
and the area measured. Using appropriate landmarks, an identical scan was used for comparison. CT scans were evaluated by two unrelated
radiologists, one of whom was not involved in the clinical trial. After formally finishing the clinical trial, patients were followed
on an ambulatory basis with visits once every three months.
Toxicity was measured based on World Health
Organization (“WHO”)/NCI guidelines on common toxicity criteria. The WHO and the NCI use standardized classifications
of the adverse events associated with the use of cancer drugs. In cancer clinical trials, these are used to determine if a drug
or treatment causes unwanted side effects (“Adverse Events”) when used under specific conditions. For example, the
most commonly used classification is known as the “Common Terminology Criteria for Adverse Events” developed by the
NCI in the U.S. Most clinical trials carried out in the U.S. and the United Kingdom code their Adverse Event. This system consists
of five grades. These are: 1 = mild; 2 = moderate; 3 = severe; 4 = life-threatening; 5 = death. In the studies reported for Cell-in-a-Box®
plus low-dose ifosfamide combination in pancreatic cancer patients, the study investigators noted 11 Serious Adverse Events (“SAEs”)
in 7 patients, none of which were believed to be treatment-related.
Each patient’s need for pain medication
and the quality of life (“QOL”) was monitored using a questionnaire established for diseases of the pancreas. A QOL
questionnaire for cancer patients, QLQ-C30, had been validated in several languages, but the module for pancreatic cancer per
se was still under development at the time of the study with respect to reliability, sensibility against changes and multicultural
validation. Accordingly, a version of the core questionnaire and a German QOL scale (published in 1995) for pancreatic cancer patients
was used. QOL data were documented independently from safety and efficacy data by having patients complete an independent questionnaire.
Assessment of QOL data did not interfere with routine documentation of Adverse Events reported by the patients. QOL questionnaires
were analyzed according to the criteria developed by the European Organization for Research and Treatment of Cancer (“EORTC”).
As used in the description of the QOL results discussed in the published report of the Phase 1/2 trial of the Cell-in-a-Box®
plus low-dose ifosfamide combination in pancreatic cancer patients, the questionnaire was used to assess the QOL of patients undergoing
treatment. The QOL was analyzed in a similar manner to the way that a QOL questionnaire developed by the EORTC is usually analyzed.
This latter questionnaire is known as EORTC QLQ-C30. QOL data were available from the baseline evaluation for 14 patients and for
analysis of change for 8 patients.
A clinical benefit score based on variables,
including the “Karnofsky Score” and body weight, was determined. Pain and analgesic consumption were calculated from
the QOL questionnaires. The Karnofsky Score is a scale that is used to attempt to quantify a cancer patient’s general well-being
and activities of daily life. It is often used to judge the suitability of patients for inclusion into clinical trials. As a clinical
trial progresses, a patient’s Karnofsky Score can change. It is also used to assess a patient’s QOL as a clinical trial
progresses. The scale starts at 100 (normal, no complaints, no evidence of disease) and decreases in decrements of 10 down through
50 (requires considerable assistance and frequent medical care) all the way to 10 (moribund, fatal processes progressing rapidly)
and finally to 0 (deceased). Pain intensity was measured on a visual analog scale ranging from 0 (no pain) to 100 (the most intensive
pain imaginable) in increments of 10. Analgesic consumption was assessed using a separate scale in which 0 indicated no regular
consumption of analgesics and 25, 50 and 100 indicated administration of non-steroidal anti-inflammatory drugs or opiates several
times per year, per month or per week, respectively.
The primary tumor did not grow in any of
the 14 patients. Two patients had a PR; 12 patients exhibited SD; and two patients showed an MR.
Median survival time of patients in this
clinical trial was 39 weeks. The one-year survival rate was 36%.
Within the 20-week study period, three
patients died from disease progression (on days 9, 85 and 132). Upon postmortem examination, the patient who died on day 9 from
recurrent pulmonary embolism was found to have extensive tumor necrosis.
The chemotherapy regimen was well tolerated.
No toxicity beyond Grade 2 (moderate adverse effect) was detected in any of the 14 patients.
Eleven SAEs were seen in 7 patients during
the study period. None of them were treatment-related (due to capsule implantation or ifosfamide administration). These SAEs were
attributed to underlying disease and/or the effects associated with the disease.
Implanting the capsules did not result
in any obvious allergic or inflammatory response, and no patients developed pancreatitis during the trial. Some patients exhibited
elevated amylase levels, presumably due to tumor infiltration of the pancreas and limited obstructive chronic pancreatitis. However,
no further increase in amylase levels was seen after angiography and capsule implantation.
In accordance with the report of the study,
only one Adverse Event (increased lipase activity on day 15 after installation of the capsules), which was a Grade 1 Adverse Event,
“may” have been linked to implanting the capsules.
Ten of 14 patients experienced a “clinical
benefit” which means either no increase or a decrease in pain intensity. For 7 of the patients, this was confirmed by their
analgesic consumption. None of these “benefited” patients registered an increased analgesic usage either in terms of
dosage or WHO levels.
None of the patients showed an increased
Karnofsky Score after treatment. However, 7 of the 14 patients had stable Karnofsky Scores at the week 10 assessment. For 4 of
these patients, their indices were still stable at the week 20 assessment.
One patient’s body weight increased
at both weeks 10 and 20 and another patient showed increased weight at week 10 (this patient withdrew from the clinical trial and
no week 20 weight was obtained). Two patients showed stable body weights at week 10, one of whom dropped out of the clinical trial
and the other showed weight loss at week 20.
Two scenarios were used to establish the
overall integrative clinical benefit response, where each patient was given a +2 score for an improved value, a +1 score for a
stable value and a -1 score for a worsened value for each of four criteria (pain, analgesic consumption, Karnofsky Score and body
weight) as compared to the relevant week 0 values.
The “worst case scenario” required
a pain relief score of 20 points or more to be judged an improvement and a decrease in the Karnofsky Score of 10 points or more
to indicate worsening. Using this scenario, 50% or 7 of the treated patients experienced clinical benefit; 21.4% or 3 patients
were neutral (benefits were offset by impairments); and 28.6% or 4 patients had no clinical benefit. The latter included those
passing away before the median survival time.
In the “best case scenario,”
a pain relief score of 10 points or more was an improvement. A decrease in Karnofsky Score of 20 points or more was considered
a worsening. In this scenario, 71.4% or 10 patients had clinical benefit, 14.2% of patients showed neither benefit nor deterioration
and 14.3% patients had no benefit.
Standard of Care: At the time this
clinical trial was conducted, only one FDA-approved treatment for advanced, inoperable pancreatic cancer was available. That was
the drug gemcitabine, first approved by the FDA in 1996.
An examination of the prescribing information
for gemcitabine reflects that the median survival seen in the Phase 3 pancreatic cancer clinical trial for gemcitabine was approximately
23 weeks (5.7 months). The percentage of one-year survivors was approximately 18%. In a Phase 3 clinical trial of Celgene’s
Abraxane® plus gemcitabine combination that was approved by the FDA in September 2013, the median survival time
for patients was about 8.5 months and the percentage of one-year survivors was approximately 35%.
The treatment with gemcitabine of patients
with pancreatic cancer is often associated with severe side effects. According to the prescribing information for gemcitabine,
for use to treat pancreatic cancer the recommended dose is 1000 mg/m2 given intravenously over 30 minutes. The schedule
of administration is weeks 1-8, weekly dosing for 7 weeks followed by one-week rest and then after week 8, weekly dosing on days
1, 8 and 15 of 28-day cycles.
Reductions in the doses of gemcitabine
are necessitated by the occurrence of myelosuppression. Permanent discontinuation of gemcitabine is necessary for any of the following:
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unexplained dyspnea or other evidence of severe pulmonary toxicity;
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severe hepatotoxicity;
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hemolytic-uremic syndrome;
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capillary leak syndrome; and
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posterior reversible encephalopathy syndrome.
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Gemcitabine should be withheld, or its
dose reduced by 50% for other severe (Grade 3 or 4) non-hematologic toxicity until that toxicity is resolved.
Conclusions: In the opinion of the
trial’s investigators, in this Phase 1/2 clinical trial the use of the combination of Cell-in-a-Box® capsules
plus low-dose ifosfamide was both safe and effective. This assessment was not based on the opinion of any drug regulatory authority
and does not guarantee that that this assessment will be maintained in any late-phase clinical trial or that any drug regulatory
authority will ultimately determine that the Cell-in-a-Box® plus low-dose ifosfamide combination is safe and effective
for the purposes of granting marketing approval.
In the Phase 1/2 clinical trial only a
small number of patients were evaluated. Statistical parameters were not used in the published reports of the Phase 1/2 trial
to validate the anticancer efficacy of the Cell-in-a-Box® plus low-dose ifosfamide combination in patients with
advanced, inoperable pancreatic cancer. In the opinion of the investigators, the results indicate a trend towards efficacy; accordingly,
the results should not be viewed as absolute numbers. It should be noted, however, that because the results were not statistically
significant, any observations of efficacy must be weighed against the possibility that the results were due to chance alone. The
purpose of the clinical trial was not to obtain data so that marketing approval could be obtained from regulatory authorities.
Rather, the clinical trial allowed the investigators to determine whether the Cell-in-a- Box® capsules plus low-dose
ifosfamide combination holds promise as a therapy for advanced pancreatic cancer. In the cancer arena, Phase 1/2 clinical trials
are used to: (i) establish the safety of the drug or treatment being investigated; and (ii) determine if a trend towards efficacy
exists. In accordance with FDA guidance, as well as similar guidance from other regulatory authorities in countries other than
the U.S., we realize that a large, multicenter, randomized, comparative study needs to be conducted and the results from such
a trial would have to confirm the results from this previous Phase 1/2 trial before an application for marketing approval could
be filed with the FDA or EMA. We expect that shortly after the filing of this Report we will file an IND with the FDA to allow
us to commence a human clinical trial involving LAPC although no assurance as to timing can be given.
If our cancer therapy is approved by the
regulatory agencies, we believe it could provide a significant benefit to those with this devastating and deadly disease, not only
in terms of lifespan but also in terms of increased quality of life. Also, we believe that success of the live cell encapsulation
technology in the pancreatic cancer setting may lead to its successful use in developing therapies for other forms of solid cancerous
tumors after preclinical studies and clinical trials have been completed.
Phase 2 Clinical Trial
Location of Trial: The clinical
trial was opened on November 16, 1999 and closed on December 1, 2000. This clinical trial was carried out at four centers in two
countries in Europe. These were in Berne, Switzerland, and in Rostock, Munich and Berlin, Germany.
Trial Sponsor: The clinical trial
was sponsored by Bavarian Nordic.
Trial Design: This was an open-label,
prospective, single-arm multi-site study.
Patient Information: All 13 patients
enrolled in the trial were treated. Twelve patients exhibited Stage 4 disease. The remaining patient had Stage 3 disease. Ten of
the 13 patients exhibited metastases.
Duration of Treatment and Dosage Information:
The number of capsules implanted varied from 221 to 300 with a mean of 244. On day 1, patients were monitored for any allergic
reactions to capsule implantation and/or pancreatitis. The administration schedule of the treatment was the same as in the earlier
Phase 1/2 trial, except that in this Phase 2 trial the dose of ifosfamide was doubled to 2 g/m2. In the Phase1/2 trial,
it was 1g/m2. On days 2-4, patients received 2 g/m2 in normal saline as a one-hour infusion. The urinary
tract protector Mesna was also given as 3 intravenous injections. This regimen was repeated on days 23-25.
Specific Clinical Endpoints: The
primary endpoint of the trial was to determine response rate as defined by SD, PR and MR as well as the clinical benefit (Karnofsky
score) of the treatment. The timing of the tumor size measurements and determination of tumor sizes by CT scans were done by independent
radiologists. A secondary endpoint was to determine time to progression, tumor response, duration of partial or complete remission,
length of symptom-free survival, survival time and quality of life. Another secondary endpoint was to evaluate the safety and tolerability
of the treatment regimen, with attention being paid to the appearance of pancreatitis or immediate allergic reactions.
Safety Analysis of Angiography, Capsule
Implantation and Chemotherapy: On average, angiography took approximately 40 minutes. For 5 of the patients in this clinical
trial, more than one blood vessel had to be used for placement of the capsules. The administration of the capsules was well tolerated.
There were no signs of allergic reactions or hemorrhagic cystitis after implantation of the capsules. Two patients had increased
levels of serum lipase at baseline. After additional measurements, these were not considered to be clinically relevant. The dose
of ifosfamide (2 g/m2) used was found to be toxic in most patients. This resulted in one patient having to reduce the
ifosfamide dose in the second of the two cycles of treatment with the drug. The most common toxic effects were nausea, vomiting,
malaise, anorexia and mild hematuria.
Serious Adverse Events: A total
of 16 SAEs were documented in eight patients, including 3 SAEs leading to death. None of these SAEs were attributed to placement
of the encapsulated cells. One patient experienced neurological impairment (drowsiness, nocturnal enuresis, mild somnolence) which
was attributed to treatment with the 2 g/m2 dose of ifosfamide. All patients experienced between 5 and 19 SAEs. Six
SAEs were rated as life-threatening; 10.2% were rated as severe; 28.7% were rated as moderate; and 53.7% were rated as mild. None
of the SAEs was thought to be related to placement of the encapsulated cells, but 44% were related to the administration of ifosfamide
at the elevated dose given. Most frequent SAEs were alopecia, anemia, leucopenia, nausea and vomiting or encephalopathy. Other
SAEs were new or worse symptoms of the patients’ underlying disease. A total of 65 events met the NCI’s common toxicity
criteria. Of these, 46.2% had Grade 1, 40% had Grade 2, 9.2% had Grade 3 and 4.6% had Grade 4 toxicities.
Tumor Reductions and Patient Survival
Results: The size of the primary tumor was measured before starting the live cell encapsulation plus ifosfamide therapy and
at weeks 10 and 20 post-treatment. No PRs were observed, but 4 patients exhibited tumor size reductions, 4 patients showed tumor
growth and the remaining 5 patients had SD over the “follow-up” period after chemotherapy.
The median survival of patients was 40
weeks. Most the survival benefit was shown early during the entire observation period. However, as time progressed, these patients
succumbed at the same rate as historical controls. This observation suggested to the investigators that prolongation of the survival
benefit might be achieved if additional courses of ifosfamide chemotherapy were given. The one-year survival rate was 23%. It was
thought that this may be attributable to the higher dose of ifosfamide used in this clinical trial.
Quality of Life: An assessment of
the quality of life of the patients was performed in this clinical trial. Quality of life data were available for all the patients.
According to this quality of life assessment, although pain during the night decreased, patients felt themselves to be less attractive
and lost interest in sex. No additional improvements in patients’ quality of life were observed.
Conclusions: The opinions of the
investigators were as follows: (i) the lack of “problems” associated with the implanted encapsulated cells was noted
as in the Phase 1/2 trial; (ii) administering more than two courses of treatment with ifosfamide might have beneficial effects
on survival; and (iii) since doubling the dose of ifosfamide from that used in the Phase 1/2 trial had no beneficial antitumor
or survival effect but was associated with increased side effects from the treatment, the dose of ifosfamide to be used in combination
with the encapsulated cells for all future trials should be 1 g/m2.
Manufacturing
We are outsourcing all cell growth, processing
and encapsulation services needed for our future proposed clinical trials of the encapsulated cell-based cancer and diabetes therapies.
The Cell-in-a-Box® encapsulation will be done by Austrianova at its cGMP-compliant manufacturing facility in Bangkok,
Thailand.
In March 2014, we entered a Manufacturing
Framework Agreement with Austrianova (“Manufacturing Framework Agreement”) pursuant to which Austrianova will encapsulate
the genetically engineered live cells that will be used for our cancer therapy. We have also contracted with Austrianova to provide
encapsulated insulin-producing cells for our preclinical studies in diabetes. At the appropriate time, we intend to enter into
a similar manufacturing framework agreement with Austrianova for the encapsulated cells we will need for our diabetes therapy.
Government Regulation and Product Approval
As a development stage biotechnology company
that operates in the U.S., we are subject to extensive regulation by the FDA and other federal, state, and local regulatory agencies.
The federal Food, Drug, and Cosmetic Act (“FDCA”) and its implementing regulations set forth, among other things, requirements
for the research, testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record
keeping, reporting, distribution, import, export, advertising, promotion, marketing and sale of our product candidates. Although
the discussion below focuses on regulation in the U.S., we anticipate seeking approval for, and marketing of, our product candidates
in other countries. Our activities in other countries will also be the subject of extensive regulation, although there can be important
differences with the U.S. The process of obtaining regulatory marketing approvals and the subsequent compliance with appropriate
federal, state, local and foreign statutes and regulations will require the expenditure of substantial time and financial resources
and may not be successful.
Regulatory approval, when obtained, may
be limited in scope which may significantly limit the uses for which a product may be placed into the market. Further, approved
drugs or biologic products, as well as their manufacturers, are subject to ongoing post-marketing review, inspection and discovery
of previously unknown issues regarding the safety and efficacy of such products or the manufacturing or quality control procedures
used in their production. These may result in restrictions on their manufacture, sale or use or in their withdrawal from the market.
Any failure or delay by us, our suppliers of manufactured drug product, collaborators or licensees in obtaining regulatory approvals
could adversely affect the marketing of our product candidates and our ability to receive product revenue, license revenue or profit-sharing
payments. For more information, see Item 1A. “Risk Factors.”
U.S. Government Regulation
The FDA is the main regulatory body that
controls pharmaceuticals and biologics in the U.S. Its regulatory authority is based in the FDCA and the Public Health Service
Act. Pharmaceutical products and biologics are also subject to other federal, state and local statutes and regulations. A failure
to comply with any requirements during the product development, approval, or post-approval periods, may lead to administrative
or judicial sanctions. These sanctions could include the imposition by the FDA or by an Institutional Review Board (“IRB”)
of a hold on clinical trials, refusal to approve pending marketing applications or supplements, withdrawal of approval, warning
letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil
penalties or criminal prosecution.
The steps required before a new drug or
biologic may be marketed in the U.S. generally include:
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completion of preclinical studies and formulation studies in compliance with the FDA’s Good Laboratory Practices (“GLP”), protocols and regulations;
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satisfactory completion of an FDA inspection of the manufacturing facilities at which the investigational product candidate is produced to assess compliance with cGMP and proof that the facilities, methods and controls are adequate;
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submission to the FDA of an IND to support human clinical testing in the U.S.;
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approval by an IRB at each clinical site before a trial may be initiated at that site;
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performance of adequate and well-controlled clinical trials in accordance with federal regulations and with Good Clinical Practices (“GCPs”) to establish the safety and efficacy of the investigational product candidate for each target indication;
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Submission to the FDA of a New Drug Application (“NDA”) or a drug or
Biologics License Application (“BLA”) for a biologic such as the therapies we are developing;
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satisfactory completion of an FDA Advisory Committee review, if applicable; and
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FDA review and approval of the NDA or BLA.
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Clinical Development
Before a drug or biologic product may be
given to humans, it must undergo preclinical testing. Preclinical tests include laboratory evaluation of a product candidate’s
chemical and biological activities and animal studies to assess potential safety and efficacy in humans. The results of these studies
must be submitted to the FDA as part of an IND which must be reviewed by the FDA for safety and other considerations before testing
can begin in humans.
An IND is a request for authorization from
the FDA to administer an investigational product candidate to humans. This authorization is required before interstate shipping
and administration can commence of any new drug or biologic product destined for use in humans in the U.S. A 30-day
waiting period after the submission of each IND is required before commencement of clinical testing in humans. If the FDA has neither
commented on nor questioned the IND within this 30-day period after submission of the IND, the clinical trial proposed in the IND
may begin. A clinical trial involves the administration of the investigational product candidate to patients under the supervision
of qualified investigators following GCP standards. These international standards are meant to protect the rights and health of
patients and to define the roles of clinical trial sponsors, administrators and monitors. A clinical trial is conducted under protocols
that detail the parameters to be used in monitoring safety, and the efficacy criteria to be evaluated. Each protocol involving
testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The product candidates in our pipeline
are at various stages of preclinical development. The path to regulatory approval includes three phases of clinical trials in which
we collect data to support an application to regulatory agencies to allow us to ultimately market a product for treatment of a
specified disease. There are many difficulties and uncertainties inherent in research and development of new products, and these
can conceivably result in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately
to market, takes years and the costs to do so are significant. Failure can occur at any point in the process, including after the
product is approved, based on post-marketing factors. New product candidates that appear promising in development may fail to reach
the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory
approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative
therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the approval process of the
regulatory agencies can result in delays in product launches and lost market opportunities. Consequently, it is very difficult
to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and
which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate
predictor of the ultimate safety or effectiveness of a product candidate.
Phase 1 Clinical Trial: A Phase 1
clinical trial begins when a regulatory agency, such as the FDA, allows initiation of the clinical investigation of a new product
candidate. The clinical trial studies a product candidate’s safety profile and may include a preliminary determination of
a product candidate’s safe dosage range. The Phase 1 clinical trial can also determine how a drug is absorbed, distributed,
metabolized and excreted by the body and, therefore, the potential duration of its action.
Phase 2 Clinical Trial: A
Phase 2 clinical trial is conducted on a limited number of patients; these patients can have a specific targeted
disease. An initial evaluation of the product candidate’s effectiveness on patients is performed. Additional
information on the product candidate’s safety and dosage range is obtained. For many diseases, a Phase 2 clinical trial
can include up to several hundred patients.
Phase 3 Clinical Trial: A Phase 3
clinical trial is typically rigorously controlled, conducted in multiple centers and involves a larger target patient population
that can consist of from several hundred to thousands of patients (depending on the disease being studied) to ensure that study
results are statistically significant. During a Phase 3 clinical trial, physicians monitor patients to determine efficacy
and to gather further information on safety. A Phase 3 clinical trial is designed to generate all the clinical data necessary to
apply for marketing approval to a regulatory agency.
The decision to terminate development of
an investigational product candidate may be made by either a health authority body, such as the FDA, by IRB/ethics committees,
or by the sponsor for various reasons. The FDA may order the temporary or permanent discontinuation of a clinical trial at any
time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements
or presents an unacceptable risk to the patients enrolled in the trial. In some cases, a clinical trial is overseen by an independent
group of qualified experts organized by the trial sponsor, or the clinical monitoring board. This group provides authorization
for whether a trial may move forward at designated checkpoints. These decisions are based on the limited access to data from the
ongoing trial. The suspension or termination of development can occur during any phase of a clinical trial if it is determined
that the patients are being exposed to an unacceptable health risk. There are also requirements for the registration of an ongoing
clinical trial of a product candidate on public registries and the disclosure of certain information pertaining to the trial, as
well as clinical trial results after completion.
A sponsor may be able to request a special
protocol assessment (“SPA”), the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial
protocol design and analysis that will form the primary basis of an efficacy claim. A sponsor meeting the regulatory criteria may
make a specific request for a SPA and provide information regarding the design and size of the proposed clinical trial. A SPA request
must be made before the proposed trial begins. All open issues must be resolved before the trial begins. If a written agreement
is reached, it will be documented and made part of the record. The agreement will be binding on the FDA and may not be changed
by the sponsor or the FDA after the trial begins, except with the written agreement of the sponsor and the FDA or if the FDA determines
that a substantial scientific issue essential to determining the safety or efficacy of the product candidate was identified after
the testing began. A SPA is not binding if new circumstances arise, and there is no guarantee that a study will ultimately be adequate
to support an approval even if the study is subject to a SPA. Having a SPA does not guarantee that a product candidate will receive
FDA approval.
Assuming successful completion of all required
testing in accordance with all applicable regulatory requirements, detailed investigational product candidate information is submitted
to the FDA in the form of an NDA or BLA to request regulatory approval for the product in the specified indication.
New Drug Applications and Biologic Licensing
Applications
To obtain approval to market a drug or
biologic in the U.S., a marketing application must be submitted to the FDA that provides data establishing the safety and effectiveness
of the product candidate for the proposed indication. The application includes all relevant data available from pertinent preclinical
studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information
relating to the product’s chemistry, manufacturing and controls, as well as the proposed labeling for the product, among
other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a product,
or from several alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted
must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational product candidate to
the satisfaction of the FDA.
In most cases, the NDA, in the case of
a drug, or BLA, in the case of a biologic, must be accompanied by a substantial user fee. There may be some instances in which
the user fee is waived. The FDA will initially review the NDA or BLA for completeness before it accepts the application for filing.
The FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based
on the agency’s threshold determination that it is sufficiently complete to permit substantive review. After the NDA or BLA
submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review
of NDAs and BLAs. During a normal review cycle, a product is given an FDA action or Prescription
Drug User Fee Act (“PDUFA”) date within 12 months of the submission, if the submission is accepted. The FDA
can extend this review by three months to consider certain late-submitted information or information intended to clarify information
already provided in the submission. The FDA reviews the NDA or BLA to determine, among other things, whether the proposed product
is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP standards. The
FDA may refer applications for novel product candidates which present difficult questions of safety or efficacy to an advisory
committee. This is typically a panel that includes clinicians and other experts for review, evaluation and a recommendation as
to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory
committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA or a BLA, the FDA
will inspect the facilities at which the product is manufactured. The FDA will not approve the product candidate unless it determines
that the manufacturing processes and facilities follow cGMP requirements and are adequate to assure consistent production of the
product within required specifications. Manufacturers of human cellular or tissue-based biologics also must comply with the FDA’s
Good Tissue Practices (“GTPs”), as applicable, and with the general biological product standards. After the FDA evaluates
the NDA or BLA and the sponsor company’s manufacturing facilities, it issues either an approval letter or a complete response
letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional
testing or information for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s
satisfaction in a resubmission of the NDA or BLA, the FDA will issue an approval letter. Notwithstanding the submission of any
requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval.
The time to final marketing approval can
vary from months to years, depending on several variables. These variables can include such things as the disease type, the strength
and complexity of the data presented, the novelty of the target or compound, risk-management approval and whether multiple rounds
of review are required for the agency to evaluate the submission. After evaluating the NDA or BLA and all related information,
including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical
trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally
contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional
clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information,
the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions
have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial
marketing of the drug with specific prescribing information, which may include contraindications, warnings or precautions, for
certain indications. After approval, some types of changes to the approved product, such as adding new indications and additional
labeling claims, are subject to further testing requirements and FDA review and approval.
Post Approval Regulations
After regulatory approval of a drug or
biologic is obtained, a company is required to comply with certain post-approval requirements. For example, as a condition of approval
of an NDA or BLA, the FDA may require post-marketing testing, including a Phase 4 clinical trial and surveillance to further
assess and monitor the product’s safety and effectiveness after commercialization has begun. Also, as a holder of an approved
NDA or BLA, a company is required to: (i) report adverse reactions and production problems to the FDA; (ii) provide updated safety
and efficacy information; and (iii) comply with requirements concerning advertising and promotional labeling for any of its products.
Also, quality control and manufacturing procedures must continue to conform to cGMP standards after approval to assure and preserve
the long-term stability of the drug or biological product. The FDA periodically inspects manufacturing facilities to assess compliance
with cGMP standards, which imposes extensive procedural and substantive record keeping requirements. Also, changes to the manufacturing
process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented.
In addition, FDA regulations require investigation and correction of any deviations from cGMP standards and impose reporting and
documentation requirements upon a company and any third-party manufacturers that a company may decide to use. Manufacturers must
continue to expend time, money and effort in production and quality control to maintain compliance with cGMP standards and other
aspects of regulatory compliance.
Disclosure of Clinical Trial Information
A sponsor of a clinical trial of certain
FDA-regulated products, including prescription drugs and biologics, is required to register and disclose certain clinical trial
information on a public website. Information related to the product, patient population, phase of investigation, study sites and
investigator involved, and other aspects of the clinical trial are made public as part of the registration. A sponsor is also obligated
to disclose the results of a clinical trial after completion. Disclosure of the results can be delayed until the product or new
indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding
the design and progress of our development programs.
Advertising and Promotion
The FDA and other federal regulatory agencies
closely regulate the marketing and promotion of drugs and biologics through, among other things, standards and regulations for
direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities
and promotional activities involving the internet. A product cannot be commercially promoted before it is approved. After approval,
product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved
by the FDA. Healthcare providers are permitted to prescribe drugs or biologics for “off-label” uses (uses not approved
by the FDA and therefore not described in the drug’s labeling) because the FDA does not regulate the practice of medicine.
However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off label uses. Broadly
speaking, a manufacturer may not promote a product for off-label use, but may engage in non-promotional, balanced communication
regarding off-label use under specified conditions. Failure to comply with applicable FDA requirements and restrictions in this
area may subject a company to adverse publicity and enforcement action by the FDA, the U.S. Department of Justice (“DOJ”),
the Office of the Inspector General of Health & Human Services (“HHS”) and state authorities. This could subject
a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and/or agreements
that materially restrict the manner in which a company promotes or distributes drug and biologics.
U.S. Patent Extension and Marketing
Exclusivity
The Biologics Price Competition and Innovation
Act (“BPCIA”) amended the PHSA to authorize the FDA to approve similar versions of innovative biologics, commonly known
as biosimilars. A competitor seeking approval of a biosimilar must file an application to establish its product as highly like
an approved innovator biologic, among other requirements. The BPCIA bars the FDA from approving biosimilar applications for 12
years after an innovator biological product receives initial marketing approval.
Depending upon the timing, duration and
specifics of the FDA approval of the use of our product candidates, some of our U.S. patents, if granted, may be eligible for limited
patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (“Hatch-Waxman Act”).
The Hatch-Waxman Act permits a patent extension term of up to five years, as compensation for patent term lost during product development
and the FDA regulatory review process. However, patent term extension cannot extend the remaining term of a patent beyond a total
of 14 years from the product’s approval date. The length of the patent term extension is related to the length of time the
drug, biologic or medical device is under regulatory review. It is calculated as half of the testing phase (the time between the
IND submission becoming effective and the NDA, BLA or premarket approval (“PMA”) submission) and all the review phase
(the time between NDA, BLA or PMA submission and approval) up to a maximum extension of five years. The time can be shortened if
the FDA determines that the applicant did not pursue approval with due diligence. Only one patent applicable to an approved product
is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent. The
U.S. Patent and Trademark Office (“USPTO”), in consultation with the FDA, reviews and approves the application for
any patent term extension. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent
that covers an approved drug, biologic or medical device. In the future, if any of our product candidates receive FDA approval,
we expect to apply for patent term extension on patents covering those products that may be eligible for such patent term restoration.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (“FCPA”)
prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly
or indirectly, to any foreign official, political party or candidate for influencing any act or decision of the foreign entity
to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are
listed in the U.S. to comply with accounting provisions requiring such companies to maintain books and records that accurately
and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate
system of internal accounting controls for international operations. In Europe, and throughout the world, other countries have
enacted anti-bribery laws and/or regulations similar to the FCPA.
European and Other International Government
Regulation
In addition to regulations in the U.S.,
we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial
sales and distribution of our product candidates. There is no guarantee that a potential treatment will receive marketing approval
or that decisions on marketing approvals or treatment indications will be consistent across geographic areas. Whether or not we
obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior
to the commencement of clinical trials or marketing of the product in those countries. Some countries outside of the U.S. have
a similar process to that of the FDA in that such countries require the submission of a clinical trial application (“CTA”)
much like the IND prior to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to each country’s
national health authority and an independent ethics committee, much like the FDA and an IRB. Once the CTA is approved in accordance
with a country’s requirements, a clinical trial may proceed in that particular country.
To obtain regulatory approval to commercialize
a new drug or biologic under the European Union regulatory systems, we must submit a marketing authorization application (“MAA”)
with the EMA, the European Union’s counterpart to the U.S. FDA. It is like the NDA or the BLA, except for, among other things,
country-specific document requirements.
Outside of the European Union the requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. Internationally,
clinical trials are generally required to be conducted in accordance with GCP standards applicable regulatory requirements of each
jurisdiction and the medical ethics principles that have their origin in the Declaration of Helsinki.
Orphan Drug Status
In accordance with laws and regulations
pertaining to regulatory agencies, a sponsor may request that the regulatory agencies designate a drug or biologic intended to
treat a “Rare Disease or Condition” as an “Orphan Drug.” For example, in the U.S., a “Rare Disease
or Condition” is defined as one which affects less than 200,000 people in the U.S., or which affects more than 200,000 people
but for which the cost of developing and making available the product is not expected to be recovered from sales of the product
in the U.S. Upon the approval of the first NDA or BLA for a drug or biologic designated as an Orphan Drug for a specified indication,
the sponsor of that NDA or BLA is entitled to 7 years of exclusive marketing rights in the U.S. for the drug or biologic for the
particular indication unless the sponsor cannot assure the availability of sufficient quantities to meet the needs of persons with
the disease. In Europe, this exclusivity is 10 years. However, Orphan Drug status for an approved indication does not prevent another
company from seeking approval of a drug that has other labeled indications that are not under orphan or other exclusivities. An
Orphan Drug may also be eligible for federal income tax credits for costs associated with the disease state, the strength and complexity
of the data presented, the novelty of the target or compound, the risk-management approval and whether multiple rounds of review
are required for the agency to evaluate the submission. There is no guarantee that a potential treatment will receive marketing
approval or that decisions on marketing approvals or treatment indications will be consistent across geographic areas. Our therapy
for pancreatic cancer and received Orphan Drug status in the U.S. and European Union.
Special FDA Expedited Review and
Approval Programs
The FDA has various programs, including
fast track designation, accelerated approval, priority review, and breakthrough therapy designation, which are intended to expedite
or simplify the process for the development and FDA review of drugs or biologics that are intended for the treatment of serious
or life-threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs
is to provide important new drugs to patients earlier than under standard FDA review procedures.
To be eligible for a fast track designation,
the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease
or condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an
unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing
therapy based on efficacy or safety factors. The FDA may review sections of the NDA or BLA for a fast track product on a rolling
basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the
NDA or BLA, the FDA agrees to accept sections of the NDA or BLA and determines that the schedule is acceptable, and the sponsor
pays any required user fees upon submission of the first section of the NDA or BLA.
The FDA may give a priority review designation
to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A priority review means
that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA
guidelines. Under the new PDUFA agreement, these six and ten month review periods are measured from the “filing” date
rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline
for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely
to be considered appropriate to receive a priority review.
In addition, products tested for their
safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over
existing treatments may be eligible for accelerated approval and may be approved on the basis of adequate and well-controlled clinical
trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit,
or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely
to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity
or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may
require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted
effect on IMM or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
Moreover, under the provisions of the Food
and Drug Administration Safety and Innovation Act, or FDASIA, passed in July 2012, a sponsor can request designation of a product
candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination
with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates
that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints,
such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also
eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended
to expedite the development and review of an application for approval of a breakthrough therapy.
Even if a product qualifies for one or
more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that
the time period for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates
as appropriate.
Accelerated Approval Pathway
The FDA may grant accelerated approval
to a drug for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing
treatments based upon a determination that the drug has an effect on a surrogate endpoint that is reasonably likely to predict
clinical benefit. The FDA may also grant accelerated approval for such a condition when the product has an effect on an intermediate
clinical endpoint that can be measured earlier than an effect on IMM, and that is reasonably likely to predict an effect on IMM
or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack
of alternative treatments. Drugs granted accelerated approval must meet the same statutory standards for safety and effectiveness
as those granted traditional approval.
For the purposes of accelerated approval,
a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign or other measure that is
thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured
more easily or more rapidly than clinical endpoints. An intermediate clinical endpoint is a measurement of a therapeutic effect
that is considered reasonably likely to predict the clinical benefit of a drug, such as an effect on IMM. The FDA has limited experience
with accelerated approvals based on intermediate clinical endpoints, but has indicated that such endpoints generally may support
accelerated approval where the therapeutic effect measured by the endpoint is not itself a clinical benefit and basis for traditional
approval, if there is a basis for concluding that the therapeutic effect is reasonably likely to predict the ultimate clinical
benefit of a drug.
The accelerated approval pathway is most
often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended
clinical benefit of a drug, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated
approval has been used extensively in the development and approval of drugs for treatment of a variety of cancers in which the
goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires
lengthy and sometimes large trials to demonstrate a clinical or survival benefit.
The accelerated approval pathway is usually
contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify
and describe the drug’s clinical benefit. As a result, a drug candidate approved on this basis is subject to rigorous post-marketing
compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical
endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would
allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved
under accelerated regulations are subject to prior review by the FDA.
Under a centralized procedure in the European
Union, the maximum timeframe for the evaluation of a MAA is 210 days (excluding “clock stops,” when additional
written or oral information is to be provided by the applicant in response to questions asked by the Committee for Medicinal Products
for Human Use (“CHMP”)). Accelerated evaluation might be granted by the CHMP in exceptional cases, for example, when
a medicinal product is expected to be of a major public health interest, which takes into consideration: (i) the seriousness of
the disease (e.g., heavy disabling or life-threatening diseases) to be treated; (ii) the absence or insufficiency of an appropriate
alternative therapeutic approach; and (iii) anticipation of high therapeutic benefit. In this circumstance, the EMA ensures that
the opinion of the CHMP is given within 150 days.
Healthcare Reform
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
(collectively, “Affordable Care Act”). The Affordable Care Act substantially changes the way healthcare will be delivered
and financed by both governmental and private insurers and significantly impacts the pharmaceutical and biotechnology industries.
The Affordable Care Act is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries,
impose new taxes and fees on the health industry and impose additional health policy reforms.
In addition, other legislative changes
have been proposed and adopted since passage of the Affordable Care Act. The Budget Control Act of 2011, among other things, created
the Joint Select Committee on Deficit Reduction (“Joint Select Committee”) to recommend proposals for spending reductions
to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of an amount greater than $1.2 trillion
for the fiscal years 2012 through 2021, triggering the legislation’s automatic reductions to several government programs.
These reductions included aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, which
went into effect in April 2013. In January 2013, former President Obama signed into law the American Taxpayer Relief Act of 2012,
which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional
reductions in Medicare and other healthcare funding, which could have a material adverse effect on our future customers, patients
and third-party payors and, accordingly, our financial operations.
In January 2016, the CMS issued a final
rule regarding the Medicaid drug rebate program. The final rule, effective April 1, 2016, among other things, revises the way the
“average manufacturer price” is to be calculated by manufacturers participating in the program and implements certain
amendments to the Medicaid rebate statute created under the Affordable Care Act. Also, there has been significant negative publicity
and increasing legislative and enforcement interest in the U.S. with respect to drug pricing practices. Specifically, there have
been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to
drug pricing, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement
methodologies for drugs. It is possible that there will be further legislation or regulation that could harm our business, products
financial condition and results of operations.
We anticipate that the Affordable Care
Act and other legislative reforms will result in additional downward pressure on the price that we receive for any approved product,
if covered, and could seriously harm our business, though we are still unsure what its full impact will be. There have been judicial
and Congressional challenges to certain aspects of the Affordable Care Act, and we expect such challenges and amendments to continue
in the future. Any reduction in reimbursement from Medicare and 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.
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 compromise our ability to generate revenue, attain profitability or commercialize our
products. At the same time, there have been significant ongoing efforts to modify or eliminate the Affordable Care Act. For example,
the “Tax Cuts and Jobs Act” (“Tax Act”), enacted on December 22, 2017, repealed the shared responsibility
payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Internal Revenue Code, commonly
referred to as the individual mandate, beginning in 2019.
The Joint Committee on Taxation estimates
that the repeal will result in over 13 million Americans losing their health insurance coverage over the next ten years and is
likely to lead to increases in insurance premiums. Further legislative changes to and regulatory changes under the Affordable Care
Act remain possible. It is unknown what form any such changes or any law proposed to replace the Affordable Care Act would take,
and how or whether it may affect our business in the future. Newly enacted FDA regulations may require us to expend additional
resources to obtain or maintain regulatory approval. For example, in August 2017 President Trump signed into law the Food &
Drug Administration Reauthorization Act (“FDARA”). This legislation imposes significant new requirements for clinical
trial sponsors which will affect, among other things, the development of drugs and biological products for pediatric use. This
legislation may result in new regulations, which may affect future options or timelines for regulatory approval.
Coverage and Reimbursement
Significant uncertainty exists as to the
coverage and reimbursement status of any drug products for which we obtain regulatory approval. In the U.S. and markets in other
countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability
of reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care
providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for
a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug
product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include
all the FDA-approved drugs for a certain indication. Third-party payors are increasingly challenging the price and examining the
medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need
to conduct expensive pharmacoeconomic studies in to demonstrate the medical necessity and cost-effectiveness of our product candidates,
in addition to the costs required to obtain FDA approvals. Our product candidates, if approved, may not be considered medically
necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement
rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient
to realize an appropriate return on our investment in product development.
Existing federal law requires pharmaceutical
manufacturers to pay rebates to state governments, based on a statutory formula, on covered outpatient drugs reimbursed by the
Medicaid program as a condition of having their drugs paid for by Average Manufacturer Price (“AMP”). AMP is determined
by a statutory formula that is based on prices defined in the statute. AMP must be calculated for all products that are covered
outpatient drugs under the Medicaid program and be the “best price.” Best price must be calculated only for those covered
outpatient drugs that are a single source drug or innovator multiple source drug, such as biologic products. Manufacturers are
required to report AMP and best price for each of their covered outpatient drugs to the government on a regular basis. Additionally,
some state Medicaid programs have imposed a requirement for supplemental rebates over and above the formula set forth in federal
law as a condition for coverage. In addition to the Medicaid rebate program, federal law also requires that if a pharmaceutical
manufacturer wishes to have its outpatient drugs covered under Medicaid as well as under Medicare Part B, it must sign a “Master
Agreement” obligating it to provide a formulaic discount of approximately 24%, known as the federal ceiling price for drugs
sold to the U.S. Departments of Defense, Veterans Affairs, the Public Health Service and the Coast Guard, and also provide discounts
through a drug pricing agreement meeting the requirements of Section 340B of the PHSA for outpatient drugs sold to certain
specified eligible healthcare organizations. The formula for determining the discounted purchase price under the 340B drug pricing
program is defined by statute and is based on the AMP and rebate amount for a product as calculated under the Medicaid drug rebate
program discussed above.
Different pricing and reimbursement schemes
exist in other countries. In the European Union governments influence the price of pharmaceutical products through their pricing
and reimbursement rules and control of national healthcare systems that fund a large part of the cost of those products to consumers.
Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price
has been agreed upon. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical
trials that compare the cost-effectiveness of a product candidate to currently available therapies. Other member states allow companies
to fix their own prices for medicines but monitor and control company profits. The downward pressure on healthcare costs in general,
particularly prescription drugs, has become more intense.
Thus, increasingly high barriers are being
erected to the entry of new products. The European Union provides options for its member states to restrict the range of medicinal
products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products
for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct
or indirect controls on the profitability of the company placing the medicinal product on the market. We may face competition for
our product candidates from lower-priced products in foreign countries that have placed price controls on pharmaceutical products.
In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.
The marketability of any product for which
we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate
coverage and reimbursement. Also, an increasing emphasis on managed care in the U.S. has increased and will continue to increase
the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time.
Even if favorable coverage and reimbursement
status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement
rates may be implemented in the future.
Other U.S. Healthcare Laws and Compliance
Requirements
In the U.S., our activities are potentially
subject to additional regulation by various federal, state and local authorities in addition to the FDA, including the CMS, other
divisions of the HHS and its Office of Inspector General, the Office for Civil Rights that has jurisdiction over matters relating
to individuals’ privacy and protected health information, the DOJ, individual U.S. Attorney offices within the DOJ and state
and local governments.
The federal Anti-Kickback Statute prohibits,
among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly,
to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or
service reimbursable under Medicare, Medicaid or other federally financed healthcare program. The Anti-Kickback Statute has been
interpreted broadly to proscribe arrangements and conduct where only one purpose of the remuneration between the parties was to
induce or reward referrals. The term remuneration has been interpreted broadly to include anything of value. This statute has been
interpreted to apply to arrangements between pharmaceutical manufacturers, on one hand, and prescribers, purchasers and formulary
managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting some business arrangements
from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration intended to induce
prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our
practices may not in all cases meet all the criteria for safe harbor protection from federal Anti-Kickback Statute liability. Failure
to meet all the requirements of an applicable safe harbor or statutory exemption, however, does not make the arrangement or conduct
per se unlawful under the Anti-Kickback Statute; instead, in such cases, the legality of the arrangement would be evaluated
on a case-by-case basis based on a consideration of all the facts and circumstances to ascertain the parties’ intent.
Moreover, the intent standard under the
Anti-Kickback Statute was amended by the Affordable Care Act to a stricter standard such that a person or entity no longer needs
to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the Affordable
Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the federal False Claims Act, as discussed below.
The federal Civil Monetary Penalties Law
imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented
a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed
or is false or fraudulent.
The federal False Claims Act prohibits
any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly
making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. Through a modification made to the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request
or demand” for money or property presented to the U.S. government. Pharmaceutical and other healthcare companies have been
prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill
federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the
companies’ marketing of the product for unapproved—and thus non-reimbursable—uses. The Federal Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”) created additional federal criminal statutes that prohibit knowingly
and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement
in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have additional similar
fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or,
in several states, apply regardless of the type of payor.
In addition, we may be subject to data
privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended
by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and its implementing regulations,
imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among
other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,”
such as independent contractors or agents of covered entities that receive or obtain protected health information with providing
a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered
entities, business associates and possibly other persons. It also gave state attorneys general new authority to file civil actions
for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated
with pursuing these actions. In addition, state laws govern the privacy and security of health information in specified circumstances,
many of which differ from each other in significant ways and may not have the same effect - thus complicating compliance efforts.
We may be subject to other state and federal
privacy laws, including laws that prohibit unfair privacy and security practices and deceptive statements about privacy and security,
laws that place specific requirements on certain types of activities, such as data security and texting, and laws requiring holders
of personal information to maintain safeguards and to take certain actions in response to a data breach. EU member states, the
United Kingdom, Switzerland and other jurisdictions have also adopted data protection laws and regulations, which impose significant
compliance obligations. In the EEA and the United Kingdom, the collection and use of personal data, including clinical trial data,
is governed by the provisions of the General Data Protection Regulation, or GDPR. The GDPR became effective on May 25, 2018, repealing
its predecessor directive and increasing responsibility and liability of pharmaceutical and medical device companies in relation
to the processing of personal data of EU data subjects. The GDPR, together with national legislation, regulations and guidelines
of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions
on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting.
In particular, these obligations and restrictions concern the consent of the individuals to whom the personal data relates, the
information provided to the individuals, the transfer of personal data out of the EEA or the United Kingdom, security breach notifications,
security and confidentiality of the personal data and imposition of substantial potential fines for breaches of the data protection
obligations. European data protection authorities may interpret the GDPR and national laws differently and impose additional requirements,
which add to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance
practices are often updated or otherwise revised.
The federal Physician Payments Sunshine
Act under the Affordable Care Act and its implementing regulations also require that certain manufacturers of drugs, devices, biologics
and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program,
with certain exceptions, to report information related to certain payments or other transfers of value made or distributed to physicians
and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching
hospitals. It also requires reporting annually certain ownership and investment interests held by physicians and their immediate
family members and payments or other “transfers of value” made to such physician owners. Failure to submit timely,
accurately and completely the required information may result in civil monetary penalties of up to an aggregate of $150,000 per
year and up to an aggregate of $1 million per year for “knowing failures”. Manufacturers were required to begin collecting
data on August 1, 2013 and submit reports on aggregate payment data to the government for the first reporting period of August 1,
2013 to December 31, 2013, by March 31, 2014. They are also required to report detailed payment data for the first reporting
period and submit legal attestation to the accuracy of such data by June 30, 2014. Thereafter, manufacturers must submit reports
by the 90th day of each subsequent calendar year. The CMS made all reported data publicly available starting on September 30,
2014. Certain states also mandate implementation of compliance programs, impose additional restrictions on pharmaceutical manufacturer
marketing practices and/ or require the tracking and reporting of gifts, compensation and other remuneration to healthcare providers
and entities.
To distribute products commercially, we
must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products
in a state, including, in some states, manufacturers and distributors who ship products into the state even if such manufacturers
or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors
to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others
to adopt new technology capable of tracking and tracing products as they move through the distribution chain. Several states have
enacted legislation requiring pharmaceutical companies to, among other things, establish marketing compliance programs, file periodic
reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or
register their sales representatives. They also prohibit pharmacies and other healthcare entities from providing specified physician
prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit other specified sales and marketing
practices. All our activities are potentially subject to federal and state consumer protection and unfair competition laws.
Because of the breadth of these laws and
the narrowness of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject
to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state laws
described above or any other governmental regulations that apply to us, we may be subject to penalties. These include criminal
and civil monetary penalties, damages, fines, imprisonment, exclusion from participation in government programs, injunctions, recall
or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private
“qui tam” actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter
supply contracts and the curtailment or restructuring of our operations. Any of these could adversely affect our ability to operate
our business and our results of operations. To the extent any of our products are sold in a foreign country, we may be subject
to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety
surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers
of value to healthcare professionals.
Controlled Substances Regulation
Our product candidates involving Cannabis
contain controlled substances, as defined in the federal Controlled Substances Act of 1970 (“CSA”). The CSA and its
implementing regulations establish a “closed system” of regulations for controlled substances. The CSA imposes registration,
security, recordkeeping and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight
of the U.S. Drug Enforcement Administration (“DEA”). The DEA is the federal agency responsible for regulating controlled
substances. It requires those individuals or entities that manufacture, import, export, distribute, research, or dispense controlled
substances to comply with the regulatory requirements to prevent the diversion of controlled substances to illicit channels of
commerce.
The DEA categorizes controlled substances
into one of five schedules—Schedule I, II, III, IV or V—with varying qualifications for listing in each schedule. Schedule
I substances have a high potential for abuse, have no currently accepted medical use in treatment in the U.S. and lack accepted
safety for use under medical supervision. They may be used only in federally approved research programs and may not be marketed
or sold for dispensing to patients in the U.S. Pharmaceutical products having a currently accepted medical use that are otherwise
approved for marketing may be listed as Schedule II, III, IV or V substances, with Schedule I substances presenting the highest
potential for abuse and physical or psychological dependence. Schedule V substances present the lowest relative potential for abuse
and dependence. The regulatory requirements are more restrictive for Schedule II substances than Schedule III substances. For example,
all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist in most situations and cannot
be refilled.
Following FDA approval of a drug containing
a Schedule I controlled substance, that substance must be rescheduled as a Schedule II, III, IV or V substance before it can be
marketed. On November 17, 2015, H.R. 639, Improving Regulatory Transparency for New Medical Therapies Act, passed through both
houses of Congress. On November 25, 2015, the bill was signed into law. The law removes uncertainty associated with timing of
the DEA rescheduling process after FDA approval. Specifically, it requires DEA to issue an “interim final rule,” pursuant
to which a manufacturer may market its product within 90 days of FDA approval. The law also preserves the period of orphan marketing
exclusivity for the full seven years such that this period only begins after DEA scheduling. This contrasts with the previous
situation whereby the orphan “clock” began to tick upon FDA approval, even though the product could not be marketed
until DEA scheduling was complete.
Facilities that manufacture, distribute,
import or export any controlled substance must register annually with the DEA. The DEA registration is specific to the location,
activity and controlled substance schedule. For example, separate registrations are required for importation and manufacturing
activities, and each registration authorizes which schedules of controlled substances the registrant may handle. However, certain
coincident activities are permitted without obtaining a separate DEA registration, such as distribution of controlled substances
by the manufacturer that produces them.
The DEA inspects all manufacturing facilities
to review security, recordkeeping, reporting and handling prior to issuing a controlled substance registration. The specific security
requirements vary by the type of business activity and the schedule and quantity of controlled substances handled. The most stringent
requirements apply to manufacturers of Schedule I and Schedule II substances. Required security measures commonly include background
checks on employees and physical control of controlled substances through storage in approved vaults, safes and cages, and through
use of alarm systems and surveillance cameras. An application for a manufacturing registration as a bulk manufacturer for a Schedule
I or II substance must be published in the Federal Register and is open for 30 days to permit interested persons to submit comments,
objections or requests for a hearing. A copy of the notice of the Federal Register publication is forwarded by DEA to all those
registered, or applicants for registration, as bulk manufacturers of that substance. Once registered, manufacturing facilities
must maintain records documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers must submit
periodic reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances and
other designated substances. Registrants must also report any controlled substance thefts or significant losses and must obtain
authorization to destroy or dispose of controlled substances. As with applications for registration as a bulk manufacturer, an
application for an importer registration for a Schedule I or II substance must also be published in the Federal Register, which
remains open for 30 days for comments. Imports of Schedule I and II controlled substances for commercial purposes are generally
restricted to substances not already available from domestic supplier or where there is not adequate competition among domestic
suppliers. In addition to an importer or exporter registration, importers and exporters must obtain a permit for every import or
export of a Schedule I and II substance or Schedule III, IV and V narcotic, and submit import or export declarations for Schedule
III, IV and V non-narcotics. In some cases, Schedule III non-narcotic substances may be subject to the import/export permit requirement,
if necessary, to ensure that the U.S. complies with its obligations under international drug control treaties.
For drugs manufactured in the U.S., the
DEA establishes annually an aggregate quota for substances within Schedules I and II that may be manufactured or produced in the
U.S. based on the DEA’s estimate of the quantity needed to meet legitimate medical, scientific research and industrial needs.
This limited aggregate amount of Cannabis that the DEA allows to be produced in the U.S. each year is allocated among individual
companies, which, in turn, must annually apply to the DEA for individual manufacturing and procurement quotas. The quotas apply
equally to the manufacturing of the active pharmaceutical ingredient and production of dosage forms. The DEA may adjust aggregate
production quotas and individual manufacturing or procurement quotas from time to time during the year, although the DEA has substantial
discretion in whether to make such adjustments for individual companies.
The states also maintain separate controlled
substance laws and regulations, including licensing, recordkeeping, security, distribution and dispensing requirements. State authorities,
including boards of pharmacy, regulate use of controlled substances in each state. Failure to maintain compliance with applicable
requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action that
could have a material adverse effect on our business, operations and financial condition. The DEA may seek civil penalties, refuse
to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could
lead to criminal prosecution.
Patents, Intellectual Property and Trade
Secrets
Intellectual property and patent protection
are of paramount importance to our business, as are the trade secrets and other strategies we have employed with Austrianova to
protect the proprietary Cell-in-a-Box® technology. Although we believe we take reasonable measures to protect our
intellectual property and trade secrets and those of Austrianova, we cannot guarantee we will be able to protect and enforce our
IP or obtain patent protection for our product candidates as needed. We license technology and trademarks relating to three areas:
(i) live cell encapsulation with cells that express cytochrome P450 where the capsule is permeable to prodrug molecules and the
cells are retained within the capsules; (ii) treatment of solid cancerous tumors and (ii) encapsulation of cells for producing
retroviral particles for gene therapy. We also have exclusive worldwide licensing rights to patents, trademarks and know-how using
Cell-in-a-Box® technology in the diabetes field and in the treatment of diseases and related conditions using cannabinoids.
Litigation may be required to protect our
product candidates, intellectual property rights or to determine the validity and scope of the proprietary rights of others. Establishment,
maintenance and enforcement of our intellectual property utilizes financial and operational resources. In addition, the possibility
exists that our intellectual property could be discovered to be owned by others, be invalid or be unenforceable - potentially bringing
unforeseen challenges to us.
Intellectual Property Agreements and
Patent Applications
The following agreements are a material
component of our intellectual property:
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We are a party to the Bavarian Nordic/GSF License Agreement pursuant to which Bavarian Nordic/GSF are the licensors and Bio Blue Bird, our wholly owned subsidiary, is the licensee. The Bavarian Nordic/GSF License Agreement was signed in July 2005 and amended in December 2006. Pursuant to the Bavarian Nordic/GSF License, the licensee is granted an exclusive license to use Bavarian Nordic’s clinical data and know-how for encapsulating genetically modified human cells to treat cancer. The licensors have rights to terminate the license if the annuity and upkeep fees are not paid to Bavarian Nordic, there is not proper reporting or there is not a clearly documented effort to commercialize this technology. The term of the Bavarian Nordic/GSF License Agreement expired on March 27, 2017.
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In October 2016, Bavarian Nordic/GSF and Bio Blue Bird amended the Bavarian Nordic/GSF License Agreement to include, among other things, the right to import within the scope of the license, reflect ownership and notification of improvements, clarify which provisions survive expiration or termination of the Bavarian Nordic License Agreement and provide rights to Bio Blue Bird to the clinical data and know-how after the expiration of the licensed patent rights.
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The Third Addendum and the Clarification Agreement provides us with an exclusive worldwide license, with a right to sublicense, to use Austrianova’s Cell-in-a-Box® encapsulation technology and associated technologies for the development of treatments for cancer and use of Austrianova’s Cell-in-a-Box® trademark and its associated technology using genetically modified HEK293 cells overexpressing the cytochrome P450 2B1 gene that are encapsulated using the licensed technology.
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The Diabetes Licensing Agreement provides us with an exclusive worldwide license, with a right to sublicense, to use the Cell-in-a-Box® trademark and its associated technology with genetically modified or non-modified non-stem cell lines and induced pluripotent stem (“iPS”) cells designed to produce insulin or other critical components for the treatment of diabetes.
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The Cannabis Licensing Agreement provides us with an exclusive worldwide license, with a right to sublicense, to use the Cell-in-a-Box® trademark and its associated technology with genetically modified non-stem cell lines which are designed to convert cannabinoids to their active form to develop therapies for diseases and their related symptoms.
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We entered into a Binding Term Sheet (“Binding Term Sheet”) with SG Austria and Austrianova pursuant to which the parties reached an agreement to amend certain provisions in the SG Austria APA, the Diabetes Licensing Agreement, the Cannabis Licensing Agreement and the Vin-de-Bona Consulting Agreement.
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We entered into the amendments
contemplated by the Binding Term Sheet (“Binding Term Sheet Amendments”). The Binding Term Sheet Amendments provide
that our obligation to make milestone payments to Austrianova will be eliminated in their entirety under the: (i) Cannabis License
Agreement; and (ii) the Diabetes License Agreement, as amended. The Binding Term Sheet Amendments also provides that our obligation
to make milestone payments to SG Austria pursuant to the SG Austria APA, as amended and clarified, is eliminated in their entirety.
One of the Binding Term Sheet Amendments also provides that the scope of the Diabetes License Agreement is expanded to include
all cell types and cell lines of any kind or description now or later identified, including, but not limited to, primary cells,
mortal cells, immortal cells and stem cells at all stages of differentiation and from any source specifically designed to produce
insulin for the treatment of diabetes.
In addition,
one of the Binding Term Sheet Amendments provides that we have a 5-year right of first refusal from August 30, 2017 in the event
that Austrianova chooses to sell, transfer or assign at any time during this period the Cell-in-a-Box® technology, tradename
and Associated Technologies; provided, however, that the Associated Technologies subject to the right of first refusal do not include
Bac-in-a-Box.
The Binding Term Sheet Amendments
further provide that: (i) the royalty payments on gross sales as specified in the SG Austria APA, the Cannabis License Agreement
and the Diabetes License Agreement are changed to 4%; and (ii) the royalty payments on amounts received by us from sublicensees
on sublicensees’ gross sales under the same agreements are changed to 20% of the amount received by us from our sublicensees,
provided, however, that in the event the amounts received by us from sublicensees is 4% or less of sublicensees’ gross sales,
Austrianova will receive 50% of what we receive (up to 2%) and then additionally 20% of any amount we receive over that 4%.
The Binding Term Sheet Amendments
also provide that Austrianova will receive 50% of any other financial and non-financial consideration received from our sublicensees
of the Cell-in-a-Box® technology.
The Melligen Cell License Agreement
provides us with an exclusive worldwide license, with a right to sublicense, to use genetically modified human cells that have
been modified to comprise pancreas islet cell glucokinase for use in developing a therapy for diabetes. The Melligen cells are
patent protected in the U.S. and Europe, which expire in August 2028, subject to any applicable patent term adjustment or extension
that may be available.
The following patent applications are pending:
We own pending patent applications
in the U.S., Australia, Canada and Europe directed at methods of treating cancerous tumors, such as those of the pancreas, liver,
breast and colon, using the live-cell encapsulation of genetically modified human cells that overexpress a form of the cytochrome
P450 enzyme system normally found in the liver. The methods involve administering encapsulated cells expressing the cytochrome
P450 enzyme system along with a prodrug, such as an oxazaphosphorine or ifosfamide, which gets converted to an active form by the
cytochrome P450 enzyme system. These applications, if approved, will expire on March 21, 2038, subject to any applicable patent
term adjustment or extension that may be available. We are in the process of prosecuting these patent applications.
Details of Our Material Agreements
Third Addendum to the SG Austria APA
In June 2013, we and SG Austria entered
the Third Addendum and the Clarification Agreement. The Third Addendum requires us to make the following payments for the purchased
assets; these payments were timely made in full under the payment deadlines set forth in the Third Addendum:
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A $60,000 payment due under the SG Austria APA;
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A payment of Stamp Duty estimated to be $10,000-17,000 to the Singapore Government;
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$500,000 to be used to pay off the existing debt of Bio Blue Bird; and
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$1,000,000 to SG Austria.
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Pursuant to the Third Addendum, we agreed
to and have entered a manufacturing agreement with SG Austria for the manufacture of the pancreatic cancer clinical trial product
we will need to treat LAPC. The Manufacturing Framework Agreement requires us to pay Austrianova a one-time manufacturing setup
fee in the amount of $647,000, of which 50% is required to be paid on the effective date of the Manufacturing Framework Agreement
and 50% is required to be paid three months later. We have paid the full amount of the manufacturing setup fee. The Manufacturing
Framework Agreement also requires us to pay a fee for producing the final encapsulated cell product of $647 per vial of 300 capsules
after production, with a minimum purchased batch size of 400 vials of any Cell-in-a-Box® product. The fees under
the Manufacturing Framework Agreement are subject to annual increases according to the annual inflation rate in the country in
which the encapsulated cell products are manufactured. We placed an order to produce 400 vials for our clinical trial to treat
LAPC and have paid Austrianova the full amount for the order.
The Third Addendum also requires the Company
to make future royalty and milestone payments as follows:
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Two percent royalty on all gross sales received by us or our affiliates;
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Ten percent royalty on gross revenues received by us or our affiliates from a sublicense or right to use the patents or the licenses granted by us or our affiliates;
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Milestone payments of $100,000 within 30 days after enrollment of the first human patient in the first clinical trial for each product; $300,000 within 30 days after enrollment of the first human patient in the first Phase 3 clinical trial for each product; and $800,000 within 60 days after having a NDA or a BLA approved by the FDA or a MAA approved by the EMA in Europe or its equivalent based on the country in which it is accepted for each product; and
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Milestone payments of $50,000 due 30 days after enrollment of the first veterinary patient in the first trial for each product and $300,000 due 60 days after having a BLA, a NDA or a MAA or its equivalent approved based on the country in which it is accepted for each veterinary product.
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On May 14, 2018, we entered into amendments
to the Third Addendum. For a full description of these amendments, see Item 1. “History of the Business.”
Diabetes Licensing Agreement
Under the Diabetes Licensing Agreement,
we are required to make a payment of $2,000,000 in two equal payments of $1,000,000 each. We made our first $1,000,000 payment
on October 30, 2013. Our second payment of $1,000,000 was made on February 25, 2014.
The Diabetes Licensing Agreement requires
us to pay Austrianova, pursuant to a manufacturing agreement to be entered between the parties, a one-time manufacturing setup
fee in the amount of approximately $600,000, of which 50% is required to be paid on the signing of a manufacturing agreement for
a product and 50% is required to be paid three months later. In addition, the Diabetes Licensing Agreement requires us to pay a
manufacturing production fee, which is to be defined in the manufacturing agreement, for producing the final encapsulated cell
product of approximately $600.00 per vial of 300 capsules after production, with a minimum purchased batch size of 400 vials of
any Cell-in-a-Box® encapsulation-based product. All costs for encapsulated cell products will be subject to an annual
increase equal to the published rate of inflation in the country of manufacture of the vials.
The Diabetes Licensing Agreement requires
us to make future royalty and milestone payments as follows:
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Ten percent royalty of gross sales of all products we sell;
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Twenty percent royalty of the amount received by us from a sub-licensee on its gross sales; and
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Milestone payments of $100,000 within 30 days of beginning the first pre-clinical experiments using the encapsulated cells; $500,000 within 30 days after enrollment of the first human patient in the first clinical trial; $800,000 within 30 days after enrollment of the first human patient in the first Phase 3 clinical trial; and $1,000,000 within 90 days after having a NDA or a BLA approved by the FDA or a MAA approved by the EMA in Europe or its equivalent based on the country in which it is accepted for each product.
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The license under the Diabetes Licensing
Agreement, as amended, may be terminated and all rights will revert to Austrianova if any of the following milestone events do
not occur within the following timeframes, subject to all the necessary and required research having been successful and the relevant
product being sufficiently prepared to enter a clinical trial:
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If we fail to enter a research program with the technology in the scope of the license providing a total funding equal to or greater than $400,000 within three years of June 25, 2013, the effective date of the Diabetes Licensing Agreement (we have met this requirement); or
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If we fail to enter a clinical trial or its equivalent for a product within seven years of the effective date of the Diabetes Licensing Agreement.
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In May 2018, we entered into amendments
to the Diabetes Licensing Agreement. For a full description of these amendments, see Item 1. “History of the Business.”
Cannabis Licensing Agreement
Pursuant to the Cannabis Licensing Agreement,
we acquired from Austrianova an exclusive worldwide license to use the Cell-in-a-Box® trademark and its associated
technology with genetically modified non-stem cell lines which are designed to activate cannabinoids to develop therapies involving
Cannabis with a right to sublicense.
Under the Cannabis Licensing Agreement,
we are required to pay Austrianova an initial upfront payment of $2,000,000 (“Upfront Payment”). We have the right
to make periodic monthly partial payments of the Upfront Payment in amounts to be agreed upon between the parties prior to each
such payment being made. Under the Cannabis Licensing Agreement, the Upfront Payment must be paid in full by no later than June
30, 2015. The parties amended the Cannabis Licensing Agreement twice pursuant to which the balance of the Upfront Payment is to
be paid by June 30, 2016. We have paid the Upfront Payment of $2,000,000 in full.
The Cannabis Licensing Agreement requires
us to pay Austrianova, pursuant to a manufacturing agreement to be entered between the parties, a one-time manufacturing setup
fee in the amount of $800,000, of which 50% is required to be paid on the signing of a manufacturing agreement for a product and
50% is required to be paid three months later. In addition, the Cannabis Licensing Agreement requires us to pay a manufacturing
production fee, which is to be defined in the manufacturing agreement, for producing the final encapsulated cell product of $800
per vial of 300 capsules after production with a minimum purchased batch size of 400 vials of any Cell-in-a-Box® product.
All costs for encapsulated cell products, the manufacturing setup fee and the manufacturing production fee will be subject to annual
increases, in accordance with the inflation rate in the country in which the encapsulated cell products are manufactured.
The Cannabis Licensing Agreement requires
us to make future royalty and milestone payments as follows:
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Ten percent royalty of the gross sale of all products sold by us;
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Twenty percent royalty of the amount received by us from a sublicense on its gross sales; and
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Milestone payments of $100,000 within 30 days of beginning the first pre-clinical experiments using the encapsulated cells; $500,000 within 30 days after enrollment of the first human patient in the first clinical trial; $800,000 within 30 days after enrollment of the first human patient in the first Phase 3 clinical trial; and $1,000,000 within 90 days after having a NDA or a BLA approved by the FDA or a MAA approved by the EMA or its equivalent based on the country in which it is accepted for each product.
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The license under the Cannabis Licensing
Agreement, as amended, may be terminated and all rights will revert to Austrianova if any of the following milestone events do
not occur within the following timeframes:
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If we do not enter a research program involving the scope of the license within three years of December 1, 2014, the effective date of the Cannabis Licensing Agreement (we have met this requirement); or
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If we do not enter a clinical trial or its equivalent for a product within 7 years of the effective date of the Cannabis Licensing Agreement.
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In May 2018, we entered into amendments
to the Cannabis Licensing Agreement. For a full description of these amendments, see Item 1. “History of the Business.”
Melligen Cell License Agreement
The Melligen Cell License Agreement requires
that we pay royalty, milestone and patent costs to UTS as follows:
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Six percent of gross exploitation revenue on product sales;
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Twenty-five percent of gross revenues if the product is sublicensed by us;
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Milestone payments of AU$ 50,000 at the successful conclusion of a preclinical study, AU$ 100,000 at the successful conclusion of a Phase 1 clinical trial, AU$ 450,000 at the successful conclusion of a Phase 2 clinical trial, and AU$ 3,000,000 at the successful conclusion of a Phase 3 clinical trial; and
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Patent costs of fifteen percent of the costs paid by UTS to prosecute and maintain patents related to the licensed intellectual property.
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In the event of a default under the Melligen
Cell License Agreement, the non-defaulting party may immediately terminate the agreement by notice in writing to the defaulting
party if: (i) the default has continued for not less than 14 days or occurred more than 14 days earlier and has not been remedied;
(ii) the non-defaulting party serves upon the defaulting party notice in writing requiring the default to be remedied within 30
days of such notice, or such greater number of days as the non-defaulting party may in its discretion allow, and (iii) the defaulting
party has failed to comply with the notice referred to in (ii) above.
The Melligen Cell License Agreement was
amended in April 2016 to change the name of the license to our current name and clarify certain ambiguities in the agreement. We
are required to pay the Melligen cell patent prosecution costs and to pay to UTS a patent administration fee equal to 15% of all
amounts paid by UTS to prosecute and maintain patents related to the Melligen cells.
In August 2017, we entered into the Binding
Term Sheet pursuant to which the parties reached an agreement to amend certain provisions in the SG Austria APA, the Diabetes Licensing
Agreement the Cannabis Licensing Agreement and the Vin-de-Bona Consulting Agreement.
In May 2018, we entered into agreements
with SG Austria and Austrianova to amend certain provisions of the SG Austria APA, the Diabetes Licensing Agreement, the Cannabis
Licensing Agreement and the Vin-de-Bona Consulting Agreement pursuant to the Binding Term Sheet. For a full description of these
amendments, see Item 1. “History of the Business.”
Sources and Availability of Raw Materials
The entire encapsulation process relating
to the encapsulation of the cells for the oncology and diabetes-based therapies we are developing is to be carried out by Austrianova.
Austrianova is the sole source of our product candidates. Austrianova is responsible for acquiring all of the necessary raw materials
used in this process, including the cellulose sulfate necessary for encapsulating the live cells. Those cells have been grown by
Eurofins to populate a MCB for our future clinical trials. See also “—Manufacturing” in this Item 1. “Business.”
Employees
As of April 30, 2020, we had four full-time
employees and eleven consultants who devote substantial time to us. The consultants are physicians, scientists, regulatory experts,
clinical operation experts and cGMP experts. All of our R&D efforts are handled by our consultants.
Medical and Scientific Advisory Board
We regularly seek advice and input from
the members of our Medical and Scientific Advisory Board on matters related to our R&D programs. The members of our Medical
and Scientific Advisory Board consist of experts across a wide range of key disciplines relevant to our clinical development programs.
We intend to continue to leverage the broad expertise of our advisors by seeking their counsel on important topics relating to
our product development and clinical development programs. The members of our Medical and Scientific Advisory Board are not our
employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability
to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or
other technologies. All the members of our Medical and Scientific Advisory Board are affiliated with other entities and devote
only a portion of their time to us. The members of our Medical and Scientific Advisory Board are not officers or directors of our
company. Our current advisors are:
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Dr. Matthias Löhr – Professor of Gastroenterology & Hepatology, Karolinska Institute, Stockholm, Sweden
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Dr. Manuel Hidalgo – Chief of the Division of Hematology and Medical Oncology at Weill Cornell Medicine and New York-Presbyterian/Weill Cornell Medical Center in New York, New York.
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Prof. Dr. Hans-Peter Hammes – Professor of Internal Medicine and Endocrinology, Faculty of Clinical Medicine Mannheim of Heidelberg University and Section Leader for Endocrinology and Diabetology, Mannheim, Germany
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Dr. Brian Salmons – Chief Executive Officer and President of Austrianova and Co-Developer of Cell-in-a-Box® and its Associated Technologies.
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Dr. Mark L. Rabe – Chief Executive Officer of Rabe Medical Solutions, San Diego, California
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David A. Judd - cellular biologist of 35 years and a long-term employee of the Grand Island Biological Company with experience in culturing various types of human cells, including the cells that were transfected with the gene that activates the prodrug ifosfamide and that are encapsulated for our LAPC clinical trial.
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Financial Information Concerning Geographic
Areas
We had no revenues in the fiscal years
ended April 30, 2020 and 2019, including no revenues from foreign countries. We have long-lived assets, other than financial instruments,
located in the following geographical areas:
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FY 2020
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FY 2019
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United States:
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$
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5,128,992
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$
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5,128,992
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All foreign countries, in total:
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$
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0
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$
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0
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We operate globally and are attempting
to develop products in multiple countries. Consequently, we face complex legal and regulatory requirements in multiple jurisdictions,
which may expose us to certain financial and other risks. International operations are subject to a variety of risks, including:
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foreign currency exchange rate fluctuations;
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greater difficulty in overseeing foreign operations;
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logistical and communications challenges;
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potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;
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burdens and costs of compliance with a variety of foreign laws;
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political and economic instability;
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increases in duties and taxation;
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foreign tax laws and potential increased costs associated with overlapping tax structures;
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greater difficulty in protecting intellectual property;
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the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our product candidates; and
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general social, economic and political conditions in these foreign markets.
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We are dependent on business relationships
with parties in multiple countries, as disclosed in Item 1A. “Risk Factors—Risks Related to Our Dependence on Third
Parties.”
ITEM 1A. RISK FACTORS
You should carefully consider these
factors that may affect future results, together with all the other information included in this Report in evaluating our business.
The risks and uncertainties described below are those that we currently believe may materially affect our business and results
of operations. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become
important factors that affect our business and results of operations. Our shares of common stock involve a high degree of
risk and should be purchased only by investors who can afford a loss of their entire investment. Prospective investors should carefully
consider the following risk factors concerning our business before making an investment.
In addition, you should carefully consider
these risks when you read “forward-looking” statements elsewhere in this Report. These are statements that relate to
our expectations for future events and time periods. Generally, the words “anticipate,” “expect,” “intend,”
and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future
events and circumstances could differ significantly from those anticipated in the forward-looking statements. For additional information,
see “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Financial Position,
Need for Additional Capital and Overall Business
We are a clinical stage
biotechnology company with limited resources, a limited operating history and have no products approved for clinical trials or
commercial sale, which may make it difficult to evaluate our current business and predict our future success and viability.
We are a clinical stage biotechnology company
focused on developing cellular therapies for cancer and diabetes based upon a proprietary cellulose-based live cell encapsulation
technology known as “Cell-in-a-Box®.” In recent years, we have devoted substantially all our resources
to the development of our product candidates. We have limited resources, a limited operating history, no products approved for
clinical trials or commercial sale and therefore have not produced any revenues. We have generated significant operating losses
since our inception. Our net losses for the years ended April 30, 2020 and 2019 were approximately $3.8 million and $4.1 million,
respectively. As of April 30, 2020, we had an accumulated deficit of approximately $104 million. Substantially all our losses have
resulted from expenses incurred relating to our research and development programs and from general and administrative expenses
and operating losses associated with our business.
We expect to continue to incur significant
expenses and operating losses for the foreseeable future. We anticipate these losses will increase as we continue our research
and development of, and clinical trials for, our product candidates. In addition to budgeted expenses, we may encounter unforeseen
expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
We have no facilities to conduct fundamental
research and we have performed our research and development activities by collaboration with contract service providers, and contract
manufacturers and by designing and developing research programs in collaboration with university-based experts who work with us
to evaluate mechanism(s) of disease for which we have designed and developed product candidates. We have not maintained a principal
laboratory or primary research facility for the development of our product candidates.
Biotechnology product development is a
highly uncertain undertaking and involves a substantial degree of risk. Prior to and at the time of this Report, we have not completed
clinical trials for any of our product candidates, obtained marketing approval for any product candidates, manufactured a commercial
scale product, or arranged for a third party to do so on our behalf, or conducted sales and marketing activities necessary for
successful product commercialization. Given the highly uncertain nature of biotechnology product development, we may never complete
clinical trials for any of our product candidates, obtain marketing approval for any product candidates, manufacture a commercial
scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful
product commercialization.
Our limited operating history as a company
makes any assessment of our future success and viability subject to significant uncertainty. We will encounter risks and difficulties
frequently experienced by early-stage biotechnology companies in rapidly evolving fields, and we have not yet demonstrated an ability
to successfully overcome such risks and difficulties. If we do not address these risks and difficulties successfully, our business,
operating results and financial condition will suffer.
The recent and ongoing
COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct
business. Our business could be adversely affected by the effects of other future health pandemics in regions where we or third
parties on which we rely have significant business operations.
Our business and its operations, including,
but not limited to, our clinical development program, supply chain operations, research and development activities and fundraising
activities, could be adversely affected by the COVID-19 pandemic in areas where we have business operations. Also, this pandemic
could cause significant disruption in the operations of third parties upon whom we rely to conduct the Company’s business.
COVID-19 was reported to have started in Wuhan, China in late 2019. Since then, COVID-19 has spread to other countries and throughout
the U.S. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Shortly thereafter, the U.S. government-imposed
restrictions on travel between the U.S., Europe, and certain other countries. The President of the U.S. declared the COVID-19 pandemic
a national emergency. Since March 2020, numerous state, regional and local jurisdictions, including the jurisdictions where our
headquarters are located, have imposed, and others in the future may impose, quarantines, shelter-in-place orders, executive, and
similar government orders for their residents to control the spread of COVID-19. As of the date of this Report, the
COVID-19 pandemic has had an impact upon our operations, although we believe that impact is not material.
The effects of the executive orders, the
shelter-in-place orders and our work-from-home policies may negatively impact productivity, disrupt our business, and delay our
clinical development program and timeline, the magnitude of which will depend, in part, on the length and severity of the restrictions
and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe,
disruptions in our operations could negatively impact our business, operating results and financial condition.
Quarantines, shelter-in-place, executive,
and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations
could occur, related to COVID-19, could impact personnel at our third-party manufacturing facilities in Thailand, or the availability
or cost of materials we use or require to conduct our business, including product development, which would disrupt our supply chain.
Some of our suppliers and vendors of certain materials used in our operations and research and development activities are located
in areas that are subject to executive orders and shelter-in-place orders. While many of these materials may be obtained from more
than one supplier, port closures and other restrictions resulting from the COVID-19 pandemic may disrupt our supply chain or limit
our ability to obtain sufficient materials to operate our business. To date, we are aware of certain suppliers for our research
and development activities that have experienced operational delays directly related to the COVID-19 pandemic.
Depending upon the length of the COVID-19
pandemic and whether the FDA allows us to commence our clinical trial once we submit our proposed IND, we anticipate our planned
clinical trial in LAPC may be affected by the COVID-19 pandemic. If COVID-19 continues to spread in the U.S. and elsewhere, we
may experience additional disruptions that could adversely impact our business and clinical trial, including: (i) delays or difficulties
in enrolling patients in our clinical trial if the FDA allows us to go forward; (ii) delays or difficulties in clinical site activation,
including difficulties in recruiting clinical site investigators and clinical site personnel; (iii) delays in clinical sites receiving
the supplies and materials needed to conduct our clinical trial, including interruption in global shipping that may affect the
transport of our clinical trial product; (iv) changes in local regulations as part of a response to the COVID-19 pandemic which
may require us to change the ways in which our clinical trial is to be conducted, which may result in unexpected costs, or to
discontinue the clinical trial altogether; (v) diversion of healthcare resources away from the conduct of clinical trials, including
the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trial;
(vi) interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed
or recommended by federal or state governments, employers and others, or interruption of clinical trial subject visits and study
procedures, the occurrence of which could affect the integrity of clinical trial data; (vii) risk that participants enrolled in
our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical
trial, including by increasing the number of observed adverse events; (viii) delays in necessary interactions with local regulators,
ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of
government employees; (ix) limitations in employee resources that would otherwise be focused on the conduct of our clinical trial
because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; (x)
refusal of the FDA to accept data from clinical trials in affected geographies; and (xi) interruption or delays to our clinical
trial activities.
The spread of COVID-19, which has caused
a widespread impact throughout the world, may materially affect us economically. The potential economic impact brought about by
the COVID-19 pandemic, and the duration of such impact, is difficult to assess or predict. The pandemic has resulted in significant
disruption of global financial markets, which could reduce our ability to access capital and negatively affect our future liquidity.
Also, a recession or market correction resulting from the spread of COVID-19 and related government orders and restrictions could
materially affect our business and the value of our common stock. The COVID-19 pandemic continues to evolve. The ultimate impact
of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts
on our business, our clinical trial, healthcare systems or the global economy.
If we are unable to successfully
raise additional capital, our future clinical trials and product development could be limited and our long-term viability may be
threatened.
We have experienced negative operating
cash flows since our inception and have funded our operations primarily through sales of our equity securities. We will need to
seek additional funds in the future through equity or debt financings, or strategic alliances with third parties, either alone
or in combination with equity financings to complete our product development initiatives. These financings could result in substantial
dilution to the holders of our common stock, or require contractual or other restrictions on our operations or on alternatives
that may be available to us. If we raise additional funds by issuing debt securities, these debt securities could impose significant
restrictions on our operations. Any such required financing may not be available in amounts or on terms acceptable to us, and the
failure to procure such required financing could have a material and adverse effect on our business, financial condition and results
of operations, or threaten our ability to continue as a going concern.
Our operating and capital requirements
during the next fiscal year and thereafter will vary based on several factors, including whether the FDA allows us to commence
our planned clinical trial for LAPC, how quickly enrollment of patients in our such trial can be commenced, the duration of the
clinical trial and any change in the clinical development plans for our product candidates and the outcome, timing and cost of
meeting regulatory requirements established by the FDA and the EMA or other comparable foreign regulatory authorities.
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Our present and future capital requirements will be significant and will depend
on many factors, including:
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the progress and results of our development efforts for our product candidates;
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the costs, timing and outcome of regulatory review of our product candidates;
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property
rights and defending any intellectual property-related claims;
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the effect of competing technological and market developments;
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market acceptance of our product candidates;
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the rate of progress in establishing coverage and reimbursement arrangements with domestic and international commercial third-party
payors and government payors;
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the extent to which we acquire or in-license other products and technologies; and
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legal, accounting, insurance and other professional and business-related costs.
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We may not be able to acquire additional funds on acceptable terms, or at
all. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets or delay, reduce the scope of
or eliminate some or all of our development programs.
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If we do not have, or are not able to obtain, sufficient funds, we may be
required to delay development or commercialization of our product candidates. We also may have to reduce the resources devoted
to our product candidates or cease operations. Any of these factors could harm our operating results.
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Due to the significant
resources required for the development of our programs, and depending on our ability to access capital, we must prioritize development
of certain product candidates. We may expend our limited resources on programs that do not yield a successful product candidate
and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood
of success.
We seek to maintain a process
of prioritization and resource allocation to maintain an optimal balance between aggressively advancing lead programs and ensuring
replenishment of our portfolio.
Due to the significant
resources required for the development of our programs, we must focus our programs on specific diseases and decide which product
candidates to pursue and advance and the amount of resources to allocate to each. Our decisions concerning the allocation of research,
development, collaboration, management and financial resources toward particular product candidates or therapeutic areas may not
lead to the development of any viable commercial product and may divert resources away from better opportunities. Similarly, our
potential decisions to delay, terminate or collaborate with third parties in respect of certain programs may subsequently also
prove to be suboptimal and could cause us to miss valuable opportunities. We may fail to capitalize on viable commercial products
or profitable market opportunities, be required to forego or delay pursuit of opportunities with other product candidates or other
diseases that may later prove to have greater commercial potential than those we choose to pursue, or relinquish valuable rights
to such product candidates through collaboration, licensing or other royalty arrangements in cases in which it would have been
advantageous for us to invest additional resources to retain sole development and commercialization rights. If we make incorrect
determinations regarding the viability or market potential of any or all of our programs or product candidates or misread trends
in the biotechnology industry, our business, prospects, financial condition and results of operations could be materially adversely
affected.
We currently have no commercial revenue
and may never become profitable.
Even if we can successfully achieve regulatory
approval for our product candidates, we do not know what the reimbursement status of our product candidates will be or when any
of these products will generate revenue for us, if at all. We have not generated, and do not expect to generate, any product revenue
for the foreseeable future. We expect to continue to incur significant operating losses for the foreseeable future due to the cost
of our research and development, preclinical studies and clinical trials and the regulatory approval process for our product candidates.
The amount of future losses is uncertain and will depend, in part, on the rate of growth of our expenses.
Our ability to generate revenue from our
product candidates also depends on numerous additional factors, including our ability to:
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successfully complete development activities, including the remaining preclinical studies and planned clinical trials for our product candidates;
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complete and submit NDAs to the FDA and MAAs to the EMA, and obtain regulatory approval for indications for which there is a commercial market;
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complete and submit applications to, and obtain regulatory approval from, other foreign regulatory authorities;
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manufacture any approved products in commercial quantities and on commercially reasonable terms;
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develop a commercial organization, or find suitable partners, to market, sell and distribute approved products in the markets in which we have retained commercialization rights;
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achieve acceptance among patients, clinicians and advocacy groups for any products we develop;
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obtain coverage and adequate reimbursement from third parties, including government payors; and
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set a commercially viable price for any products for which we may receive approval.
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We are unable to predict the timing or
amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we can complete the processes
described above, we anticipate incurring significant costs associated with commercializing our product candidates.
To date, we have generated no revenue.
Our ability to generate revenue and become profitable depends upon our ability to obtain regulatory approval for, and successfully
commercialize, our product candidates that we may develop, in-license or acquire in the future.
Our future revenues are unpredictable
which causes potential fluctuations in operating results.
Because of our limited operating history
as a biotech company; we are currently unable to accurately forecast our revenues. Future expense levels will likely be based largely
on our marketing and development plans and estimates of future revenue. Any sales or operating results will likely generally depend
on volume and timing of orders, which may not occur and on our ability to fulfill such orders, which we may not be able to do.
We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to planned expenditures could have an immediate adverse effect on our business, prospects, financial
condition and results of operations. Further, as a strategic response to changes in the competitive environment, we may from time
to time make certain pricing, service or marketing decisions that could have a material adverse effect on our business, prospects,
financial condition and results of operations.
We may experience significant fluctuations
in future operating results due to a variety of factors, many of which are outside of our control. Factors that may affect operating
results include: (i) the ability to obtain and retain customers; (ii) our ability to attract new customers at a steady rate
and maintain customer satisfaction with products; (iii) our announcement or introduction of new products by us or our competitors;
(iv) price competition; (v) the level of use and consumer acceptance of its products; (vi) the amount and timing of operating
costs and capital expenditures relating to expansion of the business, operations and infrastructure; (vii) governmental regulations;
(viii) general economic conditions; and (ix) the adverse impacts caused by COVID-19 discussed in more detail below.
We face substantial competition,
which may result in others discovering, developing or commercializing competing products before or more successfully than we do.
The development and commercialization of
new drug products is highly competitive. We face competition with respect to our current product candidates. We will face competition
with respect to any product candidates that we may seek to develop or commercialize in the future. Such competition may arise from
major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are several large
pharmaceutical and biotechnology companies that currently market products or are pursuing the development of products for the treatment
of the disease indications for which we are developing our product candidates. Some of these competitive products and therapies
are based on scientific approaches that are the same as or are like our approach, and others are based on entirely different approaches.
Potential competitors also include academic institutions, government agencies and other public and private research organizations
that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing
and commercialization.
Specifically, there are numerous companies
developing or marketing therapies for cancer and diabetes, including many major pharmaceutical and biotechnology companies. Our
commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more
effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop.
Our competitors also may obtain regulatory approval for their products more rapidly than we may obtain approval for ours, which
could result in our competitors establishing a strong market position before we can enter the market.
Many of the companies against which we
are competing or against which we may compete in the future have significantly greater financial resources and expertise in research
and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved
products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology sectors may result in even more resources
being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and established companies. These third parties compete
with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Risks Related to FDA Approval of Our
Planned Clinical Trial, Approval of Our Product Candidates and Other Legal Compliance Matters
If the FDA does not allow us to begin
a trial in LAPC under the IND that we plan to submit to the FDA or places us on clinical hold, we will not be able to commence
a Phase 2b clinical trial for LAPC in the U.S. which would likely have a material adverse effect on us.
Subject to our submission of our IND and
FDA approval, we plan to commence a Phase 2b clinical trial in LAPC. A Pre-IND meeting with the FDA was held on January 17, 2017,
at which the FDA provided us with guidance to complete the IND process and communicated its agreement with certain aspects of our
clinical development plan. We were delayed in submitting our IND to the FDA, due to guidance provided by the FDA and due to delays
in preparing the materials necessary to submit our IND. No assurance can be given whether the FDA will approve our IND which we
expect will be filed shortly after the filing of this Report although no assurance as to timing of our submission can be given.
The FDA may put us on a clinical hold until we satisfy its requirements to commence our clinical trial involving LAPC, which may
never occur. We cannot provide assurance as to the FDA’s reaction to it. In the event the FDA does not allow us to commence
our planned clinical trial in LAPC which would likely have a material adverse effect on us. The FDA may require us to conduct a
Phase 1 clinical trial rather than beginning with a Phase 2b clinical trial or conduct preclinical studies before starting any
clinical trials. Such actions would have a material adverse effect on our business plans and operations.
Our plan to first pursue a Phase
2b clinical trial before a pivotal Phase 3 trial will likely result in additional costs to us and resultant delays in the FDA review
process and any future commercialization and marketing, if regulatory approval is obtained.
If the FDA allows us to begin clinical
trials under our IND once submitted, we have determined that the data contained in previous clinical trial reports using the Cell-in-a-Box®
and its Associated Technologies are not enough to advance the program to a Phase 3 pivotal trial. Therefore, we are designing
a Phase 2b clinical trial that, if successful, we believe will provide the information necessary to plan a Phase 3 pivotal trial.
Our determination to first conduct a Phase 2b clinical trial before conducting a pivotal Phase 3 clinical trial will likely result
in additional costs to us and resultant delays in the regulatory review process and any future commercialization and marketing,
if regulatory approval is obtained. The same is true to a greater extent if the FDA requires us to commence a Phase 1 clinical
trial instead of a Phase 2b clinical trial.
Our ability to timely submit an IND
to the FDA may depend on circumstances outside of our control.
Our ability to submit an IND to the FDA
depends on a variety of factors. We must submit the results of various preclinical tests, together with manufacturing information,
analytical data, any available past clinical data or literature and a proposed clinical protocol to the FDA as part of the
IND. Preclinical tests include laboratory evaluations of product chemistry and formulation, as well as other studies to assess
the potential safety and activity of the pharmaceutical product candidate. The conduct of the preclinical tests must comply with
federal regulations and requirements. The FDA may require that we conduct additional preclinical testing or for any product candidate
before it allows us to initiate the clinical testing under any IND, which may lead to additional delays and increase the costs
of our preclinical and clinical development. An IND also involves considerable work from our employees and advisors.
If we are unable to obtain, or if
there are delays in obtaining, required approval from the regulatory agencies, we will not be able to commercialize our product
candidates and our ability to generate revenue will be materially impaired.
Our product candidates must obtain marketing
approval from the FDA for commercialization in the U.S. and from foreign regulatory agencies for commercialization
in countries outside the U.S. The process of obtaining marketing approvals in the countries in which we intend to sell and distribute
our product candidates is expensive and can take several years, if approval is obtained at all. This process can vary substantially
based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Failure to obtain
marketing approval for a product candidate will prevent us from commercializing that product candidate. To date, we have not received
approval to market any of our product candidates from regulatory agencies in any jurisdiction. We have no experience in filing
and supporting the applications necessary to gain marketing approvals and expect to rely on third-party contract research organizations
to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and
supporting information to the regulatory agencies for each product candidate to establish the product candidate’s safety
and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to,
and inspection of manufacturing facilities by, the regulatory agencies.
Our product candidates may not be effective,
may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics
that may preclude our obtaining marketing approval or prevent or limit commercial use. Regulatory agencies have substantial discretion
in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and
require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical
and clinical testing could delay, limit or prevent marketing approval of a product candidate. Changes in marketing approval policies
during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review
for each submitted product application, may also cause delays in or prevent the approval of an application. New cancer drugs frequently
are indicated only for patient populations that have not responded to an existing therapy or have relapsed after such therapies.
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects
for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
Clinical drug development involves
a lengthy and expensive process with an uncertain outcome. We may incur additional costs or experience delays in completing or
be unable to complete the development and commercialization of our product candidates.
Our Cell-in-a-Box® and ifosfamide
combination product candidate is in clinical development, and, like others’ candidates in a similar phase of development,
the risk of failure is high. It is impossible to predict when or if this product candidate or any other product candidate will
prove effective or safe in humans or will receive regulatory approval. Before obtaining marketing approval from regulatory agencies
for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate
the safety and efficacy of our product candidates in humans. Clinical trials are expensive, difficult to design and implement,
can take several years to complete and are uncertain as to their outcome. A failure of one or more clinical trials can occur at
any stage of a clinical trial. The clinical development of our product candidates is susceptible to the risk of failure inherent
at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of
patients, the occurrence of severe or medically or commercially unacceptable adverse events, failure to comply with protocols or
applicable regulatory requirements or determination by the regulatory agencies that a drug or biologic product is not approvable.
It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during
clinical evaluation because of one or more of a variety of factors, including the size, duration, design, measurements, conduct
or analysis of our clinical trials. Conversely, because of the same factors, our clinical trials may indicate an apparent positive
effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may
fail to detect toxicity of, or intolerability caused by, our product candidates, or mistakenly believe that our product candidates
are toxic or not well tolerated when that is not, in fact, the case.
The outcome of preclinical studies and
early and mid-phase clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical
trial do not necessarily predict overall results. Many companies in the pharmaceutical and biotechnology sectors have suffered
significant setbacks in late-stage clinical trials after achieving positive results in earlier stages of development, and we cannot
be certain that we will not face similar setbacks.
The design of a clinical trial can determine
whether its results will support approval of a product; however, flaws in the design of a clinical trial may not become apparent
until the clinical trial is well advanced or completed. We have limited experience in designing clinical trials and may be unable
to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible
to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical
studies and clinical trials have nonetheless failed to obtain marketing approval for their product candidates. Even if we believe
that the results of clinical trials for our product candidates warrant marketing approval, the regulatory agencies may disagree
and may not grant marketing approval of our product candidates or may require that we conduct initial clinical studies; the latter
would require that we incur significantly increased costs and would significantly extend the clinical development timeline for
our product candidates.
In some instances, there can be significant
variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors,
including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes
in and adherence to the clinical trial protocols and the rate of dropout among clinical trial participants. Any Phase 1, Phase
2 or Phase 3 clinical trial we may conduct may not demonstrate the efficacy and safety necessary to obtain regulatory approval
to market our product candidates.
We are seeking FDA approval to commence
clinical trials in the U.S. of certain of our product candidates based on clinical data that was obtained in trials conducted outside
the U.S., and it is possible that the FDA may not accept data from trials conducted in such locations or conducted nearly 20 years
ago.
We are seeking FDA acceptance of an IND
to commence a Phase 2b clinical trial in LAPC using genetically engineered live human cells encapsulated using our Cell-in-a-Box®
technology in combination with ifosfamide. A Phase 1/2 clinical trial and a Phase 2 clinical trial were previously conducted
using the same technology in combination with ifosfamide between 1998 and 1999 and between 1999 and 2000, respectively. The Phase
1/2 clinical trial was carried out at the Division of Gastroenterology, University of Rostock, Germany, and the Phase 2 clinical
trial was carried out at four centers in two countries in Europe: Berne, Switzerland, and in Rostock, Munich and Berlin, Germany.
Although the FDA may accept data from clinical
trials conducted outside the U.S., acceptance of this data is subject to certain conditions imposed by the FDA. There is a risk
that the FDA may not accept the data from the two previous trials. In that case, we may be required to conduct a Phase 1 or a Phase
1/2b clinical trial rather than the planned Phase 2b clinical trial in LAPC. This may result in additional costs to us and resultant
delays in the regulatory review process and any future commercialization and marketing, if regulatory approval is obtained. It
is not known whether the FDA would be likely to reject the use of such clinical data due to the significant time that has elapsed
since the earlier clinical trials were conducted or because the clinical trial material for our proposed Phase 2b clinical trial
is different from that used in the earlier clinical trials because of cloning the cells used in the earlier trials and certain
other modifications and improvements that have been made to the Cell-in-a-Box® technology since the time of the
earlier trials.
Risks related to Hai Kang licensed
COVID-19 diagnostic kits
With respect to our license for Hai Kang
developed COVID-19 diagnostic kits, we may not be able to (i) develop a related product candidate with our current resources, on
a timely basis, or at all; (ii) obtain the necessary regulatory approvals for such a product candidate; (iii) commercialize any
such product candidate; or (iv) obtain reimbursement for such a product candidate in the U.S. and elsewhere. It is uncertain that
any such product candidates will comply with U.S. regulatory requirements or that any health care facility or provider will be
willing or able to use such product candidates.
We intend to conduct clinical trials
for certain of our product candidates at sites outside of the U.S., and the U.S. regulatory agencies may not accept data from trials
conducted in such locations.
Although the FDA may accept data from clinical
trials conducted outside the U.S., acceptance of this data is subject to certain conditions imposed by the regulatory agencies
outside of the U.S. For example, the clinical trial must be well designed and conducted and performed by qualified investigators
in accordance with ethical principles. The trial population must also adequately represent the population in the country in which
the clinical trial is being conducted. The data must be applicable to the U.S. population and medical practice in the U.S. in ways
that the FDA deems clinically meaningful. Generally, the patient population for any clinical trial conducted outside of the U.S.
must be representative of the population for whom we intend to seek approval in the U.S.
In addition, while these clinical trials
are subject to the applicable local laws, the FDA acceptance of the data will be dependent upon its determination that the trials
also complied with all applicable U.S. laws and regulations. There can be no assurance that the FDA will accept data from trials
conducted outside of the U.S. If the FDA does not accept the data from any of our clinical trials that we determine to conduct
outside the U.S., it would likely result in the need for additional trials that would be costly and time-consuming and delay or
permanently halt the development of our product candidate.
In addition, the conduct of clinical trials
outside the U.S. could have a significant impact on us. Risks inherent in conducting international clinical trials include:
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Foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;
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Administrative burdens of conducting clinical trials under multiple foreign regulatory schemes;
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Foreign exchange fluctuations; and
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Diminished protection of intellectual property in some countries.
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If clinical trials of our product
candidates fail to demonstrate safety and efficacy to the satisfaction of the regulatory agencies, we may incur additional costs
or experience delays in completing or be unable to complete the development and commercialization of these product candidates.
We are not permitted to commercialize,
market, promote or sell any product candidate in the U.S. without obtaining marketing approval from the FDA. Comparable regulatory
agencies outside of the U.S., such as the EMA in the European Union, impose similar restrictions. We may never receive such approvals.
We may be required to complete additional preclinical development and clinical trials to demonstrate the safety and efficacy of
our product candidates in humans before we will be able to obtain these approvals.
Clinical testing is expensive, difficult
to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted
an NDA, a BLA or a MAA to regulatory agencies for any of our product candidates.
Any inability to successfully complete
preclinical and clinical development could result in additional costs to us and impair our ability to generate revenues from product
sales, regulatory and commercialization milestones and royalties. In addition, if: (i) we are required to conduct additional clinical
trials or other testing of our product candidates beyond the trials and testing that we contemplate; (ii) we are unable to successfully
complete our planned clinical trials of our product candidates or other testing; (iii) the results of these trials or tests are
unfavorable, uncertain or are only modestly favorable; or (iv) there are unacceptable safety concerns associated with our product
candidates, we, in addition to incurring additional costs, may:
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Be delayed in obtaining marketing approval for our product candidates;
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Not obtain marketing approval at all;
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Obtain approval for indications or patient populations that are not as broad as we intended or desired;
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Obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including “black-box” warnings;
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Be subject to additional post-marketing testing or other requirements; or
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Be required to remove the product from the market after obtaining marketing approval.
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Promising results in previous clinical
trials of our encapsulated live cell and ifosfamide combination for pancreatic cancer may not be replicated in future clinical
trials which could result in development delays or a failure to obtain marketing approval.
Positive results in the previous Phase
1/2 and Phase 2 clinical trials of the encapsulated live cell and ifosfamide combination product may not be predictive of similar
results in future clinical trials such as our planned Phase 2b clinical trial in LAPC. The previous Phase 1/2 and Phase 2 clinical
trials had a relatively limited number of patients in each trial. These trials resulted in outcomes that were not statistically
significant and may not be representative of future results. In addition, interim results obtained after a clinical trial has commenced
do not necessarily predict results in future clinical trials. Numerous companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage clinical
development. Our clinical trials may produce negative or inconclusive results and we may decide, or regulatory agencies may require
us, to conduct additional clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses,
and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have
nonetheless failed to obtain the approval for their products by the regulatory agencies.
If we experience any unforeseen events
in the clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could
be delayed or prevented.
We may experience numerous unforeseen events
during our clinical trials that could delay or prevent marketing approval of our product candidates, including:
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Clinical trials of our product candidates may produce unfavorable or inconclusive results;
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We may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs or candidates;
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The number of patients required for clinical trials of our product candidates may be larger than we anticipate, patient enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;
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Our third-party contractors, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner or at all;
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Regulators or IRBs may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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We may experience delays in reaching or may fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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Patients who enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;
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We may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of a product candidate;
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Regulatory agencies or IRBs may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their respective standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;
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Regulatory agencies may disagree with our clinical trial design or our interpretation of data from preclinical studies and clinical trials;
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Regulatory agencies may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we enter agreements for clinical and commercial supplies;
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The supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate, delayed, or not available at an acceptable cost, or we may experience interruptions in supply; and
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The approval policies or regulations of the regulatory agencies may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.
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Product development costs for us will increase
if we experience delays in testing or pursuing marketing approvals. We may also be required to obtain additional funds to complete
clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical studies
or clinical trials will begin as planned, will need to be restructured or will be completed on schedule or at all. Significant
preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize
our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully
commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that
cause, or lead to, clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.
If we experience delays or difficulties
in the enrollment of patients in clinical trials, we may not achieve our clinical development timeline and our receipt of necessary
regulatory approvals could be delayed or prevented.
We may not be able to initiate or continue
clinical trials for our product candidates if we are unable to locate and enroll enough eligible patients to participate in our
clinical trials. Patient enrollment is a significant factor in the overall duration of a clinical trial and is affected by many
factors, including:
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The size and nature of the patient population;
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The severity of the disease under investigation;
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The proximity of patients to clinical sites;
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The eligibility criteria for the trial;
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The design of the clinical trial;
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Efforts to facilitate timely enrollment;
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Competing clinical trials for the same patient population; and
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Clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.
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Our inability to enroll enough patients
for our clinical trials could result in significant delays or may require us to abandon one or more clinical trials altogether.
Enrollment delays in our clinical trials may result in increased development costs for our product candidates, delay or halt the
development of and approval processes for our product candidates and jeopardize our ability to achieve our clinical development
timeline and goals, including the dates by which we will commence, complete and receive results from clinical trials. Enrollment
delays may also delay or jeopardize our ability to commence sales and generate revenues from our product candidates. Any of the
foregoing could cause the value of our company to decline and limit our ability to obtain additional financing, if needed.
We may request priority review for
our product candidates in the future. The regulatory agencies may not grant priority review for any of our product candidates.
Moreover, even if the regulatory agencies designated such products for priority review, that designation may not lead to a faster
regulatory review or approval process and, in any event, does not assure approval by the regulatory agencies.
We may be eligible for priority review
designation for our product candidates if the regulatory agencies determine such product candidates offer major advances in treatment
or provide a treatment where no adequate therapy exists. A priority review designation means that the time required for the regulatory
agencies to review an application is less than the standard review period. The regulatory agencies have broad discretion with respect
to whether to grant priority review status to a product candidate, so even if we believe a product candidate is eligible for such
designation or status, the regulatory agencies may decide not to grant it. Thus, while the regulatory agencies have granted priority
review to other oncology and diabetes products, our product candidates, should we determine to seek priority review of them, may
not receive similar designation. Moreover, even if one of our product candidates is designated for priority review, such a designation
does not necessarily mean a faster overall regulatory review process or necessarily confer any advantage with respect to approval
compared to conventional procedures of the regulatory agencies.
Receiving priority review from the regulatory
agencies does not guarantee approval within an accelerated timeline or thereafter.
In some instances, we believe we
may be able to secure approval from the regulatory agencies to use accelerated development pathways. If we are unable to obtain
such approval, we may be required to conduct additional preclinical studies or clinical trials beyond those that we contemplate
which could increase the expense of obtaining and delay the receipt of necessary marketing approvals.
We anticipate that we may seek an accelerated
approval pathway for certain of our product candidates. Under the accelerated approval provisions or their implementing regulations
of the regulatory agencies, they may grant accelerated approval to a product designed to treat a serious or life-threatening condition
that provides meaningful therapeutic benefit over available therapies upon a determination that the product influences a surrogate
endpoint or intermediate clinical endpoint that is reasonably likely to predict clinical benefit. Regulatory agencies consider
a clinical benefit to be a positive therapeutic effect that is clinically meaningful in the context of a given disease, such as
irreversible morbidity or mortality. For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory
measurement, radiographic image, physical sign or other measure that is thought to predict clinical benefit but is not itself a
measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than an effect
on irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or mortality or
other clinical benefit. The accelerated approval pathway may be used in cases in which the advantage of a new drug over available
therapy may not be a direct therapeutic advantage but is a clinically important improvement from a patient and public health perspective.
If granted, accelerated approval is usually contingent on the sponsor’s agreement to conduct, in a diligent manner, additional
post-approval confirmatory studies to verify and describe the drug’s clinical benefit. If such post-approval studies fail
to confirm the drug’s clinical benefit, regulatory agencies may withdraw their approval of the drug.
Prior to seeking such accelerated approval,
we will seek feedback from the regulatory agencies and will otherwise evaluate our ability to seek and receive such accelerated
approval. There can also be no assurance that after our evaluation of the feedback and other factors we will decide to pursue or
submit an NDA, a BLA or an MAA for accelerated approval or any other form of expedited development, review or approval. Similarly,
there can be no assurance that after subsequent feedback from regulatory agencies that we will continue to pursue or apply for
accelerated approval or any other form of expedited development, review or approval, even if we initially decide to do so. Furthermore,
if we decide to apply for accelerated approval or under another expedited regulatory designation (such as the Breakthrough Therapy
designation or Fast Track designation), there can be no assurance that such submission or application will be accepted or that
any expedited development, review or approval will be granted on a timely basis or at all. Regulatory agencies could also require
us to conduct further studies prior to considering our application or granting approval of any type. A failure to obtain accelerated
approval or any other form of expedited development, review or approval for any of our product candidates that we determine to
seek accelerated approval for would result in a longer time to commercialization of such product candidate, could increase the
cost of development of such product candidate and could harm our competitive position in the marketplace.
We may seek Orphan Drug designation
for some of our product candidates, and we may be unsuccessful.
Regulatory agencies may designate drugs
for relatively small patient populations as Orphan Drugs. Under the standards and requirements of regulatory agencies, they may
designate a product as an Orphan Drug if it is a drug intended to treat a rare disease or condition. In the U.S., this is generally
defined as a disease with a patient population of fewer than 200,000 individuals. If a product with an Orphan Drug designation
subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled
to a period of marketing exclusivity, which precludes the EMA or FDA from approving another marketing application for the same
drug for the same indication during the period of exclusivity. The applicable period is seven years in the U.S. and ten years in
Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug designation
or if the drug is sufficiently profitable so that market exclusivity is no longer justified.
We have been granted Orphan Drug designation
for our pancreatic cancer therapy, including LAPC, in the U.S. and European Union. Orphan Drug exclusivity may be lost if a regulatory
agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient
quantity of the drug to meet the needs of patients with the rare disease or condition. Marketing exclusivity for a product designated
as an Orphan Drug may not effectively protect the product candidate from competition because different drugs can be approved for
the same condition. Even after an Orphan Drug is approved, the regulatory agency can subsequently approve a different drug for
the same condition if they conclude 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.
A Fast Track by the FDA or similar
designation by another regulatory agency, even if granted for any of our product candidates, may not lead to a faster development
or regulatory review or approval process and does not increase the likelihood that our product candidates will receive marketing
approval.
We do not currently have Fast Track designation
by the FDA or similar designation by another regulatory agency for any of our product candidates but intend to seek such designation
based upon the data generated from our clinical trials, if successful. If a drug or biologic is intended for the treatment of a
serious or life-threatening condition and the product candidate demonstrates the potential to address unmet medical needs for this
condition, the sponsor may apply for Fast Track designation by the FDA or similar designation by another regulatory agency. Regulatory
agencies have broad discretion whether to grant this designation by the FDA or similar designation by another regulatory agency.
Even if we believe a product candidate is eligible for this designation, we cannot assure you that a regulatory agency would decide
to grant it. Even if we do receive Fast Track or similar designation, we may not experience a faster development process, review
or approval compared to conventional procedures adopted by a regulatory agency. In addition, a regulatory agency may withdraw Fast
Track designation if it believes that the designation is no longer supported by data from our clinical development program. Many
product candidates that have received Fast Track designation have failed to obtain marketing approval.
A Breakthrough Therapy designation
by the FDA or similar designation by another regulatory agency, even if granted for any of our product candidates, may not lead
to a faster development or regulatory review or approval process and does not increase the likelihood that our product candidates
will receive marketing approval.
We do not currently have Breakthrough Therapy
designation by the FDA or similar designation by another regulatory agency for any of our product candidates but intend seek such
designation based upon the data we generate during our clinical trials, if successful.
A Breakthrough Therapy or similar designation
is within the discretion of the FDA and other regulatory agencies. Accordingly, even if we believe, after completing early clinical
trials, that one of our product candidates meets the criteria for designation as a Breakthrough Therapy or other similar designation,
a regulatory agency may disagree and instead determine not to make such designation. In any event, the receipt of a Breakthrough
Therapy or other similar designation for a product candidate may not result in a faster development process, review or approval
compared to drugs or biologics considered for approval under conventional procedures of a regulatory agency and does not assure
their ultimate approval. In addition, even if one or more of our product candidates receives Breakthrough Therapy designation
or other similar designations, a regulatory agency may later decide that such product candidates no longer meet the conditions
for the designation.
Failure to obtain marketing approval
in international jurisdictions would prevent our product candidates from being marketed abroad.
To market and sell our product candidates
in Europe and many other jurisdictions outside the U.S., we or our third-party collaborators must obtain separate marketing approvals
and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional
testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval in the U.S. The
regulatory approval process outside the U.S. generally includes all the risks associated with obtaining FDA approval. In addition,
in many countries outside the U.S., it is required that the product be approved for reimbursement before the product can be approved
for sale in that country. We or these third parties may not obtain approval from a regulatory agency outside the U.S. on a timely
basis, if at all. Approval by FDA does not ensure approval by a regulatory agency in other countries or jurisdictions, and approval
by one regulatory agency outside the U.S. does not ensure approval by a regulatory agency in other countries or jurisdictions or
by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our product
candidates in any market.
Any product candidate for which we
obtain marketing approval will be subject to extensive post-marketing regulatory requirements and could be subject to post-marketing
restrictions or withdrawal from the market. We may be subject to penalties if we fail to comply with regulatory requirements or
if we experience unanticipated problems with our products, when and if any of our product candidates are approved.
Our product candidates and the activities
associated with their development and commercialization, including their testing, manufacture, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by regulatory agencies. The requirements
that result from such regulations include submissions of safety and other post-marketing information and reports, registration
and listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance
of records and documents, including periodic inspections by regulatory agencies, requirements regarding the distribution of samples
to physicians and recordkeeping.
In addition, regulatory agencies may impose
requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product
candidate. Regulatory agencies closely regulate the post-approval marketing and promotion of drugs to ensure drugs are marketed
only for the approved indications and in accordance with the provisions of the approved labeling. They also impose stringent restrictions
on manufacturers’ communications regarding use of their products. If we promote our product candidates beyond their approved
indications, we may be subject to enforcement action for off-label promotion. Violations of the laws relating to the promotion
of prescription drugs may lead to investigations alleging violations of federal and state healthcare fraud and abuse laws, as well
as state consumer protection laws.
Also, later discovery of previously unknown
adverse events or other problems with our product candidates, manufacturers or manufacturing processes, or failure to comply with
regulatory requirements, may yield various results, including:
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Restrictions on such products, manufacturers or manufacturing processes;
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Restrictions on the labeling or marketing of a product;
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Restrictions on product distribution or use;
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Requirements to conduct post-marketing studies or clinical trials;
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Warning or untitled letters;
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Withdrawal of the products from the market;
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Refusal to approve pending applications or supplements to approved applications that we submit;
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Recall of products;
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Fines, restitution or disgorgement of profits or revenues;
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Suspension or withdrawal of marketing approvals;
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Refusal to permit the import or export of our product candidates;
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Product seizure; or
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Injunctions or the imposition of civil or criminal penalties
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Non-compliance with European requirements
regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric
population, can also result in significant financial penalties. Similarly, failure to comply with the Europe’s requirements
regarding the protection of personal information can also lead to significant penalties and sanctions.
Our relationships with customers
and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations,
which could expose us to criminal sanctions, substantial civil penalties, contractual damages, reputational harm and diminished
profits and future earnings.
Healthcare providers, physicians and third-party
payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing
approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable federal and state fraud
and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships
through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable
healthcare laws and regulations include the following:
The Anti-Kickback Statute prohibits, among
other things, persons from knowingly and willfully soliciting, offering, receiving or providing any remuneration, directly or indirectly,
in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or
recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
The False Claims Act imposes criminal and
civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting,
or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement
to avoid, decrease or conceal an obligation to pay money to the Federal governments; and
HIPAA imposes criminal and civil liability
for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. HIPAA,
as amended by HITECH and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect
to safeguarding the privacy, security and transmission of individually identifiable health information. Federal law requires applicable
manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals, which includes
data collection and reporting obligations. The information is to be made publicly available on a searchable website. Analogous
state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements
and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.
Some state laws require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers
of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy
and security of health information in some circumstances, many of which differ from each other in significant ways and often are
not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements
with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that
governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations
or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in
violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil,
criminal and administrative penalties, damages, fines, imprisonment, exclusion of our product candidates from government funded
healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians
or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws,
they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Recently enacted and future legislation
could increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect
the prices we may obtain.
In the U.S. and some foreign jurisdictions,
there have been a several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent
or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to
profitably sell any product candidates for which we obtain marketing approval.
In March 2010, former President Obama signed
into law the Affordable Care Act, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth
of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health
insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The Affordable
Care Act, as well as other healthcare reform measures that 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. 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 product candidates.
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 compromise our ability to generate revenue, attain profitability or commercialize our
products. At the same time, there have been significant ongoing efforts to modify or eliminate the Affordable Care Act. For example,
the Tax Act, enacted on December 22, 2017, repealed the shared responsibility payment for individuals who fail to maintain minimum
essential coverage under section 5000A of the Internal Revenue Code, commonly referred to as the individual mandate, beginning
in 2019. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their health
insurance coverage over the next ten years and is likely to lead to increases in insurance premiums. Further legislative changes
to and regulatory changes under the Affordable Care Act remain possible. It is unknown what form any such changes or any law proposed
to replace the Affordable Care Act would take, and how or whether it may affect our business in the future.
Newly enacted FDA regulations may require
us to expend additional resources to obtain or maintain regulatory approval. For example, in August 2017 President Trump signed
into law the FDARA. This legislation imposes significant new requirements for clinical trial sponsors which will affect, among
other things, the development of drugs and biological products for pediatric use. This legislation may result in new regulations,
which may affect future options or timelines for regulatory approval.
Legislative and regulatory proposals have
been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot
be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be
changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition,
increased scrutiny by the U.S. Congress of FDA’s approval process may significantly delay or prevent marketing approval in
the U.S., as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
Governments outside the U.S. tend
to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, particularly the countries
of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To
obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness
of our product candidate to other available therapies. If reimbursement of our product candidates is unavailable or limited in
scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
Risks Related to the Commercialization
of Our Product Candidates
Serious adverse events or undesirable
side effects or other unexpected properties of our encapsulated live cell plus ifosfamide product candidate or any of our other
product candidates may be identified during development that could delay or prevent the product candidates’ marketing approval.
Serious adverse events or undesirable side
effects caused by, or other unexpected properties of, our product candidates could cause us, an IRB or a regulatory agency to interrupt,
delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay
or denial of marketing approval by a regulatory agency. If any of our product candidates is associated with serious adverse events
or undesirable side effects or has properties that are unexpected, we may need to abandon development or limit development of that
product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent,
less severe or more acceptable from a risk-benefit perspective. Many drugs that initially showed promise in clinical or earlier
stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the drug.
Even if one of our product candidates
receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third party payors
and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be
smaller than we anticipated.
We have never commercialized a drug product.
Even if one of our product candidates is approved by a regulatory agency for marketing and sale, it may nonetheless fail to gain
sufficient market acceptance by physicians, patients, third party payors and others in the medical community. For example, physicians
are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient
treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to
switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement
for existing therapies.
Efforts to educate the medical community
and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If
any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant
revenues and we may not become profitable.
The degree of market acceptance of our
encapsulated live cell plus ifosfamide product candidate or any of our other product candidates, if approved for commercial sale,
will depend on several factors, including:
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The efficacy and safety of the product;
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The potential advantages of the product compared to alternative treatments;
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The prevalence and severity of any side effects;
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The clinical indications for which the product is approved;
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Whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;
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Limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;
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Our ability to offer the product for sale at competitive prices;
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Our ability to establish and maintain pricing sufficient to realize a meaningful return on our investment;
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The product’s convenience and ease of administration compared to alternative treatments;
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The willingness of the target patient population to try, and of physicians to prescribe, the product;
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The strength of sales, marketing and distribution support;
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The approval of other new products for the same indications;
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Changes in the standard of care for the targeted indications for the product;
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The timing of market introduction of our approved products as well as competitive products and other therapies;
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Availability and amount of reimbursement from government payors, managed care plans and other third-party payors;
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Adverse publicity about the product or favorable publicity about competitive products; and
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Potential product liability claims.
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The potential market opportunities for
our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated
on many assumptions, including industry knowledge and publications, third party research reports and other surveys. While we believe
that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our
management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source.
If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates
of the potential market opportunities.
If any of our product candidates
receives marketing approval and we or others later discover that the therapy is less effective than previously believed or causes
undesirable side effects that were not previously identified, our ability to market the therapy could be compromised.
Clinical trials of our product candidates
are conducted in carefully defined subsets of patients who have agreed to enter a clinical trial. Consequently, it is possible
that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive
effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we or
others discover that the product candidate is less effective than previously believed or causes undesirable side effects that were
not previously identified, any of the following adverse events could occur:
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A regulatory agency may withdraw its approval of the product candidate or seize the product candidate;
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We may be required to recall the product candidate or change the way the product is administered;
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Additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the product candidate;
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We may be subject to fines, injunctions or the imposition of civil or criminal penalties;
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A regulatory agency may require the addition of labeling statements, such as a “black box” warning or a contraindication;
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We may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution of our product candidate to patients;
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We could be sued and held liable for harm caused to patients;
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The product candidate may become less competitive; and
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Our reputation may suffer.
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Any of these events could have a material
and adverse effect on our operations and business and could adversely impact our stock price.
If we are unable to establish sales,
marketing and distribution capabilities or enter acceptable sales, marketing and distribution arrangements with third parties,
we may not be successful in commercializing any product candidate that we develop when a product candidate is approved.
We do not have any sales, marketing or
distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve
commercial success for any approved product candidate, we must either develop a sales and marketing organization, outsource these
functions to third parties or license our product candidates to others. If approved by the FDA, the EMA or comparable foreign regulatory
agencies, we expect to license our encapsulated live cell plus ifosfamide product candidate for pancreatic cancer to a large pharmaceutical
company with greater resources and experience than us.
We may not be able to license our encapsulated
live cell plus ifosfamide product candidate on reasonable terms, if at all. If other product candidates are approved for smaller
or easily targeted markets, we expect to commercialize them in the U.S. directly with a small and highly focused commercialization
organization. The development of sales, marketing and distribution capabilities will require substantial resources and will be
time-consuming, which could delay any product candidate launch.
We expect that we will commence the development
of these capabilities prior to receiving approval of any of our product candidates. If the commercial launch of a product candidate
for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason,
we could have prematurely or unnecessarily incurred these commercialization costs. Such a delay may be costly, and our investment
could be lost if we cannot retain or reposition our sales and marketing personnel.
In addition, we may not be able to hire
or retain a sales force in the U.S. that is sufficient in size or has adequate expertise in the medical markets that we plan to
target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results
may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly
relevant to one of our product candidates, then we may seek to collaborate with that potential partner even if we believe we could
otherwise develop and commercialize the product candidate independently.
We expect to seek one or more strategic
partners for commercialization of our product candidates outside the U.S. Because of entering arrangements with third parties to
perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be
lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may
be unsuccessful in entering the necessary arrangements with third parties or may be unable to do so on terms that are favorable
to us. In addition, we may have little or no control over such third parties and any of them may fail to devote the necessary resources
and attention to sell and market our product candidates effectively.
If we do not establish sales and marketing
capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our
product candidates that receive marketing approval.
Risks Related to Our Dependence on Third
Parties
We rely and expect to continue to
rely heavily on third parties to conduct our preclinical studies and clinical trials, and those third parties may not perform satisfactorily,
including failing to meet deadlines for the completion of such studies and trials.
We currently rely on third parties to plan
for and conduct our clinical trials. We expect to continue to rely heavily on third parties, such as a CRO, a clinical data management
organization, a medical institution, a clinical investigator and others to plan for and conduct our clinical trials. Our agreements
with these third parties generally allow the third party to terminate our agreement with them at any time. If we are required to
enter alternative arrangements because of any such termination, the introduction of our product candidates to market could be delayed.
Our reliance on these third parties for
R&D activities will reduce our control over these activities but will not relieve us of our responsibilities. For example,
we design our clinical trials and will remain responsible for ensuring that each is conducted in accordance with the general investigational
plan and protocol for the trial. Moreover, regulatory agencies require us to comply with cGMP standards for conducting, recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not
relieve us of these responsibilities and requirements. We also are required to register ongoing clinical trials and post the results
of completed clinical trials on a government-sponsored database of regulatory agencies within specified timeframes. Failure to
do so can result in fines, adverse publicity and civil and criminal sanctions.
Furthermore, these third parties may also
have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry
out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with the requirements of a regulatory
agency or our protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates
and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
We expect to rely on third parties
to store and distribute our product candidates for our clinical trials. Any performance failure on the part of such third parties
could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing
additional losses and depriving us of potential product candidate revenue. Our existing collaboration with universities and institutions
is important to our business. If we are unable to maintain these collaborations, or if these collaborations are not successful,
our business could be adversely affected.
We rely on our eleven consultants for a
substantial portion of our R&D related to our product candidates. If there are delays or failures to perform their obligations,
our product candidates would be adversely affected. If our collaboration with these consultants is unsuccessful or is terminated,
we would need to identify new research and collaboration partners for our preclinical and clinical development. If we are unsuccessful
or significantly delayed in identifying new collaboration and research partners, or unable to reach an agreement with such a partner
on commercially reasonable terms, development of our product candidates will suffer, and our business would be materially harmed.
Furthermore, if any of these consultants
change their strategic focus, or if external factors cause any one of them to divert resources from our collaboration, or if any
one of them independently develops products that compete directly or indirectly with our product candidates using resources or
information it acquires from our collaboration, our business and results of operations could suffer.
Future preclinical and clinical development
collaborations may be important to us. If we are unable to maintain these collaborations, or if these collaborations are not successful,
our business could be adversely affected.
For some of our product candidates, we
may in the future determine to collaborate with pharmaceutical and biotechnology companies for development of our product candidates.
We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for any collaboration
will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions
of the proposed collaboration and the proposed collaborator’s evaluation of several factors. If we are unable to reach agreements
with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a product
candidate, reduce or delay its development program or one or more of our other development programs, delay our potential development
schedule or increase our expenditures and undertake preclinical and clinical development activities at our own expense. If we fail
to enter collaborations and do not have sufficient funds or expertise to undertake the necessary development activities, we may
not be able to further develop our product candidates or continue to develop our product candidates and our business may be materially
and adversely affected.
Future collaborations we may enter may
involve the following risks:
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Collaborators may have significant discretion in determining the efforts and resources that they will apply to these collaborations;
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Collaborators may not perform their obligations as expected;
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Changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, may divert resources or create competing priorities;
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Collaborators may delay discovery and preclinical development, provide insufficient funding for product development of targets selected by us, stop or abandon preclinical or clinical development of a product candidate or must repeat or conduct new preclinical and clinical development of a product candidate;
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Collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed than ours;
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Product candidates may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the development of our product candidates;
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Disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development might cause delays or termination of the preclinical or clinical development or commercialization of product candidates. This might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
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Collaborators may not properly maintain or defend our intellectual property rights or intellectual property rights licensed to us or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
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Collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
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Collaborations may be terminated at the convenience of the collaborator and, if terminated, we could be required to raise additional capital to pursue further development or commercialization of our product candidates.
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In addition, subject to its contractual
obligations to us, if a collaborator of ours is involved in a business combination, the collaborator might deemphasize or terminate
the development of any of our product candidates. If one of our collaborators terminates its agreement with us, we may find it
more difficult to attract new collaborators and our perception in the business and financial communities could be adversely affected.
If we are unable to maintain our collaborations, development of our product candidates could be delayed, and we may need additional
resources to develop them.
We rely on Prof. Günzburg, Dr.
Salmons and Dr. Löhr for the development of our product candidates. If they decide to terminate their relationship with us,
we may not be successful in the development of our product candidates.
Prof. Günzburg, Dr. Salmons and Dr.
Löhr are involved in almost all our scientific endeavors underway and being planned by us. These endeavors include preclinical
and clinical studies involving our cancer therapy (LAPC) to be conducted in the U.S. and elsewhere on our behalf. In addition,
they will be assisting us in the development of a treatment for diabetes. They also provide professional consulting services to
us through the respective consulting agreements we have entered with the consulting companies through which they provide services.
The consulting agreements may be terminated for any reason at any time upon one party giving the other a written notice prior to
the effective date of the termination. If that occurs, we may not be successful in the development of our product candidates which
could have a material adverse effect on us.
We contract with third parties for
the manufacture of our product candidates for preclinical studies and clinical trials and expect to continue to do so for commercialization.
This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such
quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We do not currently own or operate manufacturing
facilities to produce clinical quantities of our encapsulated live cell and ifosfamide product for pancreatic cancer and other
encapsulated product candidates and have limited personnel with manufacturing experience. We currently rely on and expect to continue
to rely on third party contract manufacturers to manufacture supplies of our product candidates for preclinical studies and clinical
trials, as well as for commercial manufacture of our product candidates, and these must be maintained for us to receive marketing
approval for our product candidates.
Our encapsulated live cell and ifosfamide
product and our other product candidates must be manufactured through complex, multi-step synthetic processes that are time-consuming
and involve special conditions at certain stages. Biologics and drug substance manufacture requires high potency containment, and
containment under aseptic conditions. Any performance failures on the part of our existing or future manufacturers could delay
clinical development or marketing approval of our product candidates. Moreover, the facilities that produce our Cell-in-a-Box®
capsules are unique to us and would not be replicable or replaceable promptly, if at all, if those facilities become unavailable
or are damaged or destroyed through an accident, natural disaster, labor disturbance or otherwise.
If any of our manufacturer of CypCaps should
become unavailable to us for any reason, we may incur additional cost or delay in identifying or qualifying a replacement manufacturer.
In addition, while we believe that our existing manufacturer, Austrianova, can produce our product candidates, if approved, in
commercial quantities, we may also need to identify a third-party manufacturer capable of providing commercial quantities of our
product candidates. If we are unable to arrange for such a third-party manufacturing source or fail to do so on commercially reasonable
terms and in a timely manner, we may not be able to successfully produce and market our encapsulated live cell and ifosfamide product
or any other product candidate or may be delayed in doing so.
Even if we can establish such arrangements
with another third-party manufacturer, reliance on a new third-party manufacturer entails additional risks, including:
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Reliance on the third party for regulatory compliance and quality assurance;
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The possible breach of the manufacturing agreement by the third party;
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The possible misappropriation of our proprietary information, including our trade secrets and know-how; and
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The possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.
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A new third-party manufacturer may not
be able to comply with cGMP standards or the requirements of a regulatory agency. Our failure, or the failure of our third-party
manufacturer, to comply with these practices or requirements could result in sanctions being imposed on us, including clinical
holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls
of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely
affect supplies of our product candidates.
Delays in the cGMP certification of the
Austrianova manufacturing facility in Bangkok, Thailand could affect its ability to manufacture encapsulated live cells on a timely
basis and could adversely affect supplies of our product candidates for clinical trials and to market.
Our product candidates that we may develop
may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers
that operate under cGMP regulations and that might be capable of manufacturing products for us.
In addition, we expect to rely on Austrianova
to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical studies. There
are a small number of suppliers for certain equipment and raw materials that are used in the manufacture of our product candidates.
Such suppliers may not sell these raw materials to Austrianova at the times we need them or on commercially reasonable terms. For
example, there is from time to time a limited supply of acceptable cell media for production of our MCB. We do not have any control
over the process or timing of the acquisition of these raw materials by Eurofins or Austrianova. Moreover, we currently do not
have any agreements for the commercial production of these raw materials. Any significant delay in the supply of a product candidate
or the raw material components thereof for an ongoing clinical trial due to the need to replace a third-party supplier of these
raw materials could considerably delay completion of our clinical studies, product testing and potential regulatory approval of
our product candidates. If Eurofins, Austrianova or we are unable to purchase these raw materials after regulatory approval has
been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a
shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.
Our current and anticipated future dependence
upon Austrianova and others for the manufacture of our product candidates may adversely affect our future profit margins and our
ability to commercialize any products that receive marketing approval on a timely and competitive basis.
The manufacture of our product candidates
is complex and difficulties may be encountered in production. If such difficulties are encountered or failure to meet regulatory
standards occurs, our ability to provide supply of our product candidates for clinical trials or our products for patients, if
approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
The processes involved in manufacturing
our product candidates are complex, expensive, highly regulated and subject to multiple risks. Even minor deviations from normal
manufacturing processes could result in reduced production yields, product defects and other supply disruptions. Further, as product
candidates are developed through preclinical studies to potential future clinical trials towards approval and commercialization,
it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort
to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of
these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other
future clinical trials. We expect to rely on third-party manufacturers for the manufacturing of our products.
In order to conduct planned or future clinical
trials of our product candidates, or supply commercial products, if approved, we will need to have them manufactured in small and
large quantities. Our manufacturing partners may be unable to successfully increase the manufacturing capacity for any of our product
candidates in a timely or cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities. If
our manufacturing partners are unable to successfully scale up the manufacture of our product candidates in sufficient quality
and quantity, the development, testing and potential clinical trials of that product candidate may be delayed or become infeasible,
and regulatory approval or commercial launch of any resulting product may be delayed or not obtained, which could significantly
harm our business. The same risks would apply to our internal manufacturing facilities, should we in the future decide to build
internal manufacturing capacity. In addition, building internal manufacturing capacity would carry significant risks in terms of
being able to plan, design and execute on a complex project to build manufacturing facilities in a timely and cost-efficient manner.
In addition, the manufacturing process
for any products that we may develop is subject to FDA, EMA and foreign regulatory authority approval processes and continuous
oversight, and we will need to contract with manufacturers who can meet all applicable FDA, EMA and foreign regulatory authority
requirements, including complying with current good manufacturing processes, or on an ongoing basis. If we or our third-party manufacturers
are unable to reliably produce products to specifications acceptable to the FDA, EMA or other regulatory authorities, we may not
obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product
candidates, there is no assurance that either we or our third-party manufacturers will be able to manufacture the approved product
to specifications acceptable to the FDA, EMA or other regulatory authorities, to produce it in sufficient quantities to meet the
requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion
of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial
costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods, and have an adverse
effect on our business, prospects, financial condition, results of operations and growth prospects.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain
intellectual property protection for our technology and product candidates, or if the scope of the intellectual property protection
obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical
to ours, and our ability to commercialize successfully our technology and products may be impaired.
Our success depends in large part on our
ability to obtain and maintain patent protection in the U.S. and other countries with respect to our proprietary technology and
products. We seek to protect our proprietary position by filing patents in the U.S. and abroad related to our product candidates.
Our patent portfolio relating to the Cell-in-the-Box® technology was formerly licensed from Bavarian Nordic/GSF.
The Bavarian Nordic/GSF patents covered capsules encapsulating cells expressing cytochrome P450 and treatment methods using the
same. These patents expired on March 27, 2017. We exclusively license from UTS patented Melligen cells, which cover our product
candidate for the treatment of diabetes. The patents are issued in the U.S. and Europe and expire in August 2028. Currently, we
do not have any issued patents in any countries covering our product candidate for the treatment of cancer; we have pending applications
in the U.S., Australia, Canada and Europe relating to our product candidate for the treatment of pancreatic cancer. If issued,
such patents would expire in March 2038.
We cannot estimate the financial or other
impact of the expiration of the Bavarian Nordic/GSF patents or the failure of the USPTO or similar regulatory authorities in other
countries denying the claims we pursue in the U.S. and other countries.
The patent prosecution and/or patent maintenance
process is expensive and time-consuming. We may not be able to file and prosecute or maintain all necessary or desirable patent
applications or maintain the existing patents at a reasonable cost or in a timely manner. We may choose not to seek patent protection
for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Under the laws of certain jurisdictions,
patents or other intellectual property rights may be unavailable or limited in scope. It is also possible that we will fail to
identify patentable aspects of our discovery and preclinical development output before it is too late to obtain patent protection.
Moreover, in some circumstances, we do
not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering
technology that we license from third parties. Therefore, these patents and applications may not be prosecuted and enforced in
a manner consistent with the best interests of our business.
The patent position of biotechnology and
pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been
the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the
laws of the U.S. For example, India does not allow patents for methods of treating the human body. Publications of discoveries
in the scientific literature often lag the actual discoveries, and patent applications in the U.S. and other jurisdictions are
typically not published until 18 or more months after filing, or in some cases not at all. Therefore, we cannot know with
certainty whether we were the first to make the inventions claimed in our licensed patents or pending patent applications, or that
we were the first to file for patent protection of such inventions. Consequently, the issuance, scope, validity, enforceability
and commercial value of our patent rights are highly uncertain. Any future patent applications may not result in patents being
issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing
competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the U.S. and other
countries may diminish the value of our patents or narrow the scope of our patent protection.
Patent reform legislation could increase
the uncertainties and costs surrounding the prosecution of our owned or licensed patent applications and the enforcement or defense
of our owned or licensed patents. On September 16, 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”)
was signed into law. The Leahy-Smith Act includes several significant changes to patent law in the U.S. These include provisions
that affect the way patent applications are prosecuted and may also affect patent litigation. The USPTO recently developed new
regulations and procedures to govern administration of the Leahy-Smith Act. Many of the substantive changes to patent law associated
with the Leahy-Smith Act, such as the first to file provisions, only became effective on March 16, 2013. Accordingly, it is
not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and
its implementation could increase the uncertainties and costs surrounding the prosecution of our owned or licensed patent applications
and the enforcement or defense of our owned or licensed patents, all of which could have a material adverse effect on our business
and financial condition.
Also, we may be subject to a third-party
pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter-party review,
post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination
in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties
to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to
manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of
protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us
to license, develop or commercialize current our future product candidates.
Even if our owned and licensed patent applications
issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing
with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed
patents by developing similar or alternative technologies or products in a non-infringing manner.
The issuance of a patent is not conclusive
as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or
patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims
being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using
or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology
and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents
protecting such candidates might expire before or shortly after such candidates are commercialized. Thus, our owned and licensed
patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical
to ours.
The risks described elsewhere pertaining
to our patents and other intellectual property rights also apply to the intellectual property rights that we license, and any failure
to obtain, maintain and enforce these rights could have a material adverse effect on our business. In some cases, we may not have
control over the prosecution, maintenance or enforcement of the patents that we license. Moreover, our licensors may fail to take
the steps that we believe are necessary or desirable to obtain, maintain and enforce the licensed patents. Any inability on our
part to protect adequately our intellectual property may have a material adverse effect on our business, operating results and
financial position.
If we do not obtain patent and/or data exclusivity for
our product candidates, our business may be materially harmed.
Our commercial success will largely depend
on our ability to obtain and maintain patent and other intellectual property protection and/or data exclusivity under the BPCIA
in the U.S. and other countries with respect to our proprietary technology, product candidates and our target indications.
If we are unable to obtain patents covering
our product candidates or obtain data and/or marketing exclusivity for our product candidates, our competitors may be able to take
advantage of our investment in development and clinical trials by referencing our clinical and preclinical data to obtain approval
of competing products, such as a biosimilar, earlier than might otherwise be the case.
We may not be able to protect our intellectual property
rights throughout the world.
Filing,
prosecuting and defending patents or establishing other intellectual property rights to our product candidates in all countries
throughout the world would be prohibitively
expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in
the United States or non-existent. For example, the Melligen cells are protected by patents only in the U.S. and Europe and we
are only pursuing patent protection for our pancreatic cancer product candidate in the U.S., Australia, Canada and Europe.
Many companies have encountered significant
problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of some countries
do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop
the infringement of our patents or misappropriation of our intellectual property rights generally. Proceedings to enforce our patent
and other intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention
from other aspects of our business, could put our patents or intellectual property rights at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may
not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.
Many
countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner
may be compelled under specified circumstances to grant licenses to third parties. In those countries, we may have limited
remedies if patents are infringed or if we are
compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our
ability to pursue strategic alternatives, including identifying and consummating transactions
with potential third-party partners, to further develop, obtain marketing approval for and/or commercialize our product candidates,
and consequently our potential revenue opportunities.
Accordingly, our efforts to enforce our
intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual
property that we develop or license.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies. Our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees,
annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various
governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and/or applications. The USPTO
and various non-U.S. governmental patent agencies require compliance with numerous procedural, documentary, fee payment and other
similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply,
and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable
rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be
able to enter the market and this circumstance would have a material adverse effect on our business.
We may become involved in lawsuits
to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.
Because competition in our industry is
intense, competitors may infringe or otherwise violate our issued patents, patents of our licensors or other intellectual property.
To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming.
Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that
we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid
or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using
the technology at issue because our patents do not cover the technology in question. An adverse result in any litigation proceeding
could put one or more of the patents associated with our business at risk of being invalidated or interpreted narrowly. We may
also elect to enter license agreements to settle patent infringement claims or to resolve disputes prior to litigation, and any
such license agreements may require us to pay royalties and other fees that could be significant. Furthermore, because of the substantial
amount of discovery required in intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure.
If we breach any of our license or
collaboration agreements, it could compromise our development and commercialization efforts for our product candidates.
We have licensed rights to intellectual
property from third parties to commercialize our product candidates, including our Cell-in-a-Box® Technology for
LAPC and diabetes and our COVID-19 diagnostic kits. If we materially breach or fail to perform any provision under these license
and collaboration agreements, including failure to make payments to a licensor or collaborator when due for royalties and failure
to use commercially reasonable efforts to develop and commercialize our product candidates, such licensors and collaborators have
the right to terminate our agreements, and upon the effective date of such termination, our right to practice the licensed intellectual
property would end. Any uncured, material breach under the agreements could result in our loss of rights to practice the patent
rights and other intellectual property licensed to us under the agreements and could result in the loss of our ability to develop
or commercialize our product candidates.
We may need to license certain intellectual
property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property,
including patent rights, which are important or necessary to the development of our products. It may be necessary for us to use
the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain
a license from these third parties on commercially reasonable terms, or our business could be harmed, possibly materially. Although
we believe that licenses to these patents may be available from these third parties on commercially reasonable terms, if we were
not able to obtain a license, or are not able to obtain a license on commercially reasonable terms, our business could be harmed,
possibly materially.
Third parties may initiate legal
proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could
have a material adverse effect on the success of our business.
Our commercial success depends upon our
ability, and the ability of our collaborators, to develop, manufacture, market and sell our product candidates and use our proprietary
technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation
in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings
or litigation regarding intellectual property rights with respect to our products and technology, including interference or derivation
proceedings before the USPTO and various governmental patent agencies outside of the U.S. Third parties may assert infringement
claims against us based on existing patents or patents that may be granted in the future.
If we are found to infringe a third party’s
intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing
our product candidates and technology. However, we may not be able to obtain any required license on commercially reasonable terms
or at all. Even if we could obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies
licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In
addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to
have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force
us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the
confidential information or trade secrets of third parties could have a similar negative impact on our business.
We may not be successful in obtaining
or maintaining necessary rights for its development pipeline through acquisitions and licenses from third parties.
Because our programs may involve additional
product candidates that may require the use of proprietary rights held by third parties, the growth of our business may depend
in part on our ability to acquire, in-license or use these proprietary rights. We may be unable to acquire or in-license any compositions,
methods of use or other third-party intellectual property rights from third parties that we identify. The licensing and acquisition
of third-party intellectual property rights is a competitive area, and numerous established companies are also pursuing strategies
to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may
have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.
In addition, companies that perceive us
to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party
intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to
successfully obtain rights to required third-party intellectual property rights, our business, financial condition and prospects
for growth could suffer.
If we are unable to protect the confidentiality
of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some
of our technology and product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary
information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering non-disclosure
and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific
collaborators, contract manufacturers, consultants, advisors and other third parties. We seek to protect our confidential proprietary
information, in part, by entering confidentiality and invention or patent assignment agreements with our employees and consultants;
however, we cannot be certain that such agreements have been entered with all relevant parties.
Moreover, to the extent we enter such agreements,
any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets to unaffiliated
third parties. We may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed
or misappropriated a trade secret is difficult, expensive and time-consuming and the outcome is unpredictable. In addition, some
courts inside and outside the U.S. are less willing or unwilling to protect trade secrets. If any of our trade secrets were to
be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they
communicate them, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed
to or independently developed by a competitor, our competitive position would be harmed.
The majority of the technology that we
license and use for our product candidates is not protected by patents, but rather is based upon confidential know-how and trade
secrets. Confidential know-how and trade secrets are only protectable to the extent a third party utilizes the confidential know-how
or trade secret in an unauthorized manner; however, if a third party is able to independently duplicate the technology, such as
through reverse engineering, without access to or use of our confidential know-how or trade secret, we would have no recourse.
We may be subject to claims that
our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of their former
employers or other third parties.
We employ individuals and use consultants
and independent contractors who were previously employed at other biotechnology or pharmaceutical companies. Although we seek to
ensure that our employees and our consultants and independent contractors do not use the proprietary information or know-how of
others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise used or disclosed trade secrets, or other confidential information of our employees’, consultants’
or independent contractors’ former employers, clients or other third parties. We may also be subject to claims that
former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend
against these claims. There is no guarantee of success in defending these claims, and if we fail in defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right
to use, valuable intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction
to our management and others working for us.
In addition, while it is our policy to
require our employees, consultants and independent contractors who may be involved in the development of intellectual property
to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each
party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing
or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to
determine the ownership of what we regard as our intellectual property. If we or our licensors fail in prosecuting or defending
any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if
we and our licensors are successful in prosecuting or defending against such claims, litigation could result in substantial costs
and be a distraction to management.
Any trademarks we have obtained or
may obtain may be infringed or successfully challenged, resulting in harm to our business.
We expect to rely on trademarks as one
means to distinguish any of our drug candidates that are approved for marketing from the products of our competitors. Once we select
new trademarks and apply to register them, our trademark applications may not be approved. Third parties may oppose or attempt
to cancel our trademark applications or trademarks, or otherwise challenge our use of the trademarks. If our trademarks are successfully
challenged, we could be forced to rebrand our drugs, which could result in loss of brand recognition and could require us to devote
resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources
to enforce our trademarks.
Intellectual property rights do not
necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded
by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately
protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
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others may be able to make compositions that are the same as or like our product candidates, but that are not covered by the claims of any patents that we may own or exclusively license;
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others may be able to make product that is like the product candidates we intend to commercialize that is not covered by any patents that we might own or exclusively license and have the right to enforce;
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we, our licensors or any collaborators might not have been the first to make the inventions covered by issued patents or pending patent applications that we may own;
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we, our licensors or any collaborators might not have been the first to file patent applications covering certain of our inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
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it is possible that our pending patent applications will not lead to issued patents;
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issued patents that we may own may not provide us with any competitive advantages, or may be held invalid or unenforceable because of legal challenges;
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our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; and
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we may not develop additional proprietary technologies that are patentable.
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Additional Risks Related to Our Business
Model and Operations
Development of brand awareness is
critical to our success.
For certain market segments that we plan
to pursue, the development of our brand awareness is essential for us to reduce our marketing expenditures over time and realize
greater benefits from marketing expenditures. If our brand-marketing efforts are unsuccessful, growth prospects, financial condition
and results of operations would be adversely affected. Our brand awareness efforts have required, and will most likely continue
to require, additional expenses and time of the current senior management team.
Any weakness in our internal controls
could have a material adverse effect on us.
As discussed in Item 9A. “Controls
and Procedures,” the senior management has identified material weaknesses in our internal controls over financial reporting
and cannot assure you that additional material weaknesses will not be identified in the future. We cannot assure you that these
steps will be successful in preventing material weaknesses or significant deficiencies in our internal controls over financial
reporting in the future. In addition, any such failure could adversely affect our ability to report financial results on a timely
and accurate basis, which could have other material effects on our business, reputation, results of operations, financial condition
or liquidity. Material weaknesses in internal controls over financial reporting or disclosure controls and procedures could also
cause investors to lose confidence in our reported financial information which could have an adverse effect on the trading price
of our securities.
Our success depends on additional
states legalizing medical Cannabis.
Continued development of the medical Cannabis
market is dependent upon continued legislative authorization of Cannabis at the state level for medical purposes. Any number
of factors could slow or halt the progress. Further, progress, while encouraging, is not assured and the process normally encounters
setbacks before achieving success. While there may be ample public support for legislative proposal, key support must be created
in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of
these factors could slow or halt the progress and adoption of Cannabis for medical purposes, which would limit the market
for our product candidates that are based on Cannabis constituents and negatively impact our business in this area.
Medicinal Cannabis faces strong opposition.
Certain well-funded and significant businesses
may have a strong economic opposition to the medical Cannabis industry. Lobbying by groups within the pharmaceutical industry
or changes in the regulation of Cannabis-based therapies could affect our ability to develop and market cannabinoid-based
cancer therapies.
Our product candidates involving
Cannabis will be subject to controlled substance laws and regulations. Failure to receive necessary approvals may delay the launch
of our products and failure to comply with these laws and regulations may adversely affect the results of our business operations.
Our product candidates involving Cannabis
contain controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products are subject to a high
degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances
into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances by definition have a high potential
for abuse, have not currently “accepted medical use” in the U.S., lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the U.S. Pharmaceutical products approved for use in the U.S. may be listed as Schedule II,
III, IV or V, with Schedule II substances considered to present the highest potential for abuse or dependence and Schedule V
substances the lowest relative risk of abuse among such substances. Schedule I and II drugs are subject to the strictest controls
under the CSA, including manufacturing and procurement quotas, security requirements and criteria for importation. In addition,
dispensing of Schedule II drugs is further restricted. For example, they may not be refilled without a new prescription.
While Cannabis is a Schedule I
controlled substance, products approved for medical use in the U.S. that contain Cannabis or Cannabis extracts
must be placed in Schedules II - V, since approval by the FDA satisfies the “accepted medical use” requirement.
If we receive FDA approval for a product candidate involving Cannabis, the DEA will make a scheduling determination and
place it in a schedule other than Schedule I for it to be prescribed to patients in the U.S. If approved by the FDA, we expect
the product candidates to be listed by the DEA as a Schedule II or III controlled substance. Consequently, their manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant degree of regulation
by the DEA. The scheduling process may take one or more years beyond FDA approval, thereby significantly delaying the launch of
our product candidates involving Cannabis. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that
our product candidates involving Cannabis may have potential for abuse, it may require us to generate more clinical data
than that which is currently anticipated, which could increase the cost and/or delay the launch of such products.
Because one or more of our product candidates
contain active ingredients of Cannabis, which are Schedule I substances, to conduct preclinical studies and clinical
trials with these product candidates in the U.S. prior to approval, each of our research sites must submit a research protocol
to the DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense our product
candidates and to obtain the product from our manufacturer. If the DEA delays or denies the grant of a research registration to
one or more research sites, the preclinical studies or clinical trials could be significantly delayed, and we could lose and be
required to replace clinical trial sites, resulting in additional costs.
Individual states have also established
controlled substance laws and regulations. Though state-controlled substance laws often mirror federal law, because the states
are separate jurisdictions, they may separately schedule our product candidates involving Cannabis as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate
state registrations, permits or licenses to be able to obtain, handle, and distribute controlled substances for clinical trials
or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the states
in addition to those from the DEA or otherwise arising under federal law.
Because of these risks, no assurance can
be given that our Cannabis therapy under development will be successful.
The insurance coverage and reimbursement
status of newly approved products are uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current
products could limit our ability to market those products and decrease our ability to generate revenue.
The availability and extent of reimbursement
by governmental and private payors is essential for most patients to be able to afford expensive treatments. Sales of our product
candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates
will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed
by government health administration authorities, private health coverage insurers and other third-party payors. If reimbursement
is not available, or is available only to limited levels, we may not be able to successfully commercialize our product candidates.
Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing
sufficient to realize a sufficient return on our investment.
There is significant uncertainty related
to the insurance coverage and reimbursement of newly approved products. In the U.S., the principal decisions about reimbursement
for new medicines are typically made by the CMS, an agency within the HHS. CMS decides whether and to what extent a new medicine
will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. It is difficult to predict
what CMS will decide with respect to reimbursement for fundamentally novel products such as ours, as there is no body of established
practices and precedents for these new products. Reimbursement agencies in Europe may be more conservative than CMS. For example,
several cancer drugs have been approved for reimbursement in the U.S. and have not been approved for reimbursement in certain European
countries. Outside the U.S., international operations are generally subject to extensive governmental price controls and other
market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries
has and will continue to put pressure on the pricing and usage of our product candidates. In many countries, the prices of medical
products are subject to varying price control mechanisms as part of national health systems. In general, the prices of medicines
under such systems are substantially lower than in the U.S. Other countries allow companies to fix their own prices for medicines
but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict
the amount that we can charge for our product candidates. Accordingly, in markets outside the U.S., the reimbursement for our products
may be reduced compared with the U.S. and may be insufficient to generate commercially reasonable revenues and profits.
Moreover, increasing efforts by governmental
and third-party payors, in the U.S. and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage
and level of reimbursement for new products approved and, thus, they may not cover or provide adequate payment for our product
candidates. We expect to experience pricing pressures with the sale of any of our product candidates, due to the trend toward managed
healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure
on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense.
Because of this, increasingly high barriers are being erected to the entry of new products into the healthcare market.
In addition to CMS and private payors,
professional organizations such as the National Comprehensive Cancer Network and the American Society of Clinical Oncology can
influence decisions about reimbursement for new medicines by determining standards for care. Many private payors may also contract
with commercial vendors who sell software that provide guidelines that attempt to limit utilization of, and therefore reimbursement
for, certain products deemed to provide limited benefit to existing alternatives. Such organizations may set guidelines that limit
reimbursement or utilization of our products.
Healthcare legislation, including
potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty and cost for us
to obtain marketing approval of and commercialize our product candidates.
In the U.S., there have been numerous legislative
and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our
product candidates, restrict or regulate post-approval activities or affect our ability to profitably sell any product candidates
for which we obtain marketing approval. The Affordable Care Act, among other things, imposes a significant annual fee on companies
that manufacture or import branded prescription drug products. It also contains substantial provisions 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 the healthcare and health insurance industries, impose new taxes and fees on pharmaceutical
and medical device manufacturers, and impose additional health policy reforms, any of which could negatively impact our business.
The Affordable Care Act and other legislative changes are likely to continue the downward pressure on pharmaceutical and medical
device 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 passage of the Affordable Care Act. The Budget Control Act of 2011, among other things, created
the Joint Select Committee to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve
a targeted deficit reduction of an amount greater than $1.2 trillion for the fiscal years 2012 through 2021, triggering the legislation’s
automatic reduction to several government programs. This included aggregate reductions to Medicare payments to healthcare providers
of up to 2.0% per fiscal year, which went into effect in April 2013. In January 2013, former President Obama signed into law the
American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several categories of healthcare
providers and increased the statute of limitations period for the government to recover overpayments to providers from three to
five years. At the same time, there have been significant ongoing efforts to modify or eliminate the Affordable Care Act. For example,
the Tax Act, enacted on December 22, 2017, repealed the shared responsibility payment for individuals who fail to maintain minimum
essential coverage under section 5000A of the Internal Revenue Code, commonly referred to as the individual mandate, beginning
in 2019. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their health
insurance coverage over the next ten years and is likely to lead to increases in insurance premiums. Further legislative changes
to and regulatory changes under the Affordable Care Act remain possible. It is unknown what form any such changes or any law proposed
to replace the Affordable Care Act would take, and how or whether it may affect our business in the future.
Newly enacted FDA regulations may require
us to expend additional resources to obtain or maintain regulatory approval. For example, in August 2017 President Trump signed
into law the Food & Drug Administration Reauthorization Act. This legislation imposes significant new requirements for clinical
trial sponsors which will affect, among other things, the development of drugs and biological products for pediatric use. This
legislation may result in new regulations, which may affect future options or timelines for regulatory approval.
If we ever obtain regulatory approval and
successfully commercialize any of our product candidates, these laws may result in additional reductions in Medicare and other
healthcare funding, which could have a material adverse effect on our future customers, patients and third-party payors and, accordingly,
our financial operations.
We expect that the Affordable Care Act,
as well as other healthcare reform measures that have been 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 revenue. 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 compromise our ability
to generate revenue, attain profitability or commercialize our products.
Our employees, consultants and independent
contractors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could subject us to significant liability and harm our reputation.
We are exposed to the risk of fraud and
other misconduct by those who work for us. Misconduct by employees, consultants or independent contractors could include failures
to comply with the FCPA or with the DEA, the FDA or the EMA regulations or similar regulations of other foreign regulatory authorities
or to provide accurate information to the DEA, the FDA, the EMA or other foreign regulatory authorities. In addition, misconduct
could include failures to comply with certain manufacturing standards, to comply with U.S. federal and state healthcare fraud and
abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities,
to report financial information or data accurately or to disclose unauthorized activities to us. Misconduct by those who work for
us could also involve the improper use of information obtained during our clinical trials, which could result in regulatory sanctions
and serious harm to our reputation. We have implemented and will enforce a Code of Business Conduct and Ethics, but it is not always
possible to identify and deter misconduct by those who work for us. The precautions we take to detect and prevent this activity
may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to comply with such laws or regulations. If any such actions are instituted against
us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on
our business and results of operations, including the imposition of significant fines or other sanctions.
Our transactions and relationships
outside the U.S. will be subject to the FCPA and similar anti-bribery and anti-corruption laws.
As we pursue international clinical trials,
licensing and, in the future, sales arrangements outside the U.S., we will be heavily regulated and expect to have significant
interaction with foreign officials. Additionally, in many countries outside the U.S., the health care providers who prescribe pharmaceuticals
are employed by the government and the purchasers of pharmaceuticals are government entities; therefore, our interactions with
these prescribers and purchasers would be subject to regulation under the FCPA and similar anti-bribery or anti-corruption laws,
regulations or rules of other countries in which we operate. The FCPA generally prohibits paying, offering or authorizing payment
or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate to influence official
action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that
accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting
controls.
Compliance with these laws and regulations
may be costly and may limit our ability to expand into certain markets. There is no certainty that all our employees, agents, contractors,
or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high
level of complexity of these laws and regulations. Violations of these laws and regulations could result in fines, criminal sanctions
against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation
of business activities in sanctioned countries, implementation of compliance programs and prohibitions on the conduct of our business.
Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially
damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees and our business,
prospects, operating results and financial condition.
Product liability lawsuits against
us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability
exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially
sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or
products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may
result in:
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Decreased demand for any product candidates or products that we may develop;
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Injury to our reputation and significant negative media attention;
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Withdrawal of clinical trial participants;
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Significant costs to defend the related litigation;
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Substantial monetary awards to trial participants or patients;
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Loss of revenue;
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Reduced resources of our management to pursue our business strategy; and
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The inability to commercialize any products that we may develop.
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We currently do not have product liability
insurance because we do not have any products to market. We will need such insurance as we commence a clinical trial or if we commence
commercialization of our product candidates. Product liability insurance coverage is increasingly expensive. We may not be able
to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
We incur increased costs because
of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
As a public company, we have incurred and
are continuing to incur significant legal, accounting and other expenses. These expenses may increase. We are subject to, among
others, the reporting requirements of the Exchange Act of 1934, as amended (“Exchange Act”), the Sarbanes-Oxley Act,
the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the Commission. Our management
and other personnel devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have substantially
increased our legal and financial compliance costs and made some activities more time-consuming and costlier. The
increased costs have increased our net loss. These rules and regulations may make it more difficult and
more expensive for us to maintain sufficient director and officer liability insurance coverage. We cannot predict or
estimate the amount or timing of additional costs we may continue to incur to respond to these requirements. The ongoing impact
of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our
Board committees or as executive officers.
Risk Factors Related to Our Stock and
Financial Condition
We cannot predict the extent to which
a trading market for our common stock will develop or how liquid that market might become.
Our common stock is currently traded on
the OTC Link™ quotation platform of OTC Markets Group, Inc. We cannot predict the extent to which a trading market will develop
or how liquid that market might become. Accordingly, holders of our common stock may be required to retain their shares for an
indefinite period.
The OTC Link™ quotation system provides
significantly less liquidity than national stock exchanges. Quotes for stocks included on the OTC Link™ quotation system
are not listed in the financial sections of newspapers, as are those for the national stock exchanges. Therefore, prices for securities
traded solely on the OTC Link™ quotation system may be difficult to obtain, and holders of our common stock may be unable
to resell their shares at or near their original acquisition price or at any price. Market prices for our shares of common
stock will be influenced by several factors, including, but not limited to:
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The issuance of new shares pursuant to future offering;
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Changes in interest rates;
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New services or significant contracts and acquisitions;
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Variations in quarterly operating results;
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Change in financial estimates by securities analysts;
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The depth and liquidity of the market for the shares;
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Investor perceptions of us and of investments based in the countries where we do business or conduct research; and
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General economic and other national and international conditions.
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Our ability to access the capital
markets is limited by inability to use a short form registration statement on Form S-3.
A Registration Statement on Form S-3 permits
an eligible company to incorporate by reference in the registration statement its prior and subsequent filings and reports made
under the Exchange Act. In addition, Form S-3 enables eligible companies to conduct primary offerings "off the shelf"
under Rule 415 of the Securities Act of 1933, as amended (“Securities Act”). The shelf registration process under Form
S-3 combined with the ability to incorporate information on a prospective basis allows eligible companies to avoid additional delays
and interruptions in the offering process that would be associated with the filing of a registration statement and review by the
staff of the Commission and to access the capital markets in a more expeditious and efficient manner than raising capital in a
standard “long form” offering on Form S-1. Thus, our ability to raise, and the cost of raising, future capital could
be adversely affected by any inability to use a short form registration statement on Form S-3.
To be eligible to use Form S-3 for a registered
offering of our securities to investors, either: (i) the aggregate market value of our common stock held by non-affiliates must
exceed $75 million; or (ii) our common stock must be listed and registered on a national securities exchange. We do not currently
meet either of these eligibility requirements and are therefore precluded from conducting a registered offering of our securities
to investors by means of filing a Form S-3 or effecting a “shelf” offering after the date of the filing of this Report.
In addition, we failed to timely file a Form 8-K that also caused us to be ineligible to file a new Form S-3 until November 1,
2020.
Penny stock rules may have an adverse
effect on us.
Our securities sold as part of financing
provided to us are currently subject to “penny stock rules” that impose additional sales requirements on broker-dealers
who sell such securities to persons other than established customers and accredited investors, the latter of which are generally
people with assets more than $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with a spouse).
For transactions covered by these rules, we and/or broker-dealers must make a special suitability determination for the purchase
of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally,
for any transaction involving a penny stock, unless exempt, the “penny stock rules” require the delivery, prior to
the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer must
also disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks.
Consequently, the “penny stock rules” may restrict the ability of broker-dealers to sell our securities. The foregoing
required penny stock restrictions will not apply to our common stock if such securities maintain a market price of $5.00 or greater.
Therefore, the challenge for us is that the market price of our common stock may not reach or remain at such a level.
Shareholders should be aware that, according
to the Commission, the market for penny stocks continues to suffer from patterns of fraud and abuse. Such patterns include, but
are not limited to:
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Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases and paid promotions;
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“Boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, leaving investors with losses.
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Our executive officers are aware of these
abuses that have occurred historically in the penny stock market. Although we are in no position to dictate the behavior of the
market or of broker-dealers or others that may engage in such abuses, management will strive within the confines of practical limitations
to prevent the described patterns from being established with respect to our common stock.
We may experience volatility in our
stock price, which may adversely affect the trading price of our common stock.
We experience significant volatility from
time to time in the market price of our shares of common stock. Factors that may affect the market price include the following:
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Announcements of regulatory developments or technological innovations by us or our competitors;
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Changes in our relationship with our licensors and other strategic partners;
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Our quarterly operating results;
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Litigation involving or affecting us;
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Shortfalls in our actual financial results compared to our guidance or the forecasts of stock market analysts;
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Developments in patent or other technology ownership rights;
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Acquisitions or strategic alliances by us or our competitors;
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Public concern regarding the safety of our products; and
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Government regulation of drug pricing.
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The price of our common stock is
volatile, which substantially increases the risk that our investors may not be able to sell their shares at or above the price
that the investors have paid for their shares.
Because of the price volatility in our
shares we have observed since its inception, investors in our common stock may not be able to sell their shares when they desire
to do so at a price the investors desire to attain. The inability to sell securities in a rapidly declining market may substantially
increase the risk of loss because the price of our common stock may suffer greater declines due to the historical price volatility
of our shares. Certain factors, some of which are beyond our control, that may cause our share price to fluctuate significantly
include, but are not limited to, the following:
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Variations in our quarterly operating results;
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Loss of a key relationship or failure to complete significant product candidate milestones timely or at all;
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Additions or departures of key personnel; and
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Fluctuations in the stock market price and volume.
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In addition, in recent years the stock
market in general, and the over-the-counter markets in particular, have experienced extreme price and volume fluctuations. In some
cases, these fluctuations are unrelated or disproportionate to the performance of the underlying company. These market and industry
factors may materially and adversely affect our share price, regardless of our performance or whether we meet our business objectives.
In the past, class action litigation often has been brought against companies following periods of volatility in the market price
of those companies’ common stock. I f we become involved in this type of litigation in the future, it could result in
substantial costs and diversion of management attention and resources, which could have a material adverse effect on us and the
trading price of our common stock.
We have no plans to pay dividends
in the foreseeable future, and investors may not expect a dividend as a return of or on any investment in us.
We have not paid dividends on our shares
of common stock and do not anticipate paying such dividends in the foreseeable future.
Our investors may suffer future dilution
due to issuances of additional shares of our common stock in the future for various reasons.
There may be substantial dilution to our
shareholders because of future decisions of our Board to issue shares for cash transactions, services rendered, acquisitions, payment
of debt, sale of shares under our Form S-3 Registration Statement, if we are eligible to use Form S-3, or other public or private
offerings of our securities and other permissible reasons. We can give investors no assurance that they will be able to sell their
shares of our commons stock at or near the prices they ask or at all if they need money or otherwise desire to liquidate their
shares.
Risks Related to Employee and Tax Matters,
Managing Growth and Macroeconomic Conditions
We have a limited number of employees
and are highly dependent on our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Our future success
depends on our ability to retain these officers and other key personnel and to attract, retain and motivate other needed qualified
personnel.
We are an early-stage biotechnology company
with a limited operating history. As of April 30, 2020, we had four full-time employees and eleven key consultants. We are highly
dependent on the R&D, clinical and business development expertise of the principal members of our management, scientific and
clinical teams, specifically, on our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Recruiting and
retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success.
The loss of the services of our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer or other key employees
or consultants could severely impede the achievement of our R&D and commercialization of our product candidates and seriously
harm our ability to successfully implement our business strategy.
Furthermore, replacing executive officers
and key employees and consultants may be difficult and may take an extended period because of the limited number of individuals
in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize
our product candidates. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate
these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar
personnel.
We also experience competition for the
hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on other consultants
and advisors, including scientific and clinical advisors, to assist us in formulating our discovery, preclinical and clinical development
and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments
under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue
to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
Our ability to use our net operating
loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue
Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use
its pre-change net operating loss carryforwards and other pre-change tax attributes (such as R&D tax credits) to offset its
post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change
in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules
may apply under state tax laws.
If it is determined that we have in the
past experienced an ownership change, or if we experience one or more ownership changes because of this offering or future transactions
in our stock, we may be limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes
owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and
other tax assets could potentially result in increased future tax liability to us.
We expect to expand our development
and regulatory capabilities and potentially implement sales, marketing and distribution capabilities. Thus, we may encounter difficulties
in managing our growth, which could disrupt our operations.
We expect to experience significant growth
in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs
and, if any of our product candidates receive marketing approval, sales, marketing and distribution. To manage our anticipated
future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities
and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience
of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion
of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant
costs and may divert our management and business development resources. Any inability to manage growth could delay the execution
of our business plans or disrupt our operations.
Unfavorable global economic conditions
could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely
affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis related
to COVID-19 caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn,
such as the recent global financial crisis, could result in a variety of risks to our business, including our ability to raise
additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly
resulting in supply disruption. Any of the foregoing could adversely impact our business.
Our business and operations would
suffer in the event of system failures.
Despite the implementation of security
measures, our internal computer systems and those of our third-party service providers on whom we rely are vulnerable to damage
from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Furthermore,
we have little or no control over the security measures and computer systems of our third-party service providers. While we and,
to our knowledge, our third-party service providers have not experienced any such system failure, accident or security breach to
date, if such an event were to occur and cause interruptions in our operations or the operations of our third-party service providers,
it could result in a material disruption of our drug development programs. If any disruptions occur, they could have a material
adverse effect on our business.
We are subject to legal, regulatory,
financial and other risks with our operations outside the U.S.
We operate globally and are attempting
to develop products in multiple countries. Consequently, we face complex legal and regulatory requirements in multiple jurisdictions,
which may expose us to certain financial and other risks. International operations are subject to a variety of risks, including:
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foreign currency exchange rate fluctuations;
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greater difficulty in overseeing foreign operations;
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logistical and communications challenges;
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potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;
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burdens and costs of compliance with a variety of foreign laws;
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political and economic instability;
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increases in duties and taxation;
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foreign tax laws and potential increased costs associated with overlapping tax structures;
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greater difficulty in protecting intellectual property;
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the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our products; and
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general social, economic and political conditions in these foreign markets.
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The comprehensive tax reform law
could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed
into law the final version of the Tax Act. The Tax Act significantly reforms the Internal Revenue Code of 1986, as amended, with
many of its provisions effective for tax years beginning on or after January 1, 2018. The Tax Act, among other things, contains
significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate, a partial limitation
on the deductibility of business interest expense, a limitation of the deduction for net operating loss carryforwards to 80% of
current year taxable income, an indefinite net operating loss carryforward and the elimination of the two-year net operating loss
carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions
and credits.
In addition, on March 27, 2020, the U.S.
government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act makes the following
changes to the U.S. tax code that will affect our 2019 and 2020 taxes, including, but not limited to, (1) temporary modification
of the adjusted taxable income limitation under Section 163(j) from 30% to 50% for tax years 2019 and 2020 only; (2) modification
to the net operating loss rules surrounding the ability to now carryback five years net operating losses generated in 2018, 2019,
and 2020; (3) temporary repeal of the net operating loss taxable income limitation of 80%; and (4) temporary enhancement of corporate
charitable contribution limitation to 25% of taxable income for tax year 2020 only.
We continue to examine the impact this
tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact
of the Tax Act is uncertain and our business and financial condition could be adversely affected. The impact of these reforms on
our stockholders is uncertain. Stockholders should consult with their tax advisors regarding the effect of the Tax Act and the
CARES Act and other potential changes to the U.S. Federal tax laws on them.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal office is located at 23046
Avenida de la Carlota, Suite 600, Laguna Hills, California 92653. The office we lease (“Leased Premises”) consist
of approximately 400 square feet plus the use of certain shared facilities, such as a lobby, conference rooms, a kitchen and open
workspaces. The term of our current lease agreement expires on August 31, 2020. On May 28, 2020, 2020, we entered into a new lease
agreement at our current location for an additional twelve-month term, expiring on February 28, 2021. The Leased Premises will
consist of approximately 200 square feet plus the use of the same shared facilities and areas.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation currently
pending against us or any of our subsidiaries or to which any of our or our subsidiaries’ property is subject. To our knowledge,
there is no material litigation against any of our officers or directors in their capacity as such, and no such litigation is contemplated
by any governmental authorities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS
The Company is a biotechnology company
focused on developing and preparing to commercialize cellular therapies for cancer and diabetes based upon a proprietary cellulose-based
live cell encapsulation technology known as “Cell-in-a-Box®.” The Company intends to use the Cell-in-a-Box®
technology as a platform upon which treatments for several types of cancer and diabetes will be developed.
The Company is developing therapies for
solid tumor cancers involving the encapsulation of live cells placed in the body to enable the activation of cancer-killing drugs
to the source of the cancer.
The Company is also examining ways to exploit
the benefits of the Cell-in-a-Box® encapsulation technology to develop therapies for cancer based upon the constituents
of the Cannabis plant, known as “cannabinoids.”
In addition, the Company is involved in
preclinical studies to determine if its cancer therapy can slow the production and/or accumulation of malignant ascites fluid in
the abdomen that accompanies the growth of several types of abdominal cancers.
The Company is also developing a therapy
for Type 1 diabetes and insulin-dependent Type 2 diabetes based upon the encapsulation of a human liver cell line genetically engineered
to produce, store and secrete insulin at levels in proportion to the levels of blood sugar in the human body using our Cell-in-a-Box®
encapsulation technology. The Company is also exploring the possibility of encapsulating human insulin-producing stem cells and
islet cells and transplanting them into a diabetic patient. All three types of cells will be encapsulated using the Cell-in-a-Box®
encapsulation technology. Each method is designed to function as a bio-artificial pancreas for purposes of insulin production.
Finally, the Company licensed from Hai
Kang the right to sell and distribute COVID-19 diagnostic kits. Pursuant to the Hai Kang License Agreement, the Company may directly
(or through a third party) conduct research, use, develop, market, sell, distribute, import and export these kits for human and
veterinary uses in North America, the United Kingdom and certain European cites.
Impact of the COVID-19 Pandemic on the Company’s Operations
The COVID-19 pandemic is causing significant,
industry-wide delays in clinical trials. Although the Company is not yet in a clinical trial, one is being planned. Currently,
clinical trials are being delayed due to COVID-19. There are numerous reasons for these delays. For example, patients have shown
a reluctance to enroll or continue in a clinical trial due to fear of exposure to COVID-19 when they are in a hospital or doctor’s
office. There are local, regional and state-wide shelter-in-place orders and regulations. These discourage and interfere with patient
visits to a doctor’s office if the visit is not COVID-19 related. Healthcare providers and health systems are shifting their
resources away from clinical trials toward the care of COVID-19 patients. The FDA and other healthcare providers are making product
candidates for the treatment of COVID-19 a priority over product candidates unrelated to COVID-19. As of the date of this Report,
the COVID-19 pandemic has had an impact upon the Company’s operations, although the Company believes that impact is not material.
They primarily relate to delays in tasks associated with the preparation of the Company’s IND.
As a result of the COVID-19 pandemic,
commencement the Company’s planned clinical trial to treat LAPC may be delayed. Also, enrollment may be difficult for the
reasons discussed above. In addition, after enrollment in the trial, if patients contract COVID-19 during their participation
in the trial or are subject to isolation or shelter in place restrictions, this may cause them to drop out of our trial, miss
scheduled therapy appointments or follow-up visits or otherwise fail to follow the trial protocol. If patients are unable to follow
the trial protocol or if the trial results are otherwise affected by the consequences of the COVID-19 pandemic on patient participation
or actions taken to mitigate COVID-19 spread, the integrity of data from the trial may be compromised or not be accepted by the
FDA. This could impact or delay on the Company’s clinical development program.
Given when the Company’s clinical
trial to treat LAPC is planned to commence, it is highly speculative in projecting the effects of COVID-19 on the Company’s
clinical development program and the Company generally. COVID-19 quickly and dramatically changes over time. Its evolution is difficult
to predict, and no one is able to say with certainty when the pandemic will subside and life as we knew it before the pandemic
will return to normal.
Cancer Therapy
Targeted Chemotherapy
The Company is using the Cell-in-a-Box®
encapsulation technology to develop a therapy for solid cancerous tumors through targeted chemotherapy. For pancreatic cancer,
the Company is encapsulating genetically engineered live human cells that produce an enzyme designed to convert the prodrug ifosfamide
into its cancer-killing form. The capsules containing these cells will be implanted in a patient in the blood supply as near as
possible to the pancreas tumor. The cancer prodrug ifosfamide will then be given intravenously at one-third the normal dose. In
this way, it is believed that the ifosfamide will be converted at the site of the tumor in addition to the liver where it is normally
converted. The Company believes placement of the Cell-in-a-Box® capsules near the tumor enables the production of
optimal concentrations of the “cancer-killing” form of ifosfamide at the site of the tumor. The cancer-killing metabolite
of ifosfamide has a short half-life, which the Company believes will result in little to no collateral damage to other organs in
the body.
Pancreatic Cancer Therapy
A critical unmet medical need exists for
patients with LAPC whose pancreas tumors no longer respond to Abraxane® plus gemcitabine or FOLFIRINOX, the current
standards of care, after 4-6 months of treatment with these combination therapies. These patients have no effective treatment alternative
once their tumors no longer respond to these therapies. Two of the most commonly used treatments for such patients are 5-fluorouiracil
or capecitabine (a prodrug of 5-fluorouiracil) plus radiation. Both treatments are only marginally effective in treating the tumor
and result in serious side effects. The Company is developing a therapy comprised of Cell-in-a-Box® encapsulated
live cells implanted near the pancreas tumor followed treatment with low doses of the cancer prodrug ifosfamide. The Company believes
that its treatment can serve as a “consolidation therapy” with the current standards of care for patients with LAPC
and thus address this critical unmet medical need.
Subject to FDA approval, the Company plans
to commence a clinical trial involving patients with LAPC to test this hypothesis. The trial will take place initially in the U.S.
with possible study sites in Europe at a later date.
Cannabinoid Therapy to Treat Cancer
The Company plans to use cannabinoids,
constituents of the Cannabis plant, to develop therapies for cancer, with the initial target of brain cancer. The Company
is focusing on developing specific therapies based on carefully chosen molecules rather than using complex Cannabis extracts.
To further its Cannabis therapy
development plans, the Company entered a research agreement with the University of Northern Colorado. The initial goal of the ongoing
research was to develop methods for the identification, separation and quantification of constituents of Cannabis (some
of which are prodrugs) that may be used in combination with the Cell-in-a-Box® technology to treat cancer; this
has been accomplished. Subsequent studies have been undertaken to identify the appropriate cell type that can convert the selected
cannabinoid prodrugs into metabolites with anticancer activity. Once identified, the genetically modified cells that will produce
the appropriate enzyme to convert that prodrug will be encapsulated using the Company’s Cell-in-a-Box® technology.
The encapsulated cells and cannabinoid prodrugs identified by these studies will then be combined and used for future studies to
evaluate their anticancer effectiveness.
Malignant Ascites Fluid Therapy
The Company is also developing a therapy
to delay the production and accumulation of malignant ascites fluid that results from many types of abdominal tumors. Malignant
ascites fluid is secreted by abdominal tumors into the abdomen after the tumors have reached a certain stage of growth. This fluid
contains cancer cells that can seed and form new tumors throughout the abdomen. This fluid accumulates in the abdominal cavity,
causing swelling of the abdomen, severe breathing difficulties and extreme pain.
Once an abdominal tumor reaches a certain
stage of development, it produces malignant ascites in the abdominal cavity. Malignant ascites fluid must be removed by paracentesis
on a periodic basis. This procedure is painful and costly. There is no therapy that the Company is aware of that prevents or delays
the production and accumulation of malignant ascites fluid. The Company has been involved in a series of preclinical studies conducted
by TD2 to determine if the combination of Cell-in-a-Box® encapsulated cells plus ifosfamide can delay the production
and accumulation of malignant ascites fluid. The Company plans to conduct another preclinical study in Germany to determine if
its conclusions from the TD2 studies are valid. If the preclinical study is deemed successful and the Company receives approval
to do so from the FDA, the Company plans to conduct a clinical trial in the U. S. to test its hypothesis.
Diabetes Therapy
Bio-Artificial Pancreas for Diabetes
In addition, the Company plans to develop
a therapy for Type 1 diabetes and insulin-dependent Type 2 diabetes. It is developing a therapy that involves encapsulation of
human liver cells that have been genetically engineered to produce, store insulin and release insulin on demand at levels in proportion
to the levels of blood sugar (glucose) in the human body. The encapsulation will be done using the Cell-in-a-Box®
technology. The Company is also exploring the possibility of using genetically modified stem cells and natural, human insulin producing
cells (beta islet cells) and protecting them with its Cell-in-a-Box® encapsulation technology. These encapsulated
cells will then be transplanted into diabetic patients. The goal for the three approaches is to develop a bio-artificial pancreas
for purposes of insulin production for diabetics who are insulin dependent.
COVID-19 Diagnostic Kits
The Company entered into the Hai Kang License
Agreement pursuant to which Hai Kang granted to the Company a license to conduct research, use, develop, market, sell, distribute,
import and export the COVID-19 diagnostic kits for human and veterinary uses in North America, the United Kingdom and certain other
European cities.
Company Background and Material Agreements
The Company is a Nevada corporation incorporated
in 1996. In 2013, the Company restructured its operations to focus on biotechnology. The restructuring resulted in the Company
focusing all its efforts upon the development of a novel, effective and safe way to treat cancer and diabetes. On January 6, 2015,
the Company changed its name from Nuvilex, Inc. to PharmaCyte Biotech, Inc. to reflect the nature of its business.
In 2011, the Company entered the SG Austria
APA with SG Austria to purchase 100% of the assets and liabilities of SG Austria. Austrianova and Bio Blue Bird, then wholly owned
subsidiaries of SG Austria, were to become wholly owned subsidiaries of the Company on the condition that the Company pay SG Austria
$2.5 million and 100,000,000 shares of the common stock of the Company’s common stock. The Company was to receive 100,000
shares of common stock of Austrianova and nine bearer shares of Bio Blue Bird representing 100% of the ownership of Bio Blue Bird.
Through two addenda to the SG Austria APA,
the closing date of the SG Austria APA was extended twice by agreement between the parties.
In June 2013, the Company and SG Austria
entered a Third Addendum. The Third Addendum changed materially the transaction contemplated by the SG Austria APA. Under the Third
Addendum, the Company acquired 100% of the equity interests in Bio Blue Bird and received a 14.5% equity interest in SG Austria.
In addition, the Company received nine bearer shares of Bio Blue Bird to reflect its 100% ownership of Bio Blue Bird. The Company
paid: (i) $500,000 to retire all outstanding debt of Bio Blue Bird; and (ii) $1.0 million to SG Austria. The Company also paid
SG Austria $1,572,193 in exchange for the 14.5% equity interest of SG Austria. The Third Addendum required SG Austria to return
the 100,000,000 shares of common stock held by SG Austria and for the Company to return the 100,000 shares of common stock of Austrianova
the Company held.
Effective as of the same date of the Third
Addendum, the parties entered the Clarification Agreement to clarify and include certain language that was inadvertently left out
of the Third Addendum. Among other things, the Clarification Agreement confirmed that the Third Addendum granted the Company an
exclusive, worldwide license to use, with a right to sublicense, the Cell-in-a-Box® encapsulation technology for
the development of treatments for cancer and use of Austrianova’s Cell-in-a-Box® trademark and its associated
technology.
With respect to Bio Blue Bird, Bavarian
Nordic/GSF and Bio Blue Bird entered into the Bavarian Nordic/GSF License Agreement in July 2005 whereby Bio Blue Bird was granted
a non-exclusive license to further develop, make, have made (including services under contract for Bio Blue Bird or a sub-licensee),
by Contract Manufacturing Organizations, Contract Research Organizations, Consultants, Logistics Companies or others), obtain marketing
approval, sell and offer for sale the clinical data generated from the second pancreatic cancer clinical trial which contained
proprietary information from the 1st Interim Analysis of the trial that used the cells and capsules developed by Bavarian
Nordic/GSF or otherwise use the licensed patent rights related thereto in the countries in which patents had been granted.
Bavarian Nordic/GSF and Bio Blue Bird amended
the Bavarian Nordic License Agreement in December 2006 to reflect: (i) the license granted was exclusive; (ii) the royalty rate
increased from 3% to 4.5%; (iii) Bio Blue Bird assumed the patent prosecution expenses; and (iv) it was made clear that the license
will survive as a license granted by one of the licensors if the other licensor rejects performance under the Bavarian Nordic License
Agreement due to any actions or declarations of insolvency.
In June 2013, the Company entered into
the Diabetes Licensing Agreement pursuant to which the Company is provided an exclusive, worldwide license to use the Cell-in-a-Box®
encapsulation technology and trademark for the development of a therapy for Type 1 and insulin-dependent Type 2 diabetes.
In October 2014, the Company entered the
Melligen Cell License Agreement. The Company plans to develop a therapy for diabetes by encapsulating the Melligen cells using
the Cell-in-a-Box® encapsulation technology.
In December 2014, the Company entered the
Cannabis Licensing Agreement pursuant to which it acquired from Austrianova an exclusive, worldwide license to use the Cell-in-a-Box®
encapsulation technology in combination with genetically modified non-stem cell lines which are designed to activate cannabinoid
prodrug molecules for development of treatments for diseases and their related symptoms and the use of the Cell-in-a-Box®
trademark for this technology. The Company paid Austrianova $2.0 million to secure this license.
In July 2016, the Company entered the Austrianova
MOU pursuant to which Austrianova will actively work to seek an investment partner or partners who will finance clinical trials
and further develop products for the therapies for cancer, in exchange for which the Company, Austrianova and any future investment
partner or partners will each receive a share of the net revenue of applicable products in designated territories.
Effective October 1, 2016, the parties
amended the Bavarian Nordic/GSF License Agreement to include the right to import, reflect ownership and notification of improvements,
clarify which provisions survive expiration or termination of the Bavarian Nordic/GSF License Agreement, to provide rights to Bio
Blue Bird to the clinical data after expiration of the licensed patent rights and to change the notice address and recipients of
Bio Blue Bird.
In August 2017, the Company entered into
the Binding Term Sheet with SG Austria and Austrianova pursuant to which the parties reached an agreement to amend certain provisions
in the SG Austria APA, the Diabetes Licensing Agreement the Cannabis Licensing Agreement and the Vin-de-Bona Consulting Agreement.
In May 2018, the Company entered into agreements
with SG Austria and Austrianova to amend certain provisions of the SG Austria APA, the Diabetes Licensing Agreement, the Cannabis
Licensing Agreement and the Vin-de-Bona Consulting Agreement pursuant to the Binding Term Sheet. The Binding Term Sheet Amendments
provide that the Company’s obligation to make milestone payments to Austrianova are eliminated in their entirety under the
Cannabis License Agreement and the Diabetes License Agreement, as amended. The Binding Term Sheet Amendments also provide that
the Company’s obligation to make milestone payments to SG Austria pursuant to the SG Austria APA, as amended and clarified,
is eliminated in their entirety. One of the Binding Term Sheet Amendments also provides that the scope of the Diabetes License
Agreement is expanded to include all cell types and cell lines of any kind or description now or later identified, including, but
not limited to, primary cells, mortal cells, immortal cells and stem cells at all stages of differentiation and from any source
specifically designed to produce insulin for the treatment of diabetes.
In addition, one of the Binding Term Sheet
Amendments provides that the Company has a 5-year right of first refusal from August 30, 2017 in the event that Austrianova chooses
to sell, transfer or assign at any time during this period the Cell-in-a-Box® tradename and its Associated Technologies;
provided, however, that the Associated Technologies subject to the right of first refusal do not include Bac-in-a-Box®
(Bac-in-a-Box® technology is a means to protect, isolate, store and transport
living bacteria and yeast). Additionally, for a period of one year from August 30, 2017 one of the Binding Term Sheet Amendments
provides that Austrianova will not solicit, negotiate or entertain any inquiry regarding the potential acquisition of the Cell-in-a-Box®
encapsulation technology and its Associated Technologies.
The Binding Term Sheet Amendments further
provide that the royalty payments on gross sales as specified in the SG Austria APA, the Cannabis License Agreement and the Diabetes
License Agreement will be changed to 4%. They also provide that the royalty payments on amounts received by the Company from sublicensees’
gross sales under the same agreements will be changed to 20% of the amount received by the Company’s sublicensees, provided,
however, that in the event the amounts received by the Company from sublicensees is 4% or less of sublicensees’ gross
sales, Austrianova or SG Austria (as the case may be) will receive 50% of what the Company receives up to 2%. In addition, Austrianova
or SG Austria (as the case may be) will receive 20% of any amount the Company receives over a 4% royalty payment from sublicensees.
The Binding Term Sheet Amendments also
provide that Austrianova will receive 50% of any other financial and non-financial consideration received from the Company’s
sublicensees of the Cell-in-a-Box® technology.
In April 2020, the Company entered into
the Hai Kang License Agreement pursuant to which Hai Kang granted to the Company a license to certain technology owned or controlled
by Hai Kang related to COVID-19 diagnostic kits. Pursuant to the Hai Kang License Agreement, the Company may directly (or through
a third party) conduct research, use, develop, market, sell, distribute, import and export Products for human and veterinary uses
in North America, the United Kingdom and certain other European cites. A “Product” is defined as any existing Kit of
Hai Kang or any future Kit derived from Hai Kang’s Kits and includes an in vitro diagnostic test that is designed, manufactured
and used within a single laboratory for which the FDA is not enforcing any premarket review or other regulatory approval requirements.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation and Basis
of Presentation
The Consolidated Financial Statements include
the accounts of the Company and its wholly owned subsidiaries. The Company operates independently and through four wholly owned
subsidiaries: (i) Bio Blue Bird; (ii) PharmaCyte Biotech Europe Limited; (iii) PharmaCyte Biotech Australia Pty. Ltd.; and (iv)
Viridis Biotech, Inc. and are prepared in accordance with U.S. GAAP and the rules and regulations of the Commission. Intercompany
balances and transactions are eliminated. The Company’s 14.5% investment in SG Austria is presented on the cost method of
accounting.
Use of Estimates
The preparation of financial statements
in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates these estimates including
those related to fair values of financial instruments, intangible assets, fair value of stock-based awards, income taxes and contingent
liabilities, among others. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the
Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these
estimates and assumptions, which could have a material effect on the reported amounts of the Company’s consolidated financial
position and results of operations.
Intangible Assets
The Financial Accounting Standards Board
("FASB") standard on goodwill and other intangible assets prescribes a two-step process for impairment testing of goodwill
and indefinite-lived intangibles, which is performed annually, as well as when an event triggering impairment may have occurred.
The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has elected to perform
its annual analysis at the end of its reporting year.
The Company’s intangible assets are
licensing agreements related to the Cell-in-a-Box® technology for $1,549,427 and diabetes license for $2,000,000
for an aggregate total of $3,549,427.
These intangible assets have an indefinite
life; therefore, they are not amortizable.
The Company concluded that there was no
impairment of the carrying value of the intangibles for the years ended April 30, 2020 and 2019.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable.
If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than carrying
value, a write-down would be recorded to reduce the related asset to its estimated fair value. No impairment was identified or
recorded during the years ended April 30, 2020 and 2019.
Fair Value of Financial Instruments
For certain of the Company’s non-derivative
financial instruments, including cash, accounts payable and accrued expenses, the carrying amount approximates fair value due to
the short-term maturities of these instruments.
Accounting Standards Codification ("ASC")
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for current liabilities qualify as financial instruments and are a reasonable
estimate of their fair values because of the short period between the origination of such instruments and their expected realization
and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
•
|
Level 1. Observable inputs such as quoted prices in active markets;
|
|
•
|
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
•
|
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Income Taxes
Deferred taxes are calculated using the
liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit
carry forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
A valuation allowance is provided for deferred
income tax assets when, in management’s judgment, based upon currently available information and other factors, it is more
likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for
a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating
results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.
The Company believes the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting
estimate because it is based on, among other things, an estimate of future taxable income in the U.S. and certain other jurisdictions,
which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.
In determining when to release the valuation allowance established against the Company’s net deferred income tax assets,
the Company considers all available evidence, both positive and negative. Consistent with the Company’s policy, and because
of the Company’s history of operating losses, the Company does not currently recognize the benefit of all its deferred tax
assets, including tax loss carry forwards, which may be used to offset future taxable income. The Company continually assesses
its ability to generate sufficient taxable income during future periods in which deferred tax assets may be realized. When the
Company believes it is more likely than not that it will recover its deferred tax assets, the Company will reverse the valuation
allowance as an income tax benefit in the statements of operations.
The U.S. GAAP method of accounting for
uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the
tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step
two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured
as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon
ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step
one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved
with the taxing authority or the statute of limitations expires. Positions previously recognized are derecognized when the Company
subsequently determines the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical
merits and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially
from these estimates.
On December 22, 2017, the U.S. enacted
the Tax Act which made significant changes to U.S. federal income tax law affecting the Company. Set forth below is a discussion
of certain provisions of the Tax Act and the Company's assessment of the impact of such provisions on its financial statements.
Effective January 1, 2018, the Company's
U.S. income has been taxed at a 21% (subject to IRC Section 15 blended rate provisions) down from the 35 % federal corporate rate.
ASC 740-10-25-47 requires the Company to recognize the effect of this rate change on its deferred tax assets and liabilities in
the period the tax rate change was enacted. As a result, the Company concluded this caused the Company's net deferred taxes
to be remeasured at the new lower tax rate. The Company maintains a full valuation allowance on its U.S. net deferred tax assets.
Deferred tax asset remeasurement (tax expense) was offset by a net decrease in valuation allowance, that resulted in no impact
on the Company's income tax expense.
On March 27, 2020, Congress enacted the
Coronavirus Aid, Relief and Economic Security ("CARES") Act to provide certain relief as a result of the Coronavirus
Disease 2019 outbreak. The Company maintains a full valuation allowance on its U.S. net deferred tax assets. Deferred tax asset
remeasurement (tax expense) was offset by a net decrease in valuation allowance, that resulted in no impact on the Company's income
tax expense. Therefore, the Company does not expect the provisions in the CARES Act will impact the Company’s consolidated
financial statements.
Research and Development
R&D expenses consist of costs incurred
for direct and overhead-related research expenses and are expensed as incurred. Costs to acquire technologies, including licenses,
that are utilized in research and development and that have no alternative future use are expensed when incurred. Technology developed
for use in the Company’s product candidates is expensed as incurred until technological feasibility has been established.
R&D costs for the years ended April
30, 2020 and 2019 were $301,221 and $460,052, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation
expense for only those awards ultimately expected to vest on a straight-line basis over the requisite service period of the award.
The Company estimates the fair value of stock options using a Black-Scholes-Merton valuation model. This model requires the input
of highly subjective assumptions, including the option's expected term and stock price volatility. In addition, judgment is also
required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical
experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management's judgment. Thus, if factors change and the Company
uses different assumptions, the stock-based compensation expense could be materially different in the future.
Concentration of Credit Risk
The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The
Company maintains most of its cash balance at a financial institution located in California. Accounts at this institution are insured
by the Federal Deposit Insurance Corporation up to $250,000. Uninsured balances aggregated approximately $618,000 and $127,000
at April 30, 2020 and 2019, respectively. The Company has not experienced any losses in such accounts. Management believes it is
not exposed to any significant credit risk on cash.
Foreign Currency Translation
The Company translates the financial statements
of its foreign subsidiary from the local (functional) currencies to U.S. dollars in accordance with FASB ASC 830, Foreign Currency
Matters. All assets and liabilities of the Company’s foreign subsidiaries are translated at year-end exchange rates,
while revenue and expenses are translated at average exchange rates prevailing during the year. Adjustments for foreign currency
translation fluctuations are excluded from net loss and are included in other comprehensive income. Gains and losses on short-term
intercompany foreign currency transactions are recognized as incurred.
Going Concern
The accompanying Consolidated Financial
Statements have been prepared assuming that the Company will continue as a going concern; however, the following conditions raise
substantial doubt about the Company's ability to do so. As of April 30, 2020, the Company has an accumulated deficit of
$103,858,259 and incurred a net loss for year ended April 30, 2020 of $3,826,888. The Company requires substantial additional capital
to finance its planned business operations and expects to incur operating losses in future periods due to the expenses related
to the Company’s core businesses. The Company has not realized any revenue since it commenced doing business in the biotechnology
sector, and there can be no assurance that it will be successful in generating revenues in the future in this sector. The Consolidated
Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going
concern.
Over the past year, funding was provided
by investors to maintain and expand the Company. Sales of the Company’s common stock were made under the Second S-3 allowing
for offerings of up to $50 million dollars in transactions that are deemed to be “at the market offerings” as defined
in Rule 415 under the Securities Act or transactions structured as a public offering of a distinct block or blocks of the shares
of the Company’s common stock. Over the past year, the Company continued to acquire funds through the Company’s Second
S-3 pursuant to which the placement agent sells shares of common stock “at-the-market” in a program which is structured
to provide up to $25 million to the Company less certain commissions pursuant to the Second S-3. From May 1, 2019 through April
30, 2020 the Company raised capital of approximately $2.15 million in Block Trade transactions. Additionally, the Company raised
approximately $500,000 through the sale of unregistered shares of its Common Stock in private placement transactions. Subsequent
to fiscal year end, the Company raised additional capital in the amount of approximately $4.7 million from Block Trades and “at-the-market”
trades. As of the date of this Report, the Company has approximately $4.9 million in its bank account.
With the filing of this Report, the S-3
will no longer be available to the Company to use to raise capital. The Company plans to continue to sell unregistered shares
to raise capital to fund operations and R&D expenses.
Management determined that these plans
alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company believes the cash on
hand at April 30, 2020, the potential sales of unregistered shares of its common stock and any public offerings of common stock
in which the Company may engage in will provide sufficient capital to meet the Company’s capital requirements and to fund
the Company’s operations through August 31, 2021.
Recent Accounting Pronouncements
On May 1, 2019, the Company adopted Accounting
Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use
(“ROU”) assets and lease liabilities on the consolidated balance sheet. This ASU retains a distinction between finance
leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are
substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current
accounting literature. Under the standard, disclosures are required to meet the objective of enabling users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company elected the available practical expedients
on adoption. Adoption of the new standard resulted in an immaterial amount of total lease liabilities and ROU assets of as of May
1, 2019.
There were no material impacts on the
Company’s consolidated financial statements resulting from the adoption during the year ended April 30, 2020 of: (i)
ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting; (ii) ASU 2018-19, ASC Topic 326: Codification Improvements to Financial Instruments; (iii) ASU
No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement; and (iv) ASU No. 2019-07, Codification Updates to SEC Sections: Amendments to SEC Paragraphs
Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442,
Investment Company Reporting Modernization, and Miscellaneous Updates.
ASU No. 2016-13, Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13"), was issued in June 2016. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other
receivables and available for sale debt securities will be replaced with a new forward-looking "expected loss"
model that generally will result in the earlier recognition of allowances for losses. The Company will adopt ASU 2016-13 in
2021 using the modified retrospective transition approach and does not expect to have a material impact on the
Company’s consolidated financial statements.
ASU No. 2019-12, Simplifying the Accounting
for Income Taxes ("ASU 2019-12"), was issued in December 2019. Under ASU 2019-12, the accounting for income taxes
is simplified by eliminating certain exceptions and implementing additional requirements which result in a more consistent application
of ASC 740. The Company is currently in the process of evaluating the impact of adopting ASU 2019-12 in 2021, but it does not expect
it to have a material impact on the Company’s consolidated financial statements.
NOTE 3 – ACCRUED EXPENSES
Accrued expenses at April 30, 2020 and
2019 are summarized below:
|
|
2020
|
|
|
2019
|
|
Payroll related costs
|
|
$
|
435,577
|
|
|
$
|
358,616
|
|
Share issuance compensation
|
|
|
–
|
|
|
|
240,015
|
|
Director and Officer insurance financing
|
|
|
113,245
|
|
|
|
–
|
|
Other
|
|
|
267,816
|
|
|
|
22,335
|
|
Total
|
|
$
|
816,638
|
|
|
$
|
620,966
|
|
The Company financed the Director and Officer
insurance policy. The term of the policy is from March 8, 2020 through March 8, 2021. The financing agreement has an interest rate
of 4.25% per annum and requires eight monthly payments of $12,806. The unpaid balances as of April 30, 2020 of $113,245 is included
in accrued expenses.
NOTE 4 – SMALL BUSINESS ADMINISTRATION
– PAYCHECK PROTECTION PROGRAM
On March 27, 2020, the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to provide financial aid to family and
businesses impacted by the COVID-19 pandemic. The Company participated in the CARES Act, and on April 15, 2020, the
Company entered into a note payable with a bank under the Small Business Administration (“SBA”), Paycheck
Protection Program (“PPP”) in the amount of $75,200. This note payable matures on April 15, 2022 with a fixed
interest rate of 1% per annum with interest deferred for six months. The PPP loan has an initial term of two years, is
unsecured and guaranteed by the SBA. Under the terms of the PPP note, the Company may apply for forgiveness of the amount due
on the PPP loan. The Company used the proceeds from the PPP loan for qualifying expenses as defined in the PPP. The Company
intends to apply for forgiveness of the PPP loan in accordance with the terms of the Cares Act. However, the Company cannot
assure at this time that the PPP loan will be forgiven partially or in full. If the loan is not forgiven based on the PPP
guidelines to be issued by the SBA, as defined, then, the monthly payment amount will be $4,229 beginning on October 15, 2020
through April 15, 2022. The current portion of the PPP loan is $28,918 and the long-term portion is $46,282.
NOTE 5 – COMMON STOCK TRANSACTIONS
A summary of the Company’s compensatory
stock activity and related weighted average grant date fair value information for the years ended April 30, 2020 and 2019 are as
follows:
During the year ended April 30, 2018,
the Company issued 1,750,000 shares of common stock to four non-employee members of the Company’s Board of Directors
(the “Board”) pursuant to Director Letter Agreements with the Company (“DLAs”). The shares vested
upon issuance and the Company recorded a non-cash expense of $0 and $24,165 for the years ended April 30, 2020 and 2019,
respectively.
During the year ended April 30, 2018, the
Company issued 4,200,000 shares of common stock to three consultants. The terms of two of the agreements are for twelve months
and one agreement is for eighteen months. The shares vest monthly over a twelve-month to eighteen-month period and are subject
to the consultants providing services under the agreements. The Company recorded a non-cash consulting expense in the amount of
$0 and $73,800 for the years ended April 30, 2020 and 2019, respectively. There were zero unvested shares as of April 30, 2020
and 2019, respectively.
The Company awarded 6,600,000 shares of
common stock to officers as part of their compensation agreements for 2018. These shares vest monthly over a twelve-month period
and are subject to them continuing service under the agreements. During the years ended April 30, 2020 and 2019, the Company recorded
a non-cash compensation expense in the amount of $0 and $245,520. There were zero unvested shares as of April 30, 2020 and 2019,
respectively.
During the year ended April 30, 2019, the
Company issued 4,450,000 shares of common stock to four consultants. The terms of the agreements are for twelve months. The shares
vest monthly over a twelve-month period and are subject to the consultants providing services under the agreements. The Company
recorded a non-cash consulting expense in the amount of $24,726 and $230,829 for the year ended April 30, 2020 and 2019, respectively.
There were zero and 408,333 unvested shares as of April 30, 2020 and 2019, respectively.
The Company awarded 6,600,000 shares of
common stock to officers as part of their compensation agreements for 2019. These shares vest monthly over a twelve-month period
and are subject to them continuing service under the agreements. During the years ended April 30, 2020 and 2019, the Company recorded
a non-cash compensation expense in the amount of $278,891 and $47,809, respectively. There were zero and 4,400,000 unvested shares
as of April 30, 2020 and 2019, respectively.
During the year ended April 30, 2020, the
four non-employee members of the Board were issued 2,000,000 shares of common stock pursuant to their DLAs and relating to their
services for the prior year. The shares were fully vested upon issuance. The Company recorded a non-cash expense of $19,212 and
$101,288 for the years ended April 30, 2020 and 2019, respectively. There were zero unvested shares of Common Stock remaining related
to these DLAs as of April 30, 2020.
During the year ended April 30, 2020, a
consultant was issued 2,500,000 shares of common stock in respect of his services as the Chairman of the Company’s Medical
and Scientific Advisory Board over a five-year period vested upon issuance are subject to the consultant providing services to
the Company. The Company recorded a non-cash consulting expense in the amount of $22,584 and $107,749 for the years ended April
30, 2020 and 2019, respectively. There were zero unvested shares remaining related to his compensation agreements as of April 30,
2020.
During the year ended April 30, 2020, the
four non-employee members of the Board were issued 2,000,000 shares of Common Stock pursuant to their DLAs in respect of their
service during that year. The shares were fully vested upon issuance. The Company recorded a non-cash expense of $65,339 for the
year ended April 30, 2020, respectively. There were zero unvested shares remaining related to a DLA as of April 30, 2020.
During the year ended April 30, 2020, five
consultants were issued 3,200,000 shares of restricted Common Stock pursuant to their respective consulting agreement with the
Company. The terms of the agreements are for twelve months. The share issuances covered current and prior years. The shares vest
monthly over a twelve-month period and are subject to the consultants providing services under the consultant’s respective
consulting agreement. The Company recorded a non-cash consulting expense in the amount of $108,575 and $17,350 for the years ended
April 30, 2020 and 2019, respectively. There were 200,000 unvested shares remaining related to these consulting agreements as of
April 30, 2020.
The Company awarded 6,600,000 shares of
common stock to officers as part of their compensation agreements for 2020. These shares vest monthly over a twelve-month period
and are subject to them continuing service under the agreements. During the year ended April 30, 2020, the Company recorded a non-cash
compensation expense in the amount of $89,759. There were 4,400,000 unvested shares as of April 30, 2020.
During the year ended April 30, 2020, the
Company entered into four stock subscription agreements resulting in the sale and issuance of one-hundred-three million (103 million)
shares of restricted Common Stock. The Company received $515,000 from the sale of these shares.
All shares were issued without registration
under the Securities Act in reliance upon the exemption afforded by Section 4(a)(2) of the Securities Act.
On September 28, 2017, the Second S-3 was
declared effective by the Commission for a public offering of up to $50 million on a “shelf offering” basis. During
the years ended April 30, 2020 and 2019, the Company sold and issued approximately 333.3 and 161.7 million shares of common stock,
respectively, at prices ranging from $0.01 to $0.03 per share. Net of underwriting discounts, legal, accounting and other offering
expenses, the Company received proceeds of approximately $2.1 and $2.3 million from the sale of these shares for the years ended
April 30, 2020 and 2019, respectively. The Company has filed a prospectus supplement for an “at-the-market” offering
with an investment bank as sales agent. The Company will not be eligible to use the S-3 once the 10-K is filed.
A summary of the Company’s non-vested
restricted stock activity and related weighted average grant date fair value information for the last three years ended April 30,
2020 are as follows:
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Unvested, at April 30, 2018
|
|
|
5,600,000
|
|
|
$
|
0.06
|
|
Granted
|
|
|
11,050,000
|
|
|
|
0.05
|
|
Vested
|
|
|
(12,050,000
|
)
|
|
|
0.06
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unvested, at April 30, 2019
|
|
|
4,600,000
|
|
|
|
0.05
|
|
Granted
|
|
|
16,300,000
|
|
|
|
0.05
|
|
Vested
|
|
|
(16,300,000
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Unvested, at April 30, 2020
|
|
|
4,600,000
|
|
|
$
|
0.06
|
|
NOTE 6 – STOCK OPTIONS AND WARRANTS
Stock Options
As of April 30, 2020, the Company had 67,200,000
outstanding stock options to its directors and officers (collectively, “Employee Options”) and consultants (“Non-Employee
Options”).
During the years ended April 30, 2020 and
2019, the Company granted 11,000,000 and 11,000,000 Employee Options, respectively.
The fair value of the Employee Options
at the date of grant was estimated using the Black-Scholes-Merton option-pricing model, based on the following weighted average
assumptions:
|
|
Years Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
|
1.8%
|
|
|
|
2.0%
|
|
Expected volatility
|
|
|
91%
|
|
|
|
97%
|
|
Expected lives (years)
|
|
|
2.7
|
|
|
|
2.7
|
|
Expected dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
The Company’s computation of expected
volatility is based on the historical daily volatility of its publicly traded stock. For stock option grants issued during years
ended April 30, 2020 and 2019, the Company used a calculated volatility for each grant. The Company lacks adequate information
about the exercise behavior now and has determined the expected term assumption under the simplified method provided for under
ASC 718, which averages the contractual term of the Company’s stock options of five years with the average vesting term of
two and one-half years for an average of three years. The dividend yield assumption of zero is based upon the fact the Company
has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each
grant is equal to the U.S. Treasury rates in effect at the time of the grant for instruments with a similar expected life.
During the years ended April 30, 2020 and
2019, the Company granted Non-Employee Options of 1,200,000 and 1,200,000, respectively.
The fair value of the Non-Employee Options
was estimated using the Black-Scholes-Merton option-pricing model, based on the following weighted average assumptions:
|
|
Years Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
|
1.6%
|
|
|
|
2.5%
|
|
Expected volatility
|
|
|
90%
|
|
|
|
98%
|
|
Expected lives (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Non-Employee Option grants that do not
vest immediately upon grant are recorded as an expense over the vesting period. Effective August 1, 2018 the Company adopted ASU
2018-07 early using the modified retrospective transition approach. The Company determined there was no transition adjustment upon
adoption of ASU 2018-07.
A summary of the Company’s stock
option activity and related information for the two years ended April 30, 2020 are shown below:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2018
|
|
|
95,250,000
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Issued
|
|
|
12,200,000
|
|
|
|
0.05
|
|
|
|
0.05
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, April 30, 2019
|
|
|
107,450,000
|
|
|
|
0.11
|
|
|
|
0.11
|
|
Issued
|
|
|
12,200,000
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Forfeited
|
|
|
(52,450,000
|
)
|
|
|
0.15
|
|
|
|
0.14
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, April 30, 2020
|
|
|
67,200,000
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Exercisable, April 30, 2020
|
|
|
61,000,000
|
|
|
$
|
0.07
|
|
|
$
|
–
|
|
Vested and expected to vest
|
|
|
67,200,000
|
|
|
$
|
0.06
|
|
|
$
|
–
|
|
A summary of the activity for unvested
stock options during the years ended April 30, 2020 and 2019 is as follows:
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
|
|
|
|
|
|
Unvested, April 30, 2018
|
|
|
7,200,000
|
|
|
$
|
–
|
|
Granted
|
|
|
12,200,000
|
|
|
|
0.05
|
|
Vested
|
|
|
(13,200,000
|
)
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested, April 30, 2019
|
|
|
6,200,000
|
|
|
|
–
|
|
Granted
|
|
|
12,200,000
|
|
|
|
0.04
|
|
Vested
|
|
|
(12,200,000
|
)
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested, April 30, 2020
|
|
|
6,200,000
|
|
|
$
|
0.05
|
|
The Company recorded $338,050 and $320,178
of stock-based compensation related to the issuance of Employee Options to certain officers and directors in exchange for services
during the years ended April 30, 2020 and 2019, respectively. At April 30, 2020, there remained $141,642 of unrecognized compensation
expense related to unvested Employee Options granted to officers and directors, to be recognized as expense over a weighted-average
period of the remaining eight months in the calendar year. The unvested options vest at 750,000 shares per month and are expected
to be fully vested on December 31, 2020.
The Company recorded $41,326 and $92,171
of stock-based compensation related to the issuance of Non-Employee Options in exchange for services during the years ended April
30, 2020 and 2019, respectively. The unvested Non-Employee Options vest at 100,000 shares per month and are expected to be fully
vested on June 30, 2020.
The following table summarizes the outstanding
stock options by exercise price at April 30, 2020:
Exercise Price
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(years) of
Outstanding
Options
|
|
|
Weighted
Average
Exercisable
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted Average
Exercise Price
of Exercisable
Options
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
|
0.40
|
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
$
|
0.063
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
|
1.20
|
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
$
|
0.104
|
|
$
|
0.0685
|
|
|
|
600,000
|
|
|
|
1.00
|
|
|
$
|
0.0685
|
|
|
|
600,000
|
|
|
$
|
0.0685
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
|
1.62
|
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
$
|
0.058
|
|
$
|
0.0734
|
|
|
|
1,200,000
|
|
|
|
2.00
|
|
|
$
|
0.0734
|
|
|
|
1,200,000
|
|
|
$
|
0.0734
|
|
$
|
0.0729
|
|
|
|
1,800,000
|
|
|
|
2.19
|
|
|
$
|
0.0729
|
|
|
|
1,800,000
|
|
|
$
|
0.0729
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
|
2.22
|
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
$
|
0.089
|
|
$
|
0.0553
|
|
|
|
500,000
|
|
|
|
1.22
|
|
|
$
|
0.0553
|
|
|
|
500,000
|
|
|
$
|
0.0553
|
|
$
|
0.0558
|
|
|
|
9,000,000
|
|
|
|
1.60
|
|
|
$
|
0.0558
|
|
|
|
9,000,000
|
|
|
$
|
0.0558
|
|
$
|
0.0534
|
|
|
|
1,200,000
|
|
|
|
3.35
|
|
|
$
|
0.0534
|
|
|
|
1,200,000
|
|
|
$
|
0.0534
|
|
$
|
0.0539
|
|
|
|
1,000,000
|
|
|
|
1.50
|
|
|
$
|
0.0539
|
|
|
|
1,000,000
|
|
|
$
|
0.0539
|
|
$
|
0.0683
|
|
|
|
500,000
|
|
|
|
1.58
|
|
|
$
|
0.0683
|
|
|
|
500,000
|
|
|
$
|
0.0683
|
|
$
|
0.0649
|
|
|
|
500,000
|
|
|
|
1.72
|
|
|
$
|
0.0649
|
|
|
|
500,000
|
|
|
$
|
0.0649
|
|
$
|
0.0495
|
|
|
|
9,000,000
|
|
|
|
2.33
|
|
|
$
|
0.0495
|
|
|
|
9,000,000
|
|
|
$
|
0.0495
|
|
$
|
0.0380
|
|
|
|
1,200,000
|
|
|
|
4.40
|
|
|
$
|
0.0380
|
|
|
|
1,000,000
|
|
|
$
|
0.0380
|
|
$
|
0.0404
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
$
|
0.0404
|
|
|
|
1,000,000
|
|
|
$
|
0.0404
|
|
$
|
0.0370
|
|
|
|
500,000
|
|
|
|
2.09
|
|
|
$
|
0.0370
|
|
|
|
500,000
|
|
|
$
|
0.0370
|
|
$
|
0.0340
|
|
|
|
500,000
|
|
|
|
2.22
|
|
|
$
|
0.0340
|
|
|
|
500,000
|
|
|
$
|
0.0340
|
|
$
|
0.0408
|
|
|
|
9,000,000
|
|
|
|
2.81
|
|
|
$
|
0.0408
|
|
|
|
3,000,000
|
|
|
$
|
0.0408
|
|
|
Total
|
|
|
|
67,200,000
|
|
|
|
1.61
|
|
|
$
|
0.06
|
|
|
|
61,000,000
|
|
|
$
|
0.07
|
|
The aggregate intrinsic value of outstanding
options as of April 30, 2020 was zero. This represents options whose exercise price was less than the closing fair market value
of the Company’s common stock on April 30, 2020 of approximately $0.0245 per share.
Warrants
The warrants issued by the Company are
equity-classified. The fair value of the warrants was recorded as additional paid-in-capital, and no further adjustments are made.
For stock warrants paid in consideration
of services rendered by non-employees, the Company recognizes consulting expense in accordance with the requirements of ASC 505.
Effective May 30, 2018, the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,388,889 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.02 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $19,000.
The warrants have a cashless exercise feature.
Effective June 28, 2018, the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,923,077 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.03 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $38,000.
The warrants have a cashless exercise feature.
Effective November 1, 2018, the Company
issued a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 2,272,727 shares of
common stock based upon a Block Trade pursuant to the engagement agreement with the Company’s placement agent dated February
22, 2018. The Company classified these warrants as equity, and the warrants have a term of five years with an exercise price of
approximately $0.01 per share. Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate value
of these warrants to be approximately $19,000. The warrants have a cashless exercise feature.
Effective March 26, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,250,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of $0.01 per share. Using the Black-Scholes-Merton
option pricing model, the Company determined the aggregate value of these warrants to be approximately $9,000. The warrants have
a cashless exercise feature.
Effective March 26, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,250,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of $0.01 per share. Using the Black-Scholes-Merton
option pricing model, the Company determined the aggregate value of these warrants to be approximately $9,000. The warrants have
a cashless exercise feature.
Effective June 13, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,338,889 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $9,000.
The warrants have a cashless exercise feature.
Effective July 15, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,944,444 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $12,000.
The warrants have a cashless exercise feature.
Effective August 7, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 3,000,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $10,000.
The warrants have a cashless exercise feature.
Effective August 7, 2019 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 500,000 shares of common stock
based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these warrants
as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the Black-Scholes-Merton
option pricing model, the Company determined the aggregate value of these warrants to be approximately $2,000. The warrants have
a cashless exercise feature.
Effective February 24, 2020 the Company
issued a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,000,000 shares of
common stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified
these warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using
the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately
$3,000. The warrants have a cashless exercise feature.
Effective February 24, 2020 the Company
issued a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,000,000 shares of
common stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified
these warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using
the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately
$3,000. The warrants have a cashless exercise feature.
Effective March 24, 2020 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 3,500,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $12,000.
The warrants have a cashless exercise feature.
Effective March 31, 2020 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 1,000,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of approximately $0.01 per share. Using the
Black-Scholes-Merton option pricing model, the Company determined the aggregate value of these warrants to be approximately $3,000.
The warrants have a cashless exercise feature.
Effective April 7, 2020 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 2,500,000 shares of common
stock based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these
warrants as equity, and the warrants have a term of five years with an exercise price of $0.01 per share. Using the Black-Scholes-Merton
option pricing model, the Company determined the aggregate value of these warrants to be approximately $17,000. The warrants have
a cashless exercise feature.
Effective April 21, 2020 the Company issued
a common stock purchase warrant to Aeon for a Block Trade. The Company issued a warrant to purchase 833,333 shares of common stock
based upon a Block Trade pursuant to the engagement agreement with Aeon dated February 22, 2018. The Company classified these warrants
as equity, and the warrants have a term of five years with an exercise price of approximately $0.02 per share. Using the Black-Scholes-Merton
option pricing model, the Company determined the aggregate value of these warrants to be approximately $9,000. The warrants have
a cashless exercise feature.
A summary of the Company’s warrant
activity and related information for the two years ended April 30, 2020 are shown below:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, April 30, 2018
|
|
|
33,993,104
|
|
|
$
|
0.10
|
|
Issued
|
|
|
8,084,693
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding, April 30, 2019
|
|
|
42,077,797
|
|
|
|
0.09
|
|
Issued
|
|
|
16,666,666
|
|
|
|
–
|
|
Expired
|
|
|
(10,854,308
|
)
|
|
|
–
|
|
Outstanding, April 30, 2020
|
|
|
47,890,155
|
|
|
|
–
|
|
Exercisable, April 30, 2020
|
|
|
47,890,155
|
|
|
$
|
0.05
|
|
The following table summarizes additional
information concerning warrants outstanding and exercisable at April 30, 2020:
Exercise Prices
|
|
Number of
Warrant Shares
Exercisable at
April 30, 2020
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$0.12
|
|
|
17,000,000
|
|
|
|
0.69
|
|
|
|
|
|
$0.065
|
|
|
769,231
|
|
|
|
1.64
|
|
|
|
|
|
$0.0575
|
|
|
869,565
|
|
|
|
1.93
|
|
|
|
|
|
$0.03
|
|
|
2,500,000
|
|
|
|
2.58
|
|
|
|
|
|
$0.026
|
|
|
1,923,077
|
|
|
|
3.16
|
|
|
|
|
|
$0.025
|
|
|
2,000,000
|
|
|
|
2.24
|
|
|
|
|
|
$0.018
|
|
|
1,388,889
|
|
|
|
3.08
|
|
|
|
|
|
$0.011
|
|
|
2,272,727
|
|
|
|
3.51
|
|
|
|
|
|
$0.01
|
|
|
5,000,000
|
|
|
|
4.42
|
|
|
|
|
|
$0.015
|
|
|
833,333
|
|
|
|
4.98
|
|
|
|
|
|
$0.009
|
|
|
3,333,333
|
|
|
|
4.17
|
|
|
|
|
|
$0.005
|
|
|
10,000,000
|
|
|
|
4.67
|
|
|
|
|
|
|
|
|
47,890,155
|
|
|
|
2.73
|
|
|
$
|
0.05
|
|
NOTE 7 – LEGAL PROCEEDINGS
The Company is not currently a party to
any pending legal proceedings, material or otherwise. There are no legal proceedings to which any property of the Company is subject.
NOTE 8 – RELATED PARTY TRANSACTIONS
The Company had the following related party
transactions during the years ended April 30, 2020 and 2019, respectively.
The Company owns 14.5% of the equity in
SG Austria and is reported on the cost method of accounting. SG Austria has two subsidiaries: (i) Austrianova; and (ii) Austrianova
Thailand. The Company purchased products and services from these subsidiaries in the approximate amounts of $153,000 and $168,000
in the years ended April 30, 2020 and 2019, respectively.
In April 2014, the Company entered the
Vin-de-Bona Consulting Agreement pursuant to which it agreed to provide professional consulting services to the Company. Vin-de-Bona
is owned by Prof. Günzburg and Dr. Salmons, both of whom are involved in numerous aspects of the Company’s scientific
endeavors relating to cancer and diabetes (Prof. Gunzburg is the Chairman of Austrianova, and Dr. Salmons is the Chief Executive
Officer and President of Austrianova). The term of the agreement is for 12 months, automatically renewable for successive 12-month
terms. After the initial term, either party can terminate the agreement by giving the other party 30 days’ written notice
before the effective date of termination. The agreement has been automatically renewed annually. The amounts incurred for the years
ended April 30, 2020 and 2019 were approximately $24,000 and $18,000, respectively. In addition, during the year ended April 30,
2020 the Company issued 250,000 shares of common stock to Dr. Salmons. The Company recorded a noncash consulting expense of approximately
$10,000 relating to these share issuances for the year ended April 30, 2020.
During the year ended April 30, 2020,
the Company issued one share of Series A Preferred Stock to the Chief Executive Officer of the Company for $1 pursuant to a subscription
agreement. The Series A Preferred Stock is described in detail in Note 12 – Preferred Stock. The Board exercised its right
to have the Company redeem the one share of Series A Preferred Stock. It is no longer issued and outstanding.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company acquires assets still in development
and enters R&D arrangements with third parties that often require milestone and royalty payments to the third-party contingent
upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required,
contingent upon the successful achievement of an important point in the development lifecycle of the pharmaceutical product (e.g.,
approval of the product for marketing by a regulatory agency). If required by the license agreements, the Company may have to make
royalty payments based upon a percentage of the sales of the pharmaceutical products if regulatory approval for marketing is obtained.
Office Lease
Effective September 1, 2017, the Company
entered into a lease for its Leased Premises in California. The term of the lease is for 24 months and expired on August 31, 2019.
In May 2019, the Company entered into an additional one-year lease for the Leased Premises, commencing upon the expiration of the
term of the prior lease. The term of the lease expires on August 31, 2020.
On May 28, 2020, the Company entered into
an additional six-month lease of the Leased Premises, commencing on September 1, 2020. The term of the new lease expires on February
28, 2021.
Rent expenses for these offices for the
years ended April 30, 2020 and 2019 were $30,964 and $34,153, respectively.
The following table summarizes the Company’s
aggregate future minimum lease payments required under the operating lease as of.
Years Ending April 30,
|
|
Amount
|
|
2021
|
|
$
|
17,196
|
|
|
|
$
|
17,196
|
|
Material Agreements
The Company’s material agreements
are identified and summarized in Note 1 – Nature of Business – Company Background and Material Agreements.
Compensation Agreements
The Company entered into executive compensation
agreements with its three executive officers in March 2015, each of which was amended in December 2015 and March 2017. Each agreement
has a term of two years with annual extensions thereafter unless the Company or the officer provides written notification of termination
at least ninety days prior to the end of the term or subsequent extensions. The Company also entered a compensation agreement with
a Board member in April 2015 which continued in effect until amended in May 2017.
In May 2017, the Company amended the compensation
agreement with the Board members and the terms continue in effect until a member is no longer on the Board.
The Company has four independent directors.
Each director receives the same compensation: (i) $12,500 in cash for each calendar quarter of service on the Board; (ii) 500,000
fully-paid, non-assessable shares of the Company’s restricted common stock (“Shares”) annually; and (iii) a five-year
option to purchase 500,000 Shares annually at an exercise price equal to the fair market value of the Shares on the date of grant.
The Shares and the option Shares fully vest on the date of the grants.
NOTE 10 - INCOME TAXES
At April 30, 2020, the Company had federal
and state net operating loss carryforwards of approximately $44,863,000 and $41,203,000, respectively, available to offset against
future taxable income; these operating loss carryforwards expire in 2020 through 2038.
Current tax laws limit the amount of loss
available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available
to offset future taxable income may be limited. Based on the assessment of all available evidence including, but not limited to,
the Company’s limited operating history in its core business and lack of profitability, uncertainties of the commercial viability
of its technology, the impact of government regulations and healthcare reform initiatives and other risks normally associated with
biotechnology companies, the Company has concluded that is more likely than not that these operating loss carryforwards will not
be realized. Accordingly, 100% of the deferred tax valuation allowance has been recorded against these assets.
Deferred income taxes reflect the net effect of temporary differences
between the financial reporting carrying amounts of assets and liabilities and income tax carrying amounts of assets and liabilities.
The components of the Company’s deferred tax assets and liabilities are as follows:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,904,396
|
|
|
|
11,849,290
|
|
Stock compensation
|
|
|
2,494,586
|
|
|
|
2,233,230
|
|
Other
|
|
|
129,976
|
|
|
|
105,251
|
|
Total deferred tax assets
|
|
|
15,528,958
|
|
|
|
14,187,771
|
|
Valuation allowance
|
|
|
(15,528,958
|
)
|
|
|
(14,187,771
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
For all years presented, the Company did
not recognize any deferred tax assets or liabilities. The net change in valuation allowance for the years ended April 30, 2020
and 2019 were increases of $1,341,187 and $952,170, respectively.
The provision for income taxes differs
from the provision computed by applying the Federal statutory rate to net loss before income taxes as follows:
|
|
Years Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Federal benefit at statutory rate
|
|
$
|
(803,646
|
)
|
|
|
(854,118
|
)
|
State income taxes, net of Federal taxes
|
|
|
(327,199
|
)
|
|
|
(274,538
|
)
|
Permanent differences
|
|
|
248,908
|
|
|
|
170,032
|
|
Provision related to change in valuation allowance
|
|
|
1,341,187
|
|
|
|
952,170
|
|
Net valuation allowance for state tax deductions
|
|
|
(402,882
|
)
|
|
|
–
|
|
Other, net
|
|
|
(56,368
|
)
|
|
|
6,454
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
There have been no changes to the Company’s
liability for unrecognized tax benefits during the year ended April 30, 2020.
The Company files its income tax returns
in the U.S. Federal jurisdiction and various state jurisdictions. As of the year ended April 30, 2020, the tax returns for 2014
through 2019 remain open to examination by the Internal Revenue Service and various state tax authorities.
The Company’s policy is to recognize
any interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of the years ended April
30, 2020 and 2019, the Company had accrued no interest or penalties related to uncertain tax positions.
NOTE 11 – EARNINGS PER SHARE
Basic earnings (loss) per share is computed
by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average number of shares and potentially dilutive shares
of common stock outstanding during the period increased to include the number of additional shares of common stock that would be
outstanding if the potentially dilutive securities had been issued. Potential shares of common stock outstanding principally include
stock options and warrants. During the years ended April 30, 2020 and 2019, the Company incurred losses. Accordingly, the effect
of any common stock equivalent would be anti-dilutive during those periods and are not included in the calculation of diluted weighted
average number of shares outstanding.
The table below sets forth the basic loss
per share calculations:
|
|
Years Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(3,826,888
|
)
|
|
$
|
(4,067,228
|
)
|
Basic weighted average number of shares outstanding
|
|
|
1,355,717,271
|
|
|
|
1,100,104,338
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,355,717,271
|
|
|
|
1,100,104,338
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Years Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Excluded options
|
|
|
67,200,000
|
|
|
|
107,450,000
|
|
Excluded warrants
|
|
|
47,890,155
|
|
|
|
42,077,797
|
|
Total excluded options and warrants
|
|
|
115,090,155
|
|
|
|
149,527,797
|
|
NOTE 12 – PREFERRED STOCK
The Company has authorized 10,000,000
shares of preferred stock, with a par value of $0.0001, of which one share has been designated as "Series A Preferred Stock".
The one share of Series A Preferred Stock was issued on October 30, 2019 and repurchased by the Company on December 3, 2019. As
of April 30, 2020, there are no shares of preferred stock issued and outstanding.
The description of the Series A Preferred
Stock below is qualified in its entirety by reference to the Company’s Articles of Incorporation, as amended.
The Series A Preferred Stock has the following
features:
|
•
|
There is one share of preferred stock designated as Series A Preferred Stock;
|
|
|
|
|
•
|
The Series A Preferred Stock has a number of votes at any time equal to the number of votes then held by all other shareholders of the Company having a right to vote on any matter plus one. The Certificate of Designations that designated the terms of the Series A Preferred Stock cannot be amended without the consent of the holder of the Series A Preferred Stock;
|
|
|
|
|
•
|
The Company may redeem the Series A Preferred Stock at any time for a redemption price of $1.00 paid to the holder of the share of Series A Preferred Stock; and
|
|
|
|
|
•
|
The Series A Preferred Stock has no rights of transfer, conversion, dividends, preferences upon liquidation or participation in any distributions to shareholders.
|
NOTE 13 – SUBSEQUENT EVENTS
On May 28, 2020, the Company entered into
a six-month office lease extension commencing on September 1, 2020. The lease extension is for the office where the Company is
currently located in Laguna Hills, California. The term of the new lease expires on February 28, 2021 and requires monthly lease
payments of approximately $1,300.
From May 1, 2020 through August 11, 2020,
the Company sold approximately 687 million shares of common stock using the Second S-3 structured as a Block Trade. The issuance
of these shares resulted in gross proceeds to the Company of approximately $5 million. Pursuant to the Aeon Agreement, the Company
is required to pay Aeon a fee of approximately $281,000 and provide warrant coverage of 5% of the number of shares of commons stock
sold in the Block Trade with a five-year term for approximately 34 million warrant shares. The Company incurred additional fees
of approximately $191,000 to an unrelated party.
From May 1, 2020 through August 13, 2020,
the Company sold 5,339,232 shares of common stock using the Second S-3 “at-the-market” trades. The net proceeds from
these sales were $131,547.
PHARMACYTE BIOTECH, INC.
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
Years Ended April 30, 2020 and 2019
Description
|
|
Balance at
Beginning of
Year
|
|
|
Additions
Charged to
Costs and
Expenses
|
|
|
Charged to
Other
Accounts
|
|
|
Deductions
|
|
|
Balance at
End of Year
|
|
Reserve Deducted in the Balance Sheets from the
Asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2020
|
|
$
|
14,187,771
|
|
|
|
–
|
|
|
|
1,341,187
|
|
|
|
–
|
|
|
|
15,528,958
|
|
Year ended April 30, 2019
|
|
$
|
13,235,601
|
|
|
|
–
|
|
|
|
952,170
|
|
|
|
–
|
|
|
|
14,187,771
|
|